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The golden age of doing nothing has arrived for investors, just in time for summer.
Fund managers often find that the August escape to the beach (in the northern hemisphere at least) is tinged with a little separation anxiety, distanced from data terminals, emails and spreadsheets.
This has always been misplaced, in my view. Maybe even a little performative. In any case, the good news is there’s no need to bother with it now, because investors of all types have an unusual opportunity to kick back and relax.
The reason for this is the end of the Tina era. In the long period of rock-bottom interest rates after the great financial crisis, the mantra was that There Is No Alternative to equities and other riskier investments — private assets and the like, even crypto for those with a strong stomach — given the painfully skinny or even negative yields that were available on bonds.
“Investors were forced in to markets that they should not have been in,” said Greg Peters, co-chief investment officer of PGIM Fixed Income. “It was not their preferred habitat.”
An outbreak of scorching inflation and rapid interest rate rises around the world have, however, cancelled Tina. The ecosystem of analysts and pundits in financial markets is typically quick to produce a new acronym, but it has been slow to do so this time around, possibly a reflection of the reluctance to believe that interest rates really are going to stay high for a long time.
A year ago, I tried to make the acronym of choice Bonds — Buying Ordinary Notes and Debt Securities. Sadly, this failed. Too boring. But step forward Kevin Gordon, an analyst at Charles Schwab in New York who emailed to suggest Barbara — Bonds Are Really Back And Really Attractive. At a slight stretch to tap in to the zeitgeist, you can even bend this to Bonds Are Really Back In Earnest, or Barbie.
This acronym has a chance of sticking. We can dream. In an ideal world, we would see Peter Oppenheimer, chief equity strategist at Goldman Sachs, opine on the matter, hitting the pop culture/markets nerd meme mother lode.
In any case, now that Barbie has taken Tina’s crown, investors have a nice alternative to venturing out in to riskier bets: doing nothing. Professional investors have long looked down their nose at anyone who buys bonds and watches the regular interest payments roll in — “coupon clipping” in the market parlance. But as one such investor put it to me recently: “This is as God intended.”
It is not a fancy strategy, but when two-year US government bonds are yielding close to 5 per cent and 10-year Treasuries yield close to 4 per cent, who cares? “Two years ago, to get a 5 per cent return, you literally had to look to lending to the government of Iraq,” said one private wealth adviser. “Now you get that on cash. Clients are much happier that the default option of doing nothing is attractive.”
Of course, inflation erodes returns here. We can’t just have nice things. Still, the fine art of doing nothing has a number of useful applications in markets at the moment.
In a recent podcast, Jonathan Aitken, who advises large investors on strategy, spoke about exactly this. “For the first time in roughly 25 years, we’re paid not to have a view,” he said.
He continued: “If interest rates are zero, then we have to have a view all the time, because any decision to step out of risk assets is a career decision if you are not paid to wait. That has flipped on its head. If you can get the best part of 5 or 6 per cent on a US T-bill, you don’t need to have a view on these things. You are paid to wait.”
Professional investors are always aware of the risk of overtrading. It is important to recognise and accept when you are wrong and to give up on positions or views in markets that are not working out. Some long-term investors who have refused to embrace this year’s long rally in risky equities might benefit from a reminder of that. But flip-flopping on views too often can lead to being wrong twice and to racking up trading fees that eat in to returns.
Howard Marks, the legendary co-founder of Oaktree Capital Management, also made the case recently for making big pronouncements on market direction only rarely. In a note, he said he had spotted really meaningful moments in this space only five times in 50 years.
“Once in a while — once or twice a decade, perhaps — markets go so high or so low that the argument for action is compelling and the probability of being right is high,” he said. “What if I’d tried to make 50 market calls in my 50 years . . . or 500? One key is to avoid making macro calls too often. You have to pick your spots . . . . Most of the time, you have nothing to lose by abstaining from trying to adroitly get in and out of the markets: you merely participate in their long-term trends, and those have been very favourable.”
With those wise words ringing in your ears, park yourself on a sun lounger somewhere and chill, or go and sit in an air-conditioned cinema and watch the Barbie movie — the ultimate Barbie trade.