OK, before I start with a quick round-up on observations form the world of funds, just a reminder that my event on decarbonization is on today. We’re pretty much full up but if you do want to come along, sign up here –http://www.adventurousinvestor.com/decarbonisation-the-investment-implications-of-re-engineering-a-new-energy-system

Also another reminder to sign up for ETF Stream’s March EM ETF event…

Big Call: Emerging Markets

My first snippet is from Matt Hose at Jefferies who picks up the impact on Scottish Mortgage of Tesla’s share price ascent, ending last week up 15%, and now up 79% YTD.

According to Matt “based on the December factsheet, we estimate Tesla now represents c.12% of the portfolio, becoming the trust’s largest holding if the position has been run. SMT’s resulting strong NAV performance of late will have also reduced the weighting to unquoted investments to 18%, thereby offering some useful headroom to the 25% limit (at the time of purchase) within the investment policy”.

I have to say I’m a bit nonplussed by the rocketing Tesla share price. I’m absolutely not a Tesla hater but even I struggle to think that the share price is remotely realistic. But hey, what do I know.

Next up, I shan’t say very much about events at SQN Asset Finance (I’m a non-exec director at sibling fund SQN Secured Income) but I would simply repeat the observations of other analysts that the C shares, with a ticker of SQNX, are trading at around 77p. This compares with a stated NAV of 98.03p, and the dividend of 7.25p per annum. That equates to a running yield of around 9%. To date the C issue has no issues with either the solar business nor the AD plants.

My next small throw-away observation is from ETF analyst at SG this time – Gold ETPs in January had significant inflows of $3.21bn, twice the 2019 monthly average. This tells me that something is brewing in asset allocation land.

Last but by no means least, sticking with that theme of ETFs I have just read through an excellent monthly report by Vincent Deluard, Global Macro Strategist at INTL FCStone,  called ETF Panic Attacks.

Vincent’s core concern is whether there are any persistent liquidity and market mispricing problems for less liquid asset classes. He’s studied daily flows, assets, prices, and net asset value for the 1,000 largest US-listed ETFs since January 2014, or about 6 million lines of data.

His focus? On those with a big outflow, defined as a net redemption of more than 2% of outstanding assets, which corresponds to a sale of $6.2 billion for the largest ETF (SPY) and about $4.5 million for a relatively small ETF like EPHE (iShares MSCI Philippines ETF).

His conclusions are really very interesting for all of us interested in the market efficiency of ETFs.

  1. Large outflows do not cause abnormal deviations from net asset value for the largest equity and bond funds, including HYG (iShares iBoxx High Yield Corporate Bond ETF).
  2. However, large outflows can lead to significant discounts-to-NAV for smaller high-yield bond funds, leveraged loan ETFs, high-yield muni ETFs and emerging markets debt ETFs.
  3. Asia equity ETFs trade at very wide discounts to their NAVs on large outflow days, but the mispricing may partly be explained by time zone differences and the use of stale data in NAV calculations. “Large redemptions for smaller emerging markets funds, where dealers cannot properly hedge their exposure due to liquidity issues or trading constraints, lead to abnormally large losses and discounts to NAVs. These effects are typically reversed the following day, rewarding the brave investors who are willing to assume the risk when the ETF crowd bails out”.

Just in case you thought that the last category represented a trading opportunity, Vincent is quick to observe that “for most days and most funds, flows-based short term trading strategies would have the same probability of success as a coin flip…..But this is not the case for smaller funds where the underlying basket cannot easily be traded due to time zone constraints, different settlement rules, political risk, and shallow liquidity. “

“In a typical emerging market panic attack, bad news triggers waves of sell orders. Market-makers and brokers may not be able to hedge their books, especially if the local market is closed or if circuit breakers constrain trading. Spreads usually widen to compensate for the risk of holding unhedged shares overnight.

In this case, contrarian investors who take the other side of the ETF trade do provide liquidity to the market. This service tends to be compensated: most small emerging markets ETFs tend to rebound by 30 to 70 basis points the day following abnormal outflows. Investors may not be able to capture the full rebound because wider-than-usual spreads will shrink their expected gains. In addition, these gains are not without risk: investors are compensated for taking on risks that ETF sellers are no long willing to assume, i.e., buying Chilean stocks when riots erupt, buying Chinese stocks after threatening tweets from Trump, etc. But at least the strategy offers a positive trade-off between risk and reward, in a world where so many assets offer return-free risk and most safe assets trade at negative yields.”