As your buy side correspondent, I make a point of reading a whole stack of investment manager reports each quarter. I particularly focus on managers who think long term (no frequent traders), are prone to non-consensus views and aren't afraid to act on their conviction. I always read Francis Chou, Eric Sprott, John Thiessen (Vertex) and Geoff MacDonald and Tye Bousada (Edgepoint). From south of the border, Jeremy Grantham and James Montier (GMO), Mason Hawkins (Southeastern Asset Management) and Bill Gross (Pimco) are must-reads.
As usual, this month's pile brought a wide range of views and strategies. Danny Bubis of Tetrem Capital Management wrote passionately about the opportunity emerging in natural gas. Mr. Chou feels the market's view of U.S. banks is too negative. "As each year has gone by [post-crisis] the quality of bank earnings has improved, the books have become cleaner, the risks have become lower, and bank management has become far more risk averse." Meanwhile, Mr. Sprott still hates the banks ("That anyone still takes these [bank stress]tests seriously is somewhat of a mystery to us"), and is focused almost exclusively on precious metals.
The strongest consensus I could find relates to interest rates. There are few managers who aren't running light on bonds and/or keeping their maturities short (including holding cash) to protect against rising rates. Carl Hoyt at Seymour Investment Management used Warren Buffett's words to make the point. "Current rates … do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label."
Speaking of warnings, I'm not the only asset manager sounding the alarm on residential real estate. Mr. Chou reiterated his view that Canadians who need a home should rent, and if they feel compelled to buy, they should use as little debt as possible. The team at Mawer Investment Management advanced the debate by asking, "Why should the average house in Canada sell for 84 per cent more than the average house in the United States over the long runThere was plenty of concern about the debt burden in Europe and the U.S. Here, too, there's a consensus that economic growth will be modest and another 'Greece-like' crisis is possible, even probable. Expectations for the U.S., however, were higher than I've seen in many years. Larry Lunn and the team at Connor, Clark & Lunn expect the economy to continue its resurgence because, "the labour market is healing, household incomes are growing, business fixed investment is on the rise and there are signs that the housing market has bottomed."
It's not unanimous, but managers who invest around the globe are discovering better value beyond our borders. Mawer made special mention of it and Waratah Advisors, a Toronto-based hedge fund manager, noted that eight of their 10 largest long positions are U.S. stocks. Waratah even provided a Letterman-like Top 10 list of reasons for being bullish on the U.S. Under number seven, entitled Time Heals, they made the point that, "Since the start of the housing crisis … we've had five more years of innovation and productivity growth. The only thing that's been more consistent than the negative headlines since 2008 is the earnings growth achieved by American companies."
Risk doesn't equal volatility
The most insightful commentary I've read so far was from Southeastern Asset Management, the manager of the Longleaf funds. They began a treatise on risk reduction by saying, "Since 2008, investors have become increasingly paralyzed by trying to avoid risk as defined by stock price volatility. But short-term market fluctuations tell nothing about long-term investment outcome or business worth, which is determined by assets and free cash flow generation." They went on to say, "For long-term investors … risk is not volatility but the probability that they may not get their capital back and earn an adequate return."
I enjoy catching up on what the best and brightest on the buy side are saying. I always find some new ideas, understand better where capital is being allocated and consensus is forming, and am often bluntly reminded of what's really important long term.