ICR291: My two cents on Bitcoin
In this episode of the podcast, my two cents on Bitcoin.
Is it the first genuinely successful get rich quick scheme in history, just a bunch of nerds and drug dealers speculating on a harmless game, or something far more sinister?
I also chat to Bill McQuaker, portfolio manager in Fidelity International’s Solutions team.
We talk about how investment markets have performed in 2017, the outlook for next year, and Bill’s own views on Bitcoin.
Personal finance news
-Half of parents in the UK with a child aged five or under are reluctant to have more children due to the cost of childcare. This is despite recent Government initiatives to support them financially, according to investment manager Killik & Co.
-The underlying social, culture and psychological traits of individuals within the regions and cities of Britain are determining factors of their overall economic competitiveness. This is one of the findings of a new report that publishes the results of a wide-ranging survey of the behaviour of individuals across Britain’s regions and cities and the economic performance of these locations.
-UK financial services companies are increasingly bringing their offshored operations back to home nations as companies are being affected by rising costs and lacklustre service in offshore regions. This is according to specialised recruiter Robert Half Financial Services.
-A ground-breaking fraud prevention scheme aimed at identifying and protecting potential fraud victims when they visit a bank or building society branch has stopped more than £9 million being passed to criminals in its first year of operation. This is according to new figures from UK Finance.
-New figures show the overall luxury inflation rate has fallen sharply in the last six months. The latest edition of the Coutts Luxury Price Index, which covers a basket of 132 luxury goods and services, shows inflation falling from 6.2% in May to 3.6% in November.
-And finally, the Bank of England has kept interest rates on hold at 0.5%. It’s the first meeting of the Monetary Policy Committee since interest rates were risen for the first time in ten years at its November meeting.
Bill: My job at Fidelity is to manage one of our multi-asset ranges. The multi-asset open range. I think that’s the distinguishing feature of the funds I manage is that we invest in actively-managed funds, the best actively-managed funds we can find anywhere in the world in essence.
Martin: It’s been a stunning year for global equity markets. The strongest I think since 2010. Do you think markets have now reached a level of irrational exuberance?
Bill: No, I don’t. I think what’s happened in 2017 in many regards is quite rational. If you look at conditions this year the global growth backdrop has improved. Things have speeded up a bit. The rate of growth has improved. At the same time, the pattern of quite low growth volatility that we’ve seen since the global financial crisis has continued. There hasn’t been much to worry about in terms of some disappointing numbers here and there.
Alongside that if one looks at the world’s central banks they’ve remained firmly on the sidelines. I think that’s been helpful for markets. Then finally and certainly for the second half of the year quite importantly, inflation has surprised to the downside. We’ve seen that in the US, we’ve seen that in Europe more recently. That’s been reassuring for investors. I think all of those things point to quite a good year for financial markets.
What perhaps is worth commenting on in a slightly more negative way is the exuberance part of what you just said for certainly there has been quite a lot of enthusiasm from investors this year. You see that in terms of flows into pretty much every risk asset, whether we’re talking about equities or credit, commodities, anything really that has got some risk attached to it has attracted new money this year. I think perhaps there’s been a little bit too much enthusiasm for conditions that are good but nothing in financial markets, as in life, lasts forever.
Martin: Can we expect that enthusiasm to continue again next year and to see a repeat performance of strong equity returns in 2018?
Bill: I suspect that 2018 won’t be as good a year for investors. I think there’s usually a price to be paid for growth. I think in 2018 we should be a little bit concerned about what might happen to prices. There are more inflationary pressures in the world and I think they might become more apparent in 2018. How wages respond to those inflationary pressures may mask it as well. I’d worry about that.
Even if inflation doesn’t surprise to the upside, I think it’s likely that we’ll see a looser monetary policy around the world. We know that quantitative easing has been scaled back in the US and the likelihood is that by the end of 2018 the Europeans will be doing something similar. Interest rates are rising and as we go through the year that might become a bit more commonplace as well. That’s typically something of a headwind for markets.
