Daily Commentary

MarketMinder’s View: Here is an interesting development: A supertanker owned by a Japanese oil wholesaler (and sailing under the Panamanian flag) successfully crossed the Strait of Hormuz with 2 million barrels onboard, and according to the Japanese government sources quoted here, it didn’t have to pay Tehran’s mooted toll. “According to the report, the tanker had been anchored off the coast of the United Arab Emirates for more than a week before it began sailing through the strait on Monday night. It had reportedly loaded crude oil in Saudi Arabia in early March.” This shows us a couple of things that are worthwhile from a supply standpoint even if the oil now in transit is merely one day’s worth of Japanese consumption. One, given the tanker loaded in March, after conflict broke out and when uncertainty was highest, it seems oil activity in the region hasn’t stopped. Two, the situation in the Strait appears to be more complex than simplistic headlines and soundbites imply. It may be hard for individual people to see through the fog of war, but markets are pretty good at sussing these things out.

MarketMinder’s View: Lots of timeless wisdom here, with pearls about innovation, the wonders of compound growth and the importance of getting an early start on investing. Given this takes the form of a letter from the author to his new grandchild (congrats!), it starts with a look at how the world has changed since his own grandparents lived during Victorian times, with all the invention and growth powering investment returns. Indeed, it would be folly to presume that all stops just because society has some challenges today, especially when you take off the rose-tinted nostalgia glasses and remember society always has problems, many times far larger problems than today’s. Investing in stocks and reaping the compound growth they generate is the best way to capitalize on all of this. Yet too often fear gets in the way, so we think this bit is especially salient: “According to research by my colleague Marianna Hunt, the last quarter century has seen British households reduce the proportion of their financial assets held in investments from 23pc to 17pc, while increasing the proportion held in cash from 19pc to 35pc. That represents a massive and misguided flight to safety, which has cost them a life-changing amount of money. During this period, global stock markets have outperformed the returns on safe but unrewarding cash by a wide margin, despite a couple of periods of heavy losses. Marianna compared two savers who both started in 2000 with £5,000 and added £1,000 a year for 25 years. One of them lost their nerve after three years of losses and transferred what remained of their investments into cash at the end of 2002. The other held firm and stayed the course. The first investor-turned-saver ended up with just over £38,000. The more courageous, stay-the-course investor accumulated nearly £153,000.” Not that we advocate buy-and-hold, but even if you participate in bear markets, it isn’t the end provided you also participate in bull markets.

MarketMinder’s View: This article illustrates a crucial point: If a security is marketed as “bondlike” yet offers yields orders of magnitude higher than Treasury bonds, then it is probably not actually bondlike. Meaning, it probably carries much higher expected volatility, which cuts against why people typically own bonds. Take the newfangled ETFs explored here (which include some actual funds, so we remind you MarketMinder doesn’t make individual security recommendations and features this for the broader theme only). Called autocallable funds, they “are a type of structured note, a form of debt usually issued by a major bank. Their return is typically tied to the performance of at least one stock or market index. They pay their stated rate of income so long as the underlying asset doesn’t fall more than a predetermined percentage by certain dates. They also return their full principal value if the target asset is at or above a prespecified level at maturity.” So what is the catch? If the underlying asset drops below a certain threshold, you lose the payout and take the principal hit. “Owning one of these funds puts you in the position of insuring against a moderate-to-severe decline in stock prices. Like an insurance company, you get to earn a premium for providing that coverage. That’s why these funds can offer regular monthly payouts at 12%, 14% or even 19% annualized rates. But those yields aren’t fixed. So the payout rate can change over time. Is there a catch? Yep. You assume 100% of the risk that the underlying stock or index might go down—and stay down—by a lot. The net result of all this complexity is that losses tend to be infrequent, but when they come they can be severe.” While these funds are new and have limited performance history, backtesting (an imperfect but useful exercise) shows they would have been hammered in 2008’s global financial crisis. So this is sage advice: “If your financial adviser recommends an autocallable ETF, simply ask: What happens to my income and principal if the underlying stock or index falls by 50% and stays down? The answer needs to have numbers in it, and if the numbers don’t have minus signs in front of them, your adviser is misinformed.” And always remember: High interest payments compensate for high risk. Let your goals and needs drive your asset allocation, not yields.