- A great strategy for investors - Apply the insights of great investors.
- Investing landscape has changed with more information available.
- Generally risky investments are undervalue and risk aversion is costly. Active managers seeking opportunities can outperform.
- Miller likes sectors such as housing and financials and cited stocks C, AAPL, NFLX.
One exercise we are keen on is listening to the current investment thesis of great investment managers. The best provide an insightful lense through which an investment is evaluated and most often overlooked by our own analysis. In that vein I highly recommend hearing Bill Miller's thoughts on the markets and investment opportunities particularly his recent commentary on CNBC yesterday. Miller brought to light several themes.
- There is a plethora of investment advice and it's everywhere versus days when little was available except to the professional.
I interpret this as there is far less value in selecting active management as the information asymmetry of the passed leaves investor with much less value paying for great stock pickers when even mediocre managers have easy access to information. Expect the trend towards indexing to continue. As a consequence investors should look to inexpensive index etfs such as S&P 500 (NYSEARCA:SPY), Dow Jones (NYSEARCA:DIA)
2. Buy Risk - Avoiding risk is costly.
One consequence of the financial crisis is extreme risk aversion, evident in near-record-low bond yields. Since the crisis, risky assets, such as stocks, have done better than "safe" assets, such as government bonds. It is my opinion, and it looks likely to continue for many years.
Miller suggests that more risky assets will continue to perform well relative to safer assets where investors are paying a premium for the safety. Undoubtedly the record low yields in bonds, even those of lower credit quality, pose a low hurdle for stocks. Investors should shy away from fixed income and particularly long maturity investments that are sure to underperform.
3. Don't pay some for an index
Risk aversion has led many equity mutual fund managers to become closet indexers, as they fear the loss of assets and employment should their returns fall below those of the benchmark. If you go with an active mutual fund, pick a conviction manager who has what the academics call "high active share"-that is, his or her portfolio looks very different from the market.
Miller suggests many mangers simply stay to close to the index and as a result add little value. Look for portfolios that stray from the index finding the best possible value. Often this means more concentrated select portfolios of the mangers best picks.
4. Hedge Funds have a new investor audience more concerned with lower portfolio volatility then return.
The institutionalization of the hedge fund industry, such that low volatility is often more important than excess returns-means that the opportunities for truly active managers who think independently and are able to take advantage of the behavioral foibles of others are great, in my opinion.
Without a doubt the face of hedge fund investors has change from wealthy individuals and family offices seeking excess returns return to the institutional investors such as pensions and endowments that seek the shock absorption effect of diverse investment strategies. Miller suggests active managers can find value in assets that don't embody these characteristics.
5. Hedge funds with management and performance fees will have difficulty beating the markets.
The very high fees charged by private equity and hedge funds create a significant hurdle to overcome in a low nominal rate-of-return environment. If you are thinking about those products, consider their publicly traded management companies instead.
Finally in his interview Miller had a few stock picks:
- Homebuilders - Miller likes the long term prognosis of the sector citing that building continues to lag long term demand for housing by 500,000 units.
- Financials - Miller likes financials and believes dividend growth emerges in the future. The recent pullback in Citigroup (NYSE:C) is a great opportunity.
- Netflix (NASDAQ:NFLX) - Miller points to their pricing power and market leading subscriber base and believes the shares are undervalued
- Apple (NASDAQ:AAPL) - Apples Value is unbelievably compelling based on the cash on it balance sheet and earnings multiple. Miller feels AAPL's stock buyback is being executed at attractive levels. Shares could be worth more than $700
I find Millers insights compelling and will undoubtedly undertake researching many of his recommendations. What do you think? Tell is in the comments section.