gestion financiera - Cluster Family Office

La Paradoja de la Gestión Activa.

A colación de nuestro artículo titulado «Las miserias y trapos sucios de los ETFs y fondos indexados«, donde explicábamos que no es oro todo lo que reluce en la gestión pasiva, tan de moda en estos tiempos, vamos a resumiros y comentaros el interesante estudio llevado a cabo por Alexey Panchekha, CFA, en el blog Enterprising Investor del CFA Institute. En dicho estudio, este especialista e investigador de aplicaciones matemáticas para la gestión del riesgo, que ha trabajado para Goldman Sachs y Bloomberg entre otros, nos explica lