I might concentrate on energy, but that doesn’t mean I devote every waking hour to reading quarterlies of E+P companies and oil stockpile reports. Recently, I read a copy of the special report on alternative investments from the Money Management Institute – certainly not written to influence a view on oil prices. But do you know what that overview of capital flows of alternative investments told me? It helped confirm my belief that oil is indeed headed higher.
The Money Management Institute (MMI) is composed of virtually every important asset management group and together contributes data that charts the course of where large individual and family trust money is moving. The 2014 issue of the MMI research report on Alternative Assets distribution through wirehouses appeared on May 2nd, and gives an overview on the way that asset allocation of big investors has been trending in the last year, as well as how that has changed in the last three years.
Two major takeaways exploded out at me with even a cursory look at the report. First, it’s very clear that big money investors are moving rapidly away from traditional alternative investments like hedge funds and into what are being called ‘liquid’ alternatives, like ETF baskets and mutual funds. This makes a lot of intuitive sense as hedge funds have racked up two sub-par years, at least compared to the major indexes. But the shift is also obviously in response to the big hedge fund scandals that have emerged in the last several years, including Galleon, SAC and of course Bernie Madoff – investors are clearly looking for a quicker rip-cord to investments that are in trouble, instead of the lock-up periods and quarterly requests for distributions that most traditional hedge funds require.
But a second takeaway has a more important impact on the assets that are likely to do well in the coming year and those that are destined to underperform.
It is a good rule of thumb in investing that you’d rather not be following the herd: study after study shows that the majority of investors buy assets just as they are reaching their apex and sell them just as they have reached their cyclical lows.
Last year’s 30% rise in equities was due to a great degree in the disbelief of investors in the dizzying heights of stock indexes, and instead chose overwhelmingly to pour most of their money into bond funds or stay on the sidelines altogether.
And what do the trends show for the 2014 report? More of the same.
Once again, non-traditional bond funds showed a sequential increase of 46% of inflows in 2013, an even greater increase than 2012, followed by a 24% increase in long/short (spread) equity fund offerings. And which non-traditional funds showed the greatest outflows? That’s right, you guessed it: Commodity basket funds and managed futures as well as equity metals funds.
“If they’re selling, I’m buying” – this is a simple investment maxim that alone could make you a fortune – if you can determine just when the public is selling and when it’s buying. The latest MMI report can’t break down just precisely when these trends are going to end and when the public is going to go all in on commodities and other risk assets. However, it does appear, at least for now, that the smart bet is to stay long all those things that look overpriced to so many – and stay out of all those things that look so safe.
This is not going to end well, I will admit. When the public does decide that they have missed out on a great profit and tries to buy stocks and gold and oil again near the highs, you’ll again have to be smart and get off the rising coaster. But that’s not today.
It’s in fact still a great environment to be long high beta stocks, Oil and maybe even finally time to get back into those awful mining stocks that have disappointed for so long.