Equities: Where Does Performance Come From?
From FT Alphaville:
Alphaville knew it wouldn’t take long until our considerable
influence, as influencers, filtered through to the real (ish) world of
quantitative research.
So when a report titled “The Fyre Festival
Stock Market: Capitalism without Capital” landed in our inboxes on
Wednesday, citing Alphaville as a pivotal influence, we read it with the
weary delight of someone who knows their own self-worth.
The note
by Vincent Deluard of INTL FCStone takes on our view of the modern
economy being a manicured mirage, and it applies to the stock market. In
particular, the rise of businesses who owe their success to, well,
nothing at all:
Here’s Deluard:
Simulations
show that buying productive assets, such as labour and tangible
capital, on the cheap was the most profitable strategy until 2014. This
logic has reversed after the value of bonds with a negative yield soared
in 2016: owning tangible capital is no longer an advantage when capital
is free. The best-performing stocks are immaterial businesses with no
tangible capital and few workers. Payment networks are more valuable
than banks’ branches. Brick-and-mortar stores cannot compete with online
marketplaces. Franchises are worth more than restaurants.
This
observation, of course, is well known. Businesses with few employees
(labour), or few assets (capital) have been driving stock market returns
since the end of the eurozone crisis. Think companies like the cloud-computing kings, Beyond Meat, or even, erm, Tilray.
Qualifying this observation is easy; quantifying it is harder.
So
Deluard has decided to take action. Using the Russell 3000 index as his
base portfolio, he’s devised four portfolios which are weighted
relative to where a business’s intrinsic value comes from.
It
sounds complex, but the logic is quite simple. Value, Deluard writes,
comes from three sources: labour, intangible capital and tangible
capital. So he’s devised four portfolios: one for each source, and one
for companies which don’t depend on any of the above.....
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MUCH MORE
