Monday, August 16, 2010

FT - the puzzle behind the valuations of bule chips

Quoting from John Plender in the FT on Wed 11-Aug-2010:
Market behaviour is singularly unfriendly to conventional investors at presetn. Asset prices, whether of equities, bonds or alternative investments such as commodoties, go up and down in lockstep in a Pavlovian response to central bankers tweaking the monetary tap. Yet when prices goe down, many investors feel that nothing looks that cheap.

The obvious expception, I would argue, is that of quality stocks in the US and much of Europe, which are not on demanding ratings. ... It is as if, he [Jeremy Grantham of GMO] says, there is an extra and unusual force working againgst them. ... The first concerns population."
His first explanation is a bit daft, so I omit it.
The second explanation is that institutional investors have been following the strategy of the Yale Endowment by putting more of their portfolios into private equity, hedge funds and real estate, while within their equity investments they have been increasing exposure to foreign equities. Hedge funds, of course, are not paid to buy Coca-Cola, while private equity firms do not invest in big companies with hallowed brands.Old fashioned blue chips ... are being liquidated to pay for this portfolio shift.

This is fine, as far as it goes, but the puzzle can also be approached from another angle - that of the dwindling number of investors whose strategy involves buying low and selling high. ... Then there are the momentum traders, fund managers who follow short-term trends to minimise their business risk as opposed to maximising clients' returns. Paul Woolley ... has shown how such fund management principal-agent issues contribute to mispricing and market inefficiency.

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