Harald Berlinicke, CFA 🍵’s Post

The "Valuation Smile": Great visualisation about valuation differential amongst companies…💦 💵 depending on liquidity This interesting visualisation from Yet Another Value Blog caught my attention. For its sheer simplicity. And for the fact that it is pretty spot-on 🎯. So what does it tell us? "You can see stocks that are extremely liquid enjoy a premium multiple,… while assets that are extremely illiquid (or, preferably, don’t trade at all, so effectively no liquidity) enjoy a premium because they can be 'volatility laundered'* / are so in demand from allocators. It’s assets in the middle that seem to suffer. These are assets that are liquid / publicly traded, but not so liquid that pod shops can trade in and out of them like water. Think smaller companies that are out of the indices, semi-controlled companies that only trade a few thousand shares a day, companies trading on smaller exchanges, companies with some restrictions on ownership (like MLPs mentioned above), etc. Across the board, those assets seem to trade for lower multiples and would probably get a boost if they went fully illiquid (i.e. private) or liquid (i.e. took steps to improve their liquidity to get a multiple boost)." *There we go again, thanks Cliff Asness, for creating that gift 🎁 that keeps giving. ☺️ Wouldn’t be surprised to see many more publicly traded companies go private in the coming years as this valuation differential is simply too attractive to ignore. h/t Matthias Mirwald (+++Opinions are my own. Not investment advice. Do your own research.+++) #markets #investing #money #wealthmanagement Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

Private equity groups struggling 😩 with the hefty debt loads of their holdings says Moody’s "In a new analysis, the agency indicated that recent increases in interest rates have put the assets held by some of the world US’s fastest-growing PE groups under strain. It said more than half of the companies in the portfolios of Platinum Equity and Clearlake Capital Group, both Los Angeles-based, are at heightened risk of default, with a rating of B3 or below. Moody's said the holdings of Clearlake, a co-owner of ⚽️ Chelsea Football Club, and Platinum had the highest leverage ratios of the firms it surveyed, while others had begun to reduce their debt loads. The two groups have attracted tens of billions of dollars in recent years from top institutional investors in North America, transforming them from niche middle-market firms into dealmaking powerhouses. 😮 While Clearlake grew from about $1bn in assets in 2008 to $90bn today, the size of Platinum’s funds has nearly quintupled during that time to almost $50bn in assets. ⚠️ The report found that overall in the two years to August, portfolio companies of the top dozen buyout groups defaulted at a rate of 14.3%, a figure twice as high as that for companies not backed by private equity. Private capital powerhouses including Apollo Global Management, Inc. and Ares Management Corporation have had buyouts suffer. ‼️ Nearly a quarter of the Apollo-owned companies that Moody’s rates have defaulted since 2022, while 47 per cent of Ares-backed companies they follow are distressed, the agency said. ‼️ The industry has been hit by the swiftest interest rate increases in a generation, which brought down valuations that had soared during the pandemic and pummelled the balance sheets of thousands of highly leveraged private equity-backed companies. Between January 2022 and August of this year, more than a third of the Platinum-owned companies rated by Moody’s underwent restructuring or a debt default. 17% of Clearlake’s portfolio suffered the same outcome. Clearlake also became an active user of so-called continuation funds, where the group in effect sells the company to itself and other investors — novel deals that will be tested by higher rates for the first time. 💡The fast-growing market for private credit has impeded rating agencies’ task, since such loans are more difficult to track than more traditional forms of borrowing. ☝️Private credit can 'mask some issues' in a private equity firm’s portfolio, Julia Chursin, vice-president at Moody’s, said in an interview. 'There could be some opaque credit risk which is absorbed by the private credit sector, although they claim they only pick good ones.'" (Financial Times, 10 October 2024) (+++Opinions are my own. Not investment advice. Do your own research.+++) Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

A value manager with questionable values… Happy Friday! 😃 (+++Opinions are my own. Not investment advice. Do your own research.+++) #humour #humor Enjoyed this post? 👍 Like 💬 Comment 💌 Share 🔔 Subscribe My posts focus on the topics of manager selection, special situations investing and asset allocation. And typically Fridays, you’ll see a humorous post like this one.

