Monthly Archives: June 2016

Brexit! Do they know what they have chosen?


June 27, 2016

We thought it appropriate that a “Brit” put pen to paper for this week’s commentary as the UK voted on Thursday to exit the EU. To say I am shocked and dismayed is an understatement! In our business you need to be sensitive and alert to what are termed “Black Swan” events. The vote that just took place is one of those events, and no one can say with certainty what will happen next. Having said that, despite the strong reaction of the markets on Friday, the real impact on the US will likely be limited. In fact there is the short term benefit of cheaper prices for anybody visiting the UK this summer.

More British people voted in this EU referendum than in the previous general election, with a 72% turnout of eligible voters. Experts predicted a narrow outcome but the “Leavers” won by a margin of 51.9% to 48.1%. There were a number of key differences by region. Scotland voted by a large majority to remain, and we now expect Scotland to use this opportunity to request a new vote on independence so that it can remain a  part of the EU! In England, centers of education and finance, such as Oxford, Cambridge and London, as well as younger voters under 35 voted overwhelmingly to remain in the EU. By contrast the disaffected parts of England and the over 55 voted to leave, no doubt swayed by political rhetoric, especially on immigration. There are clearly many “fed up” voters who sent a powerful message to the established politicians that enough is enough, regardless of the threatened economic consequences.

It was not just UK politicians who were rebuked by this vote. Leading up to the referendum most global business and political leaders, including our own President, expressed a preference that the UK stay. Bill Gates wrote in the UK press that part of the reason for locating the Microsoft European HQ in Cambridge was the seamless access to the broader European markets. He warned that if the UK left the EU many companies including Microsoft might reconsider their location and operations. Important British trading partners such as India and China also indicated their concern that regulatory and political uncertainty could also negatively impact the economies of all involved. The UK Treasury reported that leaving the EU would result in the British being permanently poorer, with lower productivity and GDP. Maybe the voters dismissed all this as pure propaganda. Perhaps more disturbingly there is now a stronger platform for radical political groups in Europe to appeal to the disaffected to gain power.

The process of a British exit from the EU will now begin. The change is very complex. Many say the negotiations could take more than two years. As these deliberations proceed we are all going to have to deal with the uncertainty and additional workload that this decision has caused. My major disappointment is twofold: (1) that a country can go to the polls over such a major issue with no clear idea across the broad population as to the long term repercussions, and (2) that politicians once again can leverage emotions and naïve beliefs into gaining their own power and fame, perhaps at the cost of everyone else! The final word comes from my older brother in the City of London, who summed it up with ‘we had some minor problems with Europe in 1066 and one thousand years later things are still ok’!

Nick Hoffman


Gut Check Needed


June 20, 2016

All experienced investors understand the trade-off between risk and reward. We expect that higher risk investments will yield higher rates of return. I believe that every investor has an innate opinion, or as I like to call it, a “gut check feel”, for the level of return they need for the risks they take. One investor might need a 6% return in order to make an investment with a certain level of risk, while another might only need a 4% return from the same investment. There is no right or wrong answer, but this is an essential discussion when assessing the risk an investor should be taking.

This week an international investment firm, Schroders, published survey results of global investors’ expectations of returns and income for retirement funds. The survey question was simple. “When thinking about the income from your investments (excluding cash and property) what is the minimum level of income you would like to receive?” The responses were surprising.

The average expectation of the minimum return was a remarkable 9.1%. As you might expect, American investors were the most aggressive expecting an 11.1% return. European investors wanted 7.9%, and Asian investors 9.7%. Such lofty return expectations would suggest that our global investors are quite the risk takers, but the survey participants seemed to believe that 9% is obtainable with little or no risk. It would also appear that our global investor sample does not believe in the need to be a long-term investor. Fewer than 20% of the surveyed respondents stated that they hold assets longer than 5 years.

So investors across the globe want high returns earned over the short term with limited risk. As you know, the current performance of the major markets falls far short of delivering against this type of wish list. The gap between what is wanted and what is realistically available will be a driving issue as the markets trade going forward. The search for return and yield will force investors to seek new opportunities and markets to place money. Unrealistic desires of return usually force investors to take on greater risk than they would like, which can lead to dire consequences.

Recent returns for some of the smartest and best managed money in the world seem to confirm the problem facing our global investor. David Swensen, who runs the endowment for Yale, is arguably one of the best minds in the current investment world having generated 10% annual returns for the last ten years. However, the Yale endowment is hardly safe, and it is highly illiquid. The 9.1% return for our global investor strikes me as a bit too optimistic, but maybe all the surveyed group that participated in the Schroder study are graduates of Yale.

Carl Gambrell