Turn on business cable news virtually 24/7 to find an endless stream of talking heads, including yours truly, giving their perspective as to where the markets may or may not be headed.
But among the highly influential market experts who don’t regularly make the television rounds is Roger Ibbotson, Yale finance professor and former chairman of Ibbotson Associates, his financial research and information firm that Morningstar (MORN) acquired in 2006.
Although used by professionals at every level, Ibbotson’s highly quantitative work tends to skew toward sophisticated institutions. For example, a recent Ibbotson paper presented a 22-page analysis, “Mean-Variance Versus Mean-Conditional Value-at-Risk Optimization: The Impact of Incorporating Fat Tails and Skewness Into the Asset Allocation Decision.” Not exactly Sunday afternoon reading.
Now running his own asset management firm, Ibbotson gave a keynote address recently in which he discussed what he refers to as the “Big Five” -- the five major drivers of portfolio performance over the long term.
1. Risk/Return 2. Diversification 3. Liquidity and styles 4. Alpha and active management 5. Taxation, costs and fees Source: InvestmentAdvisor.com
What caught my eye were his comments on seeking out less liquid investments, which regular readers know we’ve advocated for some time.
“We all want more liquidity and less risk," says Ibbotson, but “"if you buy any asset in its most liquid form, you pay the most.” Having studied liquidity for over 20 years, he contends that this “liquidity driver” provides the best opportunity for portfolio alpha, since “the less liquid the investment, the greater the chance of it appreciating."
While by no means as educated or astute as Ibbotson, I first wrote nearly nine years ago how “Generally speaking, I want to be long illiquid markets and short liquid markets.” At the time, that approach led me to shares of Equity Residential Properties (EQR), then a $25 stock trading fewer than a million shares a day. By 2007, volume had doubled, and so had the stock.
We’ve seen a similar transformation in emerging markets and commodities over that same period, whereby strong price action attracts new players and more liquidity.
Seven years ago I wrote how “what I like best about many Latin American names right now is their liquidity, or should I say, their lack of it.” At the time, Brazil’s Bovespa traded less than $100 million worth of stock a day. It now averages more than 15 times that amount.
Peru, which back then traded $1 million of stock on the local Lima Stock Exchange, has also seen a flood of new liquidity, including a new U.S.-traded ETF, iShares MSCI All Peru Capped Index ETF (EPU), which has already amassed nearly $200 million in assets.
In today’s environment, the absence of liquidity is one factor maintaining my interest in stocks like Mitsui & Co. (MITSY), Konami (KNM), Advantest (ATE) and other Japanese ADRs that, despite strong price action and multibillion-dollar valuations, haven’t attracted enough of a U.S. following to trade more than a few thousand shares a day.
Paid to take a risk, the speculator steps up to provide liquidity until uncertain conditions appear more “safe,” at which point the herd starts getting in on the trade. By then I’m hopefully long gone.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.
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RT @JonathanHoenig: Buy the Shares That Everyone Else Ignores http://bit.ly/bL7VFD $MORN $EQR $KNM $EWJ $MITSY
Buy the Shares That Everyone Else Ignores http://bit.ly/bL7VFD $MORN $EQR $KNM $EWJ $MITSY
Buy the Shares That Everyone Else Ignores http://bit.ly/bL7VFD $MORN $EQR $KNM $EWJ $MITSY #ibbotson
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