BREAKING: CFA Level II Pass Rate Slumps to 47% I can assure you I'm not to blame for this…I am only involved at Level 3 CFA grading!!! 😉 As Bloomberg just reported: "The pass rate for the second level of the chartered financial analyst test slumped to 47%, down from a quarter-century high reached earlier this year while still above average. In August, 47% of candidates sitting for the Level II test were successful, compared with the 59% pass rate for May test-takers. That success level was the highest since 1998. Still, the August results were above the 10-year average of 45% and the lows from 2021, when disruptions caused by the Covid-19 pandemic led to lower pass rates, the CFA Institute said in a statement Thursday. 'Once again, we saw pass-rate differences between first-time testers and those who tested having previously deferred their exam on one or more occasions,' Christopher Wiese, managing director for education at the institute, said in the statement. Candidates who maintained their study schedule and took their exams as planned had a 55% pass rate, compared with 35% for those who delayed, he said — similar to outcomes for Level I test-takers. CFA exams are offered several times a year and can lead to new job opportunities and higher salaries in the finance industry for those who pass all three levels. Almost 8,900 candidates sat for the Level II exam in August, which was administered at 423 testing centers around the world. Those who took Level I of the exam in August got their results earlier this week, with 44% passing, above the 40% average for the past decade. Level III results are scheduled for release on Oct. 17." (+++Opinions are my own. Not investment advice. Do your own research.+++) #markets #investing #cfaprogram #cfaexam #cfalevel2 Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

60:40 isn’t dead but boy 👦 can you have lost decades with this strategy! Came across this fascinating chart in yesterday’s presentation by Incrementum AG fund manager Hans G Schiefen. As GMO writes in their research 🔬 piece "A second opinion is just what the doctor ordered — a valuation-aware, dynamic approach to strategic allocation" by Ben Inker: "The de facto 'passive' allocation of 60% equities/40% bonds has proven effective at compounding wealth over time by tapping into two key risk premia: the equity risk premium earned by underwriting the risk of an economic growth shock and an inflation risk premium received for bearing the risk of surprise inflation. 💡Since 1979, when the Bloomberg U.S. Aggregate Index incepted, a 60/40 portfolio made up of U.S. equities and bonds has delivered returns of 10.2% annualized, outpacing inflation by 7.0% and exceeding the return requirements of most investors. So, we’re done, right? We should all just run 60/40 allocations and call it a day? That approach has worked exceptionally well since 1979, and quite nicely over even longer time periods. While the classic disclaimer on investment ads says past performance is no indication of future results, we can take away some lessons from 120 years of results for a 60/40 portfolio which has delivered real return of about 4.8% since 1900 – a couple of points less than the 1979-to-present period, but again sufficient for most investors’ needs. ⚠️ But this enviable long track record hides the fact that there have been six periods, averaging 11 years each, in which an investor in a 60/40 portfolio would have either broken even relative to inflation or, even worse, lost money in real terms. Those chapters share something in common – they all followed exceptionally strong periods of return for the traditional portfolio and thus began when either or both stocks and bonds were trading at extremely high valuations. In the most recent run up from early 2009 through the end of 2021, this passively allocated 60/40 portfolio delivered about 9.4% real, about twice the long-run average. These stellar returns were powered by rising equity markets and a decline in interest rates that left the S&P and real bond yields at some of their least attractive valuations in history. Today, following the fastest rate hike cycle in 30 years, real and nominal yields on government bonds look reasonable (though the inverted yield curve may make it hard for bonds to earn more than cash). But the yield pickup for taking most credit risk looks unsatisfactory and some stocks, particularly in the U.S., are trading at excessively high valuations. Against this backdrop, reversion toward longer term valuations would lead to very disappointing medium-term returns for a 60/40 portfolio." (+++Opinions are my own. Not investment advice. Do your own research.+++) Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

Why employers should go beyond the mandatory fruit 🍏 🍇 🍌 basket for their staff I love watching The Carlyle Group's David Rubenstein when he interviews industry captains or hedge fund billionaires on his show on Bloomberg. This is an interesting snippet ✂️ from his episode with Google's CEO Sundar Pichai on a topic that is close to many people’s heart❤️ (or rather: stomach 😋). I think most of us (including myself) have had employers who were…proudly…offering their staff a weekly fruit basket, sometimes even topped by those who had that basket replenished one more time during the week. But should those employers have gone further in terms of wooing their employees with culinary perks? You know a rhetorical question when you see one, don’t you❓ So check out this clip for the answer what's in it for employers to up 🆙 their game in this regard! 'Cos not doing what Google's CEO is talking about could prove to be a classic case of being penny wise but pound foolish for corporations… 🥹 (+++Opinions are my own. Not investment advice. Do your own research.+++) #markets #investing #money #hr #humanresources Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