Something that I think we need to keep an eye on in 2018 is the oil price for the oil price has been quite helpful for a lot of 2017. The last few months we’ve seen it jump and if we were to continue to see oil prices rise next year, which I don’t think is impossible, then that would also put some pressure on the system. A less good year in 2018 I suspect some more things for investors to worry about.
Martin: Now one challenge investors face when there’s high equity market valuations and also rising interest rates is getting sufficient diversification within a multi-asset portfolio. How do you go about approaching that particular challenge?
Bill: Well, it’s been a challenge for investors like me since the global financial crisis and since bond yields fell precipitously. I think there’s no magic solution to this. We need to look at what instruments are available that we think will rise in price should some bad things begin to happen tomorrow. That’s the essence of diversification.
What would I point investors to? I think US treasuries yielding 2.3%, 2.4%. In historical standards that’s not particularly high yield. If there were to be a downturn in economic growth then I think the likelihood is that those yields will fall and that would offset some pain in other parts of investors portfolios. Particularly in equities.
Other investments that have got the same character I think there’s something to be said for index-linked bonds. I mentioned the possibility of a bit more inflation in the world and if we were to see a situation where inflation picked up but growth didn’t then I think index-lined bonds could be quite a nice investment against that backdrop and we’ve also offered diversification.
Gold is a solid investment that I point people towards. It’s a classic risk-off investment and should there be some problems next year I suspect that the gold price would go up.
Then perhaps last on my list, loans are slightly more esoteric asset class, a bit more risky in the sense that it involves credit, but one of its attractive features in some environments is that it’s not interest rate centred. Should short-term interest rates rise that actually benefits the performance of loans. Going back to diversification they tend not to be correlated with equity markets or that appeals to it.
Martin: You mentioned in your introduction you run your multi-asset portfolio using actively managed funds. Active fund management has faced a lot of criticism in recent years. How can investors go about picking good quality actively managed funds?
Bill: Well, I think the answer to that question lies with good quality research. Here at Fidelity we spend a lot of time and energy researching what different strategies are about, teasing apart the approach that a portfolio manager or a team takes to generating performance, looking at the whole investment process through both a qualitative and a quantitative prism to arrive at a clear decision as to whether the strategy is good, bad, or indifferent.
I think a lot of the academic work that has been done critiquing active management has tended to look at the universe of actively managed funds in totality. I think you might get some quite different answers if instead of looking at everything you look at a subset of funds where there are reasons to believe that [inaudible 00:08:38] out performance can be generated by a high quality investment strategy. That’s certainly what we’re trying to do.
The other part of that side of things is understanding that different strategies come with different characteristics and different strengths. That means that even good strategies will perform at different times of the economic and market cycle. The other part of the challenge is to blend together different funds so that almost regardless of what unfolds in the world you have in your portfolio one or more funds in each region that is well-suited to the environment that has been faced today and tomorrow and as a result is generating above market performance.
Martin: Finally then, Bill, if I can ask you if you’ve got any views on the rise of Bitcoin? Possibly the top performing asset class, if we can call it that, this year and other cryptic currencies too. Do you think those will ever feature in mainstream investment portfolios?
Bill: I do think that what we’re seeing with Bitcoin it’s entertaining. It captures the headlines. I would categorise it as speculation rather than investment. I struggle to point to intrinsic value in Bitcoin. In terms of how well it’s performing if you compared it with other bubbles that have emerged historically it’s actually tracking the biggest and best of the lot, which is the Dutch tulip bulb speculative period that unfolded 300 or 400 years ago.
I think there’s some parallels between Bitcoin and tulip bulbs. Perhaps tulip bulbs have use in as much as you can at least feed tulip bulbs to squirrels. I’m not sure that this is more than a speculative fad. That said, electronic currencies, and I’m no expert in terms of the way that they work and so on, but there must be a possibility that they have advantages over conventional currencies.
If that is correct then I think it is highly likely that over time governments will take those advantages and build them into more conventional nationally-issued currencies to the point where these independently-issued currencies quietly fade away.
Martin: Bill, thank you for joining us on Informed Choice Radio today. That was fantastic.
Bill: It was a pleasure. Thank you.