Now Would be the Time to Add That Position

August 2, 2018

(Guest Post by Matthew Ladner)

As longtime JPBG blog readers may or may not be aware, one of my hobbies is college football, specifically Longhorn football. One of my favorite posters on the Orangebloods site goes by the handle Orbea and focuses on financial information in his posts, and this recent post in particular struck me:

This is a post about sentiment. This is a post of how frequently it is the case that when investment management companies close funds, fire managers, and change strategies it marks the end of a trend and the start of a new trend in the other direction. 

But first some prior examples. These are done from memory. Because of that I likely have some of the details a little off, which in no way is a detraction as the gist of the story is basically correct. 

Tom Jackson
Tom Jackson was a deep value equity manager with an impeccable track record. In the late 80’s or early 90’s he was hired by Prudential Mutual Funds to manage their flagship equity mutual fund, the Prudential Equity Fund. He went on a tear for the first half of the 1990’s, won a couple of awards, and was on the cover of investment magazines (that in and of itself is a sign that a trend is over). Then in 1996 Technology stocks took off and Jackson started to lag badly. By 1998/99 Jackson was holding a third of the fund in cash because there were no deep value stocks to buy. In early 2000 Prudential fired Jackson and revamped the strategy of the fund to be a large cap growth fund. 

Of course, Prudential fired Jackson at the wrong time. Large cap growth tanked over the next three years while deep value went up.

Michael Metz
Michael Metz was the Chief Investment Officer for Oppenheimer (the brokerage firm, not the mutual fund company). In the first half of 1998 Metz recommended selling stocks because valuations were ridiculous and buying the 10 year Treasury. The official investment position of the firm was not to own equities but to own the 10 year. Unfortunately, stocks went on a tear to the upside for the next two years and bonds went down in value. In the early 2000 Oppenheimer sacked Metz and recommended selling bonds and buying stocks.

Of course, Metz was ultimately correct. Over the 5 year period from 1998 to 2003 the 10 year Treasury handily outperformed the S&P 500

Third Avenue Focused Credit Fund
Third Avenue management company was found in 1986 by Martin Whitman. Whitman was often called a revolutionary deep value manager with a speciality in small cap stocks. Often times deep value involved buying bankrupt bonds or distressed bonds. In order to expand their mutual fund offerings, sometime after the last recession, Third Avenue decided to open a junk bond fund. Since the bias of the company was in deep value and distressed securities the fund was chock full of the worst bonds imaginable. The fund did well for a few years, and then credit spread started to widen. Credit spread really widened on low tier debt (which was basically all the fund held). From the summer of 2014 through December 2015 the fund cratered. In December 2015 Third Avenue, in a surprise move, decided to close the fund and liquidate the holdings.

Of course, the decision by Third Avenue to close the fund came within 45 days of the bottom in junk bonds. 

A tip of the hat to @mm1966 who pointed out to me that the name of the fund was the Third Avenue Focused Credit Fund and not the Third Avenue High Yield Fund. 

Andy Hall
Hall was referred to as the God of the energy and oil markets. He rose to fame when he earned a $100 million bonus in 2008 as an energy trader at Citi. He went on to start his own hedge fund. For a number of years Hall racked up huge gains in the energy markets. Then the 2014 oil price collapse happened. Hall looked to be recovering from the collapse until the 2017 decline in oil prices happened and his fund lost 30% of its value in the first half of 2017. In July 2017 Hall shut down his primary hedge fund stating that $50 a barrel oil was the new normal.

Of course, the fund was shut down within weeks of the 2017 bottom and oil is now at $70.

Vanguard Changes The Strategy Of Its Precious Metals Fund
Vanguard just announced that it is changing the investment direction of its Precious Metal Fund. The new name of the fund is Global Capital Cycles Fund (whatever that is). The rationale for this change was to (and I quote) “to broaden the fund’s mandate and diversify the portfolio”.

Over the last seven years the fund has lost 60% of its value, which was right in line with the GDX (the gold miners ETF). 

This a recurring story with investment manage firms. By the time an investment firm throws in the towel on an asset class, then the bottom in that asset class is not far away. 

So, if you don’t have a small position in precious metals and miners – now would be the time to add that position.

Why post this on an education policy blog? I’m not sure but I’ll just leave this here in case anyone wants to consider the possibility that they sold their “Let a Thousand Flowers Bloom” stock prematurely:

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