Just as a Ford dealership representative will not have much good to say about a Chevrolet, an investment parallel, Bill Gross, the largest bond fund manager in the world, will rarely say interest rates are going up, which will hurt his position.
We take note when someone is critical of their own wheelhouse. Recently Rupal Bhansali of Ariel investments was critical of her specialty, Emerging Markets. Our ears perk up when this happens, as while we do like this asset class, and have exposure, we have concerns on the overzealous money flows going into this asset class, taming our appetite for further allocation to this investment class. Remember when something is overhyped, or too popular, we tend to become skeptical (Zigg when other Zagg.) When someone is critical of their own, we give it more credence as there are very few reasons other than honesty as far as we can tell.
Here are a couple of Mrs. Bhansali’s main points:
- Common misconception that there area a lot of excess returns to be garnered because the growth rates are high. She says not true, see next point!
- Correlation between GDP growth and returns are good especially in Emerging Markets–NOT TRUE according to Rupal
- Risk and returns are adequately compensated – Not so according to Rupal …there is major liquidity risk. Developed markets have $23 trillion of market capitalization compared to Emerging Market’s $3 trillion market capitalization…cash flows into and out of this asset class will dramatically move the market as they cannot absorb this movement (This is our main concern as well)
- Investing in Emerging Markets especially the commodity based areas, Rupal recommends investing at high PE or low earnings cycle due to the deep cyclical nature, THIS IS NOT THE CASE TODAY–ACTUALLY THE OPPOSITE as PE’s are low
- In the next decade, it is very possible that developed countries will outperform Emerging Markets, due to current elevated Emerging Market values (Buying at the correct time is critical)
- Japan and Switzerland are Rupal’s stealth favorite longer term investments
Thanks for the critical pointers of her own area of expertise, we like candid honesty as it is often so hard to find and will continue to monitor her statements.
HHH (Happy Honest Hump Day!)