With my job some assignments are more taxing than others. Take the Fund Forum in Monaco earlier this summer. My producer Rose managed to turn her €100 into €300 in half an hour on the casino’s blackjack table there. She said the result came from clear strategy and gut instinct. But that was in June and now here we are in September and I’m wondering if investors don’t need a bit of the Rose magic.
Look at the FTSE 100. We’ve had three up months, three down months and two flat months. We’ve worried about sovereign debt and bank exposure, we’ve had unexpected growth, we’re concerned about deflation and inflation, double dips and strong corporate profits, rising interest rates and more QE. In short we’ve had nearly every conceivable scenario. And, in all that time and through all that soul searching, guess what the FTSE’s done? It’s up just over one per cent for the year.
No wonder celebrated hedge fund managers like Stanley Druckenmiller in the US have quit. It’s almost impossible to deliver superior investment returns in a world driven by the uncertainty of policy and economic outcomes, all overlaid by the destabilising effect of short term, computer aided, momentum traders.
In theory this should be a great environment for the stock pickers – those who do their homework, find an undervalued asset and wait for the market to discover the mispricing.
Unfortunately we’re living in an age of unparalleled correlation between global asset markets and it’s either risk on or risk off. Risk on and all stocks, euro, pound, commodities rally. Risk off and the yen and bonds get the upper hand, with the dollar caught in the middle. You could wait a long time for the payoff and in the meantime get blown out.
Which is why with bond yields so low – and cash offering nothing – so many have been looking at high dividend paying stocks. The problem is there’s no point getting a high yield if the stock loses out by more. One answer is to hedge out the downside with a put option while still getting the benefit of any rally. The difficulty is to make sure the cost of the option doesn’t eat into so much of the dividend income that it makes the exercise pointless. Maybe Rose’s blackjack strategy is worth a second look.
Ross Westgate co-hosts Worldwide Exchange daily on CNBC and also anchors Strictly Money -- www.cnbc.com