BREAKING: Pimco’s sweet 🍯 spot is in 5-year bonds as it expects steeper yield curve on back of deficits "Investors who expect central banks in industrialized nations to successfully tap the brakes on growth while skirting downturns would do well to target five-year bonds, according to Pimco-Pacific Investment Management Company. Newport Beach, California-headquartered Pimco sees those maturities sitting in the sweet spot as policymakers ratchet down interest rates and investors deploy cash that has long been sitting on the sidelines. The asset manager runs the $167 billion Pimco Income Fund (PIMIX) — the world’s largest actively managed bond fund — which has beat 90% of peers over the past five years. 'The US economy, like others, appears poised to achieve a rare soft landing 🛬 – moderating growth and inflation without recession,' wrote Pimco’s Tiffany W., an economist, and Andrew Balls, the firm’s CIO of global fixed income. 'Cash rates are set to decline alongside policy rates, while high government deficits may drive long-term bond yields higher over time.' Things are already looking up: the US fixed-income market ended September with a five-month streak of gains, its best run since 2019. And in the 12 months since Treasury yields topped 5%, the Bloomberg US Aggregate index has returned a little over 11%. But investors hold a record $6.46 trillion in US money market funds while yield on the five-year Treasury, which historically performs well during periods of easing, sits just under 4%. ⚠️ In this environment, Pimco said, five-year bonds stand to benefit from price appreciation, in contrast 'it creates reinvestment risk for cash and other short-term instruments.' 'Central banks, especially the Fed, are focused on returning monetary policy rates to estimated neutral levels,' the pair said in their cyclical outlook for the next six to 12 months published Wednesday. They see the US’s neutral rate — where the economy is neither growing nor restricted — in the range of 2% to 3%. Important areas of the US yield curve have normalized, snapping a record period of inversion as the Fed finally began easing rates last month. The US presidential election 🗳️ in November 'reinforces our curve steepening view,' the pair wrote. Tariffs, particularly those proposed by former President Donald Trump, would present an inflationary challenge for the Fed. Globally, Pimco prefers owning more interest-rate exposure in areas where terminal pricing is higher than the US, like the UK 🇬🇧 and Australia 🇦🇺. The asset manager favors higher-quality credit and structured products while advising caution in fixed income 'given some complacency we see in corporate credit due to tighter valuations.'" (Bloomberg, 9 October 2024) (+++Opinions are my own. Not investment advice. Do your own research.+++) Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

⌚️ 👜 🥃 Have luxury brands overdone price increases in recent years — are lower margins now coming to the sector? 😳 The Financial Times Lex column pointing out an unfavourable trend that may prove a major headwind for the luxury sector whose shares have had a nice bounce following the massive rally in Chinese equities: "That luxury goods have a value proposition at all may be news to many. Consumers are quick to decry greedflation when the price of supermarket staples rises faster than the cost of raw materials. But when one is already paying silly money for a handbag or a watch, it is difficult to understand when too much becomes too much. Yet for all that, there are convincing signs that the luxury sector’s post-pandemic price rises have dented its appeal. Bernstein analysts estimate that, between 2020 and 2023, global like-for-like prices on a selection of “evergreen” products rose 66% at LVMH-owned Dior with CHANEL hot on its tail. At the other end of the spectrum, industry leader Hermès restrained itself to a 20% increase. This trend has been responsible for much of the sector’s margin expansion over the past few years. Operating profits rose from 21% of revenue in 2019 to 26% in 2022 on HSBC numbers. Trouble is, it is now unravelling. With consumers tightening their belts, pricing has gone from being a tailwind to a headwind. Already, many brands have stopped upping their price tags. Some have even gone into reverse. And brands do not necessarily need to discount to see lower margins. They just need to introduce more of the cheaper entry-level products. Overall, the second quarter saw a 3% decline in the average selling price of luxury products and a 6% decline in the price of handbags, according to Bernstein analysis of Lyst data. ⚠️ Not all brands will be equally affected. Hermès, which combined restraint with desirability, managed to push through an 8 to 9% increase in the first two months of the year, according to HSBC. Moncler and Prada Group — among those that increased prices most sharply post-pandemic — have done so from a lower base. Recent performance suggests that they have not — as yet — managed to price their customers out of the door. Conversely, Burberry had been relatively conservative in its traditional product line. But new collections have been vastly more expensive, driving a 21% volume decline in the second quarter of the year. Overall, declining pricing power suggests that the much-awaited luxury renaissance will be a long time coming. Investors have bid up the sector more than 10% on hopes that China’s stimulus package will revive its fortunes. It will not be that simple." (+++Opinions are my own. Not investment advice. Do your own research.+++) #markets #investing #money #wealthmanagement Claudio Brocado Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸

📈 📉The case for trend following CTAs in a higher rate environment At the recent Kepler Partners LLP liquid alts conference in Wembley I attended a presentation by Swiss🇨🇭Managed Futures boutique Quantica Capital AG. And I had a longer chat with the firm’s CEO Nicolas Mirjolet over lunch — so many questions on my mind given that trend following has historically been a somewhat tricky hedge fund strategy for me with mixed investment results (and sub-optimal holding periods)! It was interesting to see how their approach differed from that of the industry heavyweights 🏋🏻♂️ like Man AHL, Aspect Capital or Winton Group. But let's look at the latest research 🔬 piece the firm just published which has a particularly powerful takeaway for asset allocators. Here is the executive summary (make sure you check out the charts in the carousel 🎠): "In this research note, we provide a simple framework that illustrates why in a higher cash rate environment, trend-following CTAs become more – not less – attractive relative to bonds. Our results are based on a basic 3️⃣ asset portfolio, consisting of US equities, US government bonds, and a proxy index for diversified trend-following CTA strategies. We evaluate the historical excess returns of the three assets over the last 35 years, conditional on the level of the US risk-free rate, the 3-month US Treasury bill rate. We do not find a statistically significant difference in the future expected excess returns for these assets conditioned on the US cash rate. However, we do observe a statistically significant difference between low and high cash rate environments in a variable that is crucial to portfolio construction: the correlation between US equities and US government bonds. ⚠️ 💡Specifically, we show that when the US cash rate has historically been above 3%, the average equity-bond correlation has been significantly less negative than when the cash rate has been below 3%. These findings have important implications for adjusting portfolio allocations in response to a higher level of the cash rate. ➡️Using a set of simplified but conservative assumptions, we show that while a 55/35/10 equity/bond/trend-following portfolio may be more optimal than the traditional 60/40 equity/bond allocation in a low cash rate environment, the optimal allocation shifts to a 55/25/20 portfolio with a higher trend-following CTA weight when the cash rate is high.⬅️ The increased optimal allocation to trend-following in a high cash rate environment is mainly driven by the change in the equity/bond correlation. The optimal allocation to trend-following increases in a high cash rate environment, primarily by reducing the bond allocation, while the allocation to equities remains largely unchanged." (+++Opinions are my own. Not investment advice. Do your own research.+++) Tap the bell 🔔 to subscribe to my profile & you'll be notified when I post. 💸 Lukasz Wojtowicz, CAIA

👨⚕️ Would love to check my fellow investors' pulse 🩺 with the following poll 🗳️ ❓ Over a 10-year period to either hold gold🏅 or to hold Bitcoin 👾, which one would you choose? ℹ️ This week I am using the question for my poll that Bloomberg's Merryn Somerset Webb asks every guest at the end of her excellent podcast "Merryn Talks Money": “If I were to give you a choice over a 10-year period, and it doesn't matter if you're not an expert in these things, over a 10-year period to either hold gold or to hold Bitcoin, which one would you choose?” Without being able to trade it, purely on a buy-and-hold basis, take a sleeping pill 💊 and wake up ten years later kind of basis… As Merryn allows her visitors only to choose amongst those two options, I am also just using the two options in my poll. John Stepek As a reminder, if you have an idea 💡 for a LinkedIn poll but feel you lack the reach to make the results meaningful, do send me a DM 📥 and I may run it for you…provided the topic resonates with me! (The topic for today's poll is my own idea, otherwise you would see the collaborator for the poll mentioned here.) I am running 🏃♂️ a weekly investment related poll on Mondays (08:00 CET) for 7 days. 🙏 Thanks for participating! (+++Opinions are my own. Not investment advice. Do your own research.+++) #markets #investing #money #gold #bitcoin Enjoyed this post? 🗳️ Then, first of all, please vote ☑️ 👍 Like 💬 Comment 💌 Share 🔔 Subscribe to my profile to be an active part of my LI community. My investment research focuses on the topics of manager selection, special situations investing and asset allocation. ➡️ As I do not want to sway the poll one way or another, I may not specifically respond to anybody’s comments on it. ⬅️