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Short: Humans. Long: ‘Dystopian Eras Of Non-Mean Reversion’

Short: Humans. Long: ‘Dystopian Eras Of Non-Mean Reversion’

Listen, if you’re one of the many people out there who designed your portfolio to benefit from the continued advancement of humanity through the ownership of companies you have determined (via your crystal ball) will be at the forefront of technological innovation, well then you’re probably pretty goddamn disgusted about now. Because some of those companies have had a rough go of it lately what with Facebook’s ongoing privacy/data issues, Amazon’s Trump problem and another series of existential crises at Tesla.

See the thing about thinking you can predict the future when it comes to tech and when it comes to identifying which companies are going to lead us all into a brave new tomorrow is that you can’t – predict the future that is. Sometimes, shit goes wrong. Recall the following from Howard Marks whose summer 2017 FAANG note we will never tire of quoting:

In the current iteration, these attributes are being applied to a small group of tech-based companies, which are typified by “the FAANGs”: Facebook, Amazon, Apple, Netflix and Google (now renamed Alphabet).  They all sport great business models and unchallenged leadership in their markets.  Most importantly, they’re viewed as having captured the future and thus as sure to be winners in the years to come. 

  • the environment changed in unforeseen ways,
  • it turned out that the newness of the business model had hidden its flaws,
  • competition arose,
  • excellence in the concept gave rise to weaknesses in execution, and/or
  • it was shown that even great fundamentals can become overpriced and thus give way to massive losses.

The FAANGs are truly great companies, growing rapidly and trouncing the competition (where it exists). Some of them doubtless will be the great companies of tomorrow.  But will they all? Are they invincible, and is their success truly inevitable?

There are clear reasons to be excited about their growth in the near term, but what about the durability of earnings over the long term, where much of the value in a high-multiple stock necessarily lies? The iPhone is just ten years old, and twenty years ago the Internet wasn’t in widespread use.  That raises the question of whether investors in technology can really see the future.

Spoiler alert on that last bolded bit: you cannot see the future, neither can your favorite name brand financial Twitter pundit, and neither can those analysts who insist that Tesla will be fine despite every indication that shit is crashing and burning (literally in that case). I talked a ton about this last week in “Amazon, Tesla, Facebook And Investing In ‘The Future’“.

Having said all of that, you’d be forgiven for putting a lot of your eggs in the FAANG basket. I mean after all, it is indeed likely that some of these companies are going to dominate the future of tech and if you manage other people’s money, you can’t afford not to be in some of these names (because your competition is certainly in them and while you’re waiting on the ever elusive return of value investing, you’re bleeding AUM to the moron who’s paying up on the assumption that tomorrow will look just like today when it comes to which companies’ names are stamped on innovation).

But what if you could have your cake and eat it too? What if you could bet on the future without suffering disproportionately when the market haircuts that “future” here in the present thanks to say, a Trump tweet, or a Cambridge Analytica scandal?

Well that’s just what Macquarie thinks they’ve managed to do. I mean sure, their Global Thematics Portfolio and their Quality Sustainable Growth baskets have run into a bit of trouble lately, but not nearly as much trouble as generic tech and do you know why? Well let them tell you, via this space-age explanation excerpted from a note out Tuesday:

As the tech sell-off accelerated over the last week, we decided to examine the extent of the damage that it has inflicted on our core portfolios (‘Quality Sustainable Growth’ – QSG and ‘Thematic Winners’). In the last week of March, tech indices have generally fallen by 200-300bps vs benchmarks. While we were expecting some losses, the degree of underperformance was limited.

The reason is simple. Our portfolios are not specifically tech-driven. Instead, they are designed for a dystopian era of non-mean reversion rather than tech per se.

Got that? “The reason is simple.” Where “simple” means building portfolios that are “designed for a dystopian era of non-mean reversion” rather than tech – “per se”.

It doesn’t get much more straightforward than that, but just in case the above is somehow unclear (i.e., just in case there are clients out there who don’t moonlight as science fiction writers), let Macquarie tell you about the “only” time their portfolios suffer losses:

The only times our portfolios sustain significant losses is when there is a perception that conventional business and capital cycles are returning.

So, the “only” time these portfolios would lose money is if capital markets were to return to some semblance of normalcy or, more generally, if “conventional business” models started to be viable again. Got it.

What about the “enemy”? Who is the arch nemesis of Macquarie? To wit:

Our enduring enemy is value not tech sell-offs.

Ok, so the “enduring” foe is value investing.

“Having said” that (i.e., having regaled you with some of the most bizarre commentary to ever grace the pages of an analyst note), Macquarie does concede that their “dystopian era” portfolios are chock-full of tech. But that’s just happenstance. If something else comes along and somehow supplants tech as the “single greatest source of global disruption” without managing to garner the “tech” label (a virtual impossibility, because global disruption is pretty much synonymous with the idea of “tech”), well then they’d rotate into those names:

Having said that, given that technology is the single greatest source of global disruption & deflationary pressures, we tend to be heavier weighted in tech names.

What, you might fairly ask, is the “objective” of Macquarie’s stock selection when it comes to building the portfolios mentioned above? Well that’s easy:

The objectives of our stock selection is either finding companies that still have a ‘runway’ left (defined as ability to grow and deliver ROEs, without excessive fall in margins or leveraging – ‘QSG’ – irrespective of sectors) and Themes (‘declining return on humans & conventional capital and rising returns on digital capital’).

Basically, the “QSG” portfolio is all about ROE sustainability and the thematic portfolios are just a short on humanity.

By the way, here’s a tip: if you’re looking for a euphemism for “short humans”, don’t go with “declining return on humans” – that’s not any better. In fact, it sounds waaay worse.

And speaking of “sounding worse”, have a look at the titles of the “Themes” in the Global Thematics portfolio (click to enlarge):

So that’s:

  • Replacing humans
  • Augmenting humans
  • Opium of the people
  • Bullets and prisons
  • Education and skilling (and “skilling” sounds like something you do to a hamster)
  • Funeral parlors and psychiatric centers
  • Disruptors and facilitators

That makes me want to kill myself right now if it means avoiding a future where those are the themes that matter. And look, if I go ahead and allocate based on this portfolio before I leap off a balcony, whoever I bequeath my assets to will benefit from my contribution to the “funeral parlors” category.

So if you’re struggling to figure out how to make money now by i) shorting the long-term viability of your own species and ii) simultaneously dodging the pitfalls of being overly leveraged to Donald Trump’s Amazon tweets and Russian Facebook hacking, you might want to take a look at how Macquarie is positioned.

Because if you’re not investing for a “dystopian era of non-mean reversion” well then what the fuck are you actually doing with your clients’ money all day?

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