Monthly Merricks – It’s Not Just The Magnificent 7:
It’s Not Just The Magnificent 7:
You’d be forgiven for thinking that there were only 7 stocks in the entire world that were worthy of investment, such has been the obsession with reporting upon the so called Magnificent 7 that dominate the S&P 500. It’s easy to forget that the number has grown quite rapidly from the original 4 that made up the FANGs, quite quickly adapted to FAANGs when the club membership was forced to open wider. At this rate we’ll be discussing the Tremendous Ten, the Dynamic Dozen or even, Heaven forbid, the S&P 500 before long.
We’ve said before that AI is an overnight sensation that has been more than a decade in the making and its influence on the future of the world is of course only beginning to take shape, but is it being over-hyped? It reminds me of the very recent clamour that we saw from ESG, with every fund group or investment provider quickly realising that they had to re-label their existing range to reflect the need for “sustainability” in order to remain relevant in the wider domain. Of course, accusations of green washing are now commonplace.
Investors ignore these themes at their peril, but is attention being drawn away from other opportunities that make less public appeal (because no one’s come up with a catchy name perhaps)? At a recent presentation we shone the spotlight on cybersecurity as one such opportunity which has recently started to outperform the S&P 500 see chart below (until Palo Alto disappointed the market on February 20th, since when the sector has resumed its climb).
There are no household names within the cyber sector just yet, but with the growth of AI and no less than 54 general elections scheduled to take place around the world this year, the need for cybersecurity is only growing. As a sector it is now included as part of a couple of defence ETFs that would otherwise only have considered more traditional (and less palatable to investors) companies that are involved in weapons manufacturing. Cybersecurity is coming of age as an essential part of our lives but its runway of opportunity seems, to my mind, to have a long way to run yet.
What Happens When You Make An Illiquid Asset Class Liquid?:
On January 11th this year, Bitcoin ETFs were given the green light to trade in the US by the Securities & Exchange Commission which effectively allowed investors to invest in the cryptocurrency without the need to physically buy and hold it themselves. In other words, the ruling made a previously illiquid asset, liquid.
The comparisons with gold are obvious. Before gold ETFs were allowed (the first one was in 2003 in Australia) investors in gold had to physically buy, store and (if sensible) insure their gold more often than not in a safe or vault. Trading it was not easy. Once gold was allowed to be held in an ETF format (not to be confused with gold mining shares) it provided a “touch of a button” route into holding and selling the precious metal. It made a previously illiquid asset, liquid.
Look at the chart below to see what happened to the price of Wisdom Tree’s Gold Bullion Unhedged ETF between the beginning of 2004 and the Autumn of 2011 – a rise of 377%. Admittedly, the Global Financial Crisis of 2008 fed the demand for a safe asset such as gold, but would the gold price have risen so sharply if there had not been an easy way for institutions and individuals to trade it? We’ll never know for sure but personally I very much doubt it. Liquidity made a huge difference.
So fast forward to today and interchange bitcoin (and other cryptos) for gold. Now, don’t ask me to explain how bitcoin or any of the cryptocurrencies work, or the blockchain upon which they depend. In much the same way that I have no idea how my phone works, how my car works or indeed how my brain works, I’m very happy to accept that they do and that someone else knows how they do in the event they go wrong. My brain may not be the best example, but you get my drift.
I remain deeply sceptical of cryptocurrencies and there has already been much evidence of the unwary falling victim to scammers, but there is also an increasing number of financial institutions that are dipping their toes in. My sense is that there is something in it and that the regulatory green light being given to it has created an opportunity to hold a diversifier within my portfolio, particularly now that there are vehicles which allow you to change your mind on it quite quickly.
If I’m hopelessly wrong, holding a modest amount in one of the blockchain ETFs available to UK investors shouldn’t prove too damaging to a total return if it blows out, but if we see anything like the response we saw from gold over a decade ago it could provide a handy tailwind to overall returns.