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Why We Don’t Like TINA; Avoid Being Cornered into Over-Priced Assets

A bead of sweat runs down the Manager’s forehead.  The pressure is on.

Tina, the Dealer, taps her foot impatiently.

The Manager reviews his options one more time.  Which to choose?

a) A slow and usually trusty Bentley? The problem is that, whilst they normally only break down every 20 years, this one has not seen a mechanic in 30 years. Or…

b) A shiny red Ferrari?  However, this car needs careful maintenance every 4 years but hasn’t had a service in the last 9 years. 

The Ferrari will go faster than and be more fun than the Bentley but when it does break down it will be costly. When it crashes, it will be pretty nasty.

The Manager’s dilemma is heightened by the fact that these are the only two cars left in the showroom. Both classic cars have gone up substantially over time and both are at their highest prices, ever.

Tina piles on the pressure, looking at her watch, "I’ve got buyers queuing up outside and I’m afraid this is the last chance.  Let’s face it, There Is No Alternative!”  (This is how Tina got her name). 

The Manager’s job, reputation and his client’s livelihoods are at stake, what to do? Which to choose?  The pressure is crushing.

From Cars to Markets

This is similar to the position that many multi-asset managers have found themselves in over recent weeks.  Indeed, in two meetings recently with fund managers, both have shrugged their shoulders and actually announced, “Well, there is no alternative, is there?” (in a resigned tone).

The reason is that the Bentleys - or government bond markets - and the Ferraris - the equity markets - offer very little value and yet the asset managers feel the pressure is on to put the money into the markets. 

Standing back from the markets and holding too much cash can mean the Manager may miss out on a bit more performance and may become career-threatening for him or her.  

Crash Barrier

At Equilibrium, we believe that is our responsibility on our clients’ behalf to assess the probabilities of loss as well as gain.

For example, just because one market, say UK equities, are at a lower valuation than, say, US equities does not mean we should be buying UK equities. 

Both could be overvalued and just because one seems cheaper does not mean you cannot lose money.  Just because a Ferrari is cheaper than a Bugatti, does not mean you cannot overpay for the Ferrari and lose money on it.


(There Are Nicer Investment Alternatives.)

In recent months we have reduced equities and switched into a structured product.  Sure, this is equivalent to buying a speed-limited car, but equally we think it is less likely to crash. 

Most recently we have also put some of the cash to work by investing in a short duration high yield bond fund.  Although this involves lending to some companies with lower credit ratings, holding the bonds for very short periods significantly reduces risk - think renting sports cars for very short periods.

Driving Returns

The Manager in the opening piece is under pressure, if he gets back to the office empty-handed his boss is likely to be unhappy and clients may walk (literally). 

In contrast, Equilibrium understands how hard our clients have worked to build their nest-eggs and we see ourselves as both investors and guardians of their capital. 

Our portfolios contain plenty of equities and bonds but we will not be cornered into buying because of lack of alternatives. The behavioural pressures do not apply and growing and preserving the client’s capital takes precedence. 

To read more blogs from Neal Foundly click here.

The commentary in this blog in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the reader. You should be aware that the value of an investment can go down as well as up, and no guarantees as to the future performance, income or capital growth are given expressly or by implication.