New York — The best way to crush the crowd in 2017? Buy the things everyone insisted would never keep going up.
A portfolio stuffed with allegedly over-inflated assets would have returned more than 120% so far in 2017, trouncing the S&P 500 Index and underscoring the challenge for investors facing a plethora of pricey securities.
The hypothetical “bubblicious” portfolio includes Chinese real estate and internet names, a pair of US tech behemoths, a crypto-currency fund, the exchange-traded funds (ETF) industry, bonds that mature decades from now, and a dash of short volatility bets just to make things more interesting.
The out-performance is a testament to the momentum mania prevalent in today’s markets, a dynamic which has prompted the likes of Greenlight Capital’s David Einhorn, Goldman Sachs, and Sanford C Bernstein to mull whether value investing is in the midst of an existential crisis, given ultra-low interest rates and abundant liquidity.
With the benefit of hindsight, it’s easy — and somewhat tautological — to suggest that investors would have done better had they bought the things that went parabolic. But at any point in 2017, getting into many of these names would have proved a nail-biting endeavour.
Consider the elements that comprise this equal-weighted bubblicious portfolio:
Outside of Sunac, the debt-laden Chinese developer, equities in this hypothetical portfolio have traded at valuations many investors would consider prohibitively expensive. Trailing and forward price-to-earnings ratios (in the event that the companies even have earnings to speak of) have been multiples of their respective benchmarks. By now, even Sunac considerably outstrips the Hang Seng Index on both metrics.
For developed-market sovereign debt, generating returns has meant relying on capital appreciation rather than collecting interest in light of yields at near-record lows. In the case of Argentina, buyers had to grit their teeth and cross their fingers, hoping that a country with a long history of defaults would prove credit-worthy for longer than actuarial tables might suggest.
And then there’s bitcoin, an asset where analysts’ attempts to arrive at an elusive measure of intrinsic value have been exercises in futility, hilarity, or both.
Since accusations of “bubble!” have been flung fast and furious at virtually every asset class, such a portfolio is fairly well diversified. This helps explain why this combination of highly volatile equities and massive duration risk has managed to post a positive total return every month this year. So if you ask a wizened portfolio manager what a bubble is, don’t be surprised by a sharp retort.
Bloomberg
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