The Fire Next Time
You ain’t seen nothing yet, says Deepak Gulati. The CEO and CIO of Argentiere Capital AG sees the next crisis having a broader impact than the last. “Risk premia are at the lowest ever, and in some cases you are now being paid to take insurance on risk,” says Gulati, who oversees about $1.2 billion. “Premia cannot drop much further.” Simultaneously, he adds, risk-reward from owning volatility is higher in many investment classes than even in 2007.
Volatility in equity markets is mispriced, Gulati says. A shock could cause something to falter and volatility to rise quickly. What’s more, the market has zero protection to the downside, he says, because everybody is looking for yield. As a result, any adverse effects will be amplified.
While the last crisis “was all about greed, the next crisis will be about need,” he says. “Back then we had about 15 investment banks trying to generate profit. Now it’s thousands of market participants hunting for yield. And that’s because we’ve pushed Grandma into toxic investments. When those leveraged trades unwind, and they will end eventually, investors will get hurt.” —L.C.
Even Optimists Get Pessimistic
Before he says anything else, Dan Fuss wants to make one thing clear: He’s an optimist. Still, there’s one thing the veteran investor with 59 years of experience in the market has noticed lately that gives him pause. It’s about how the U.S. is changing the way it wants to relate to foreign counterparts. He’s starting to sense a growing tentativeness among clients in Asia, in particular. “They’re wondering what’s happening, just like many of us are,” says Fuss, who helps oversee $261.3 billion in assets as vice chairman of Boston-based Loomis, Sayles & Co. “They’re starting to make some decisions that normally would have been investing in U.S. assets and they’re not—they’re investing elsewhere.”
It reminds Fuss of 1973-74, the worst period for markets he’s encountered in stocks or bonds. In February 1973, following the Watergate break-in the year before, the U.S. House of Representatives appointed a select committee to investigate President Richard Nixon for “high crimes and misdemeanors.” By the time Nixon resigned in August 1974, U.S. stocks had fallen 25 percent in just over two years. “Distrust in the political process was very, very severe,” Fuss says. “Discussing this with many of our folks these days, they don’t quite understand that: How can that lead to a bear market? But I know what it felt like at the time. It was awful. Will this be that? I certainly don’t think so, but as it was happening, I didn’t think it was going to be that bad.” Overall, Fuss, like others, has been surprised at how stable markets have been recently.
While it’s difficult to prepare for geopolitical disruptions, one thing Fuss is trying to figure out is the best investment strategy at a time when rates are finally rising from artificial lows. For its part, Loomis Sayles has cut the maturity of its funds. For example, the firm has reduced the maturity of its bond fund by half, to 6.5 years; duration is now even shorter than that, at 3.2 years.
The $13.3 billion Loomis Sayles Bond Fund boosted its buying reserves to more than 20 percent of total assets, up from less than 2 percent two years ago. The idea, Fuss says, is to buy any decent credit or sector on the cheap once it ends up taking a hit.
As for the next crisis, he’s candid in admitting that he’s never seen one coming. So his warning: Don’t believe anyone who says they have. — Nabila Ahmed
This article was provided by Bloomberg News.