ETF entrepreneur Som Seif explains why money managers are in a bubble and why he can't understand market complacency over trade war threat
Decades of interest rate declines mean the vast majority of advisors have built their careers in a bubble, according to leading finance entrepreneur Som Seif.
The man who built Claymore Investments into a firm with $8 billion in assets, and who is now president and CEO of Purpose Investments, believes the art of portfolio construction is more important now than ever before, but said that a false sense of security has set in among peers.
He said: “I actually think the complacency in our industry, unfortunately, is that we have lived through the lens of a bubble of interest rate declines for the past 35 years, so 95% of our industry’s participants have built their careers in that bubble.”
Seif, whose company last week completed the 100% acquisition of Montreal-based online lender Thinking Capital Financial Corp in a deal said to be worth more than $200 million, said the traditional 60-40 portfolio mix needs a deeper assessment in the current environment.
The Bay Street veteran, who launched one of Canada’s first ETFs, said hedging strategies – both with bonds and equities - form a crucial part of what Purpose does and called straight-up bonds the “worst risk-adjusted return promise we can see in our market lifetime”.
Using option-writing strategies, he said, is the only way he’d own a bond in his portfolio.
He said: “From the vantage point of where we are today, [60-40] is going to be a very disappointing portfolio construction. If you actually have a longer-term lens of 100-plus years, you get the view that 60-40 is not optimal portfolio construction.
“We believe that what’s really critical is that you have to build them with a line of, one, diversification, and, two, asset-level diversification. We do a lot of things around building your equity book and managing both long equities; the stocks that you like.
“I’ve always been a big believer in companies that have a fundamental value plus quality; cheaper companies that are performing well are the ones you want to own, Secondly, you overlay or complement that with hedging strategies that are de-risking your equity risk and also managing risk around volatility.
“On the bond side it’s about managing interest rates really aggressively. We do a lot of interest-rate hedging and we do a lot of option-writing strategies, which we think are really important. To me, that’s the only way I’d own a bond in my portfolio. I would never own a straight-up bond – I think it’s the worst risk-adjusted return promise we can see in our market lifetime.”
Meanwhile, Seif said a similar level of complacency is afflicting the market when it comes to the potential consequences of a President Donald Trump-instigated trade war. The end result, said Seif, is always recession.
He said: “These are not things you can take lightly and the market just seems to brush it off. I get the positive elements: economic growth; US is positive; employment rates are at the lowest they have been; you are starting to see a little bit of inflation which is generally ok; and the Fed feels more confident to start raising rates.
“All those really good things are there, but what I’m most concerned about is it’s ignoring what I think is a really big deal: trade wars end in recessions. We believe recessions are likely 12-24 months away. We’ve always been thinking that interest rates, depending on what the Fed does, will lead to come concerns at the end of 2019, which would mean the equity markets will do well in 2018 and 2019. But if we start to see an acceleration of this protectionism, I think you start to see some of that accelerate.”
He added: “When you have a president who says trade wars can be won, I think everyone should be really cautious. I’m not saying we should be selling stocks and getting out of it, I just don’t get why the stock market doesn’t seem to want to pay attention to it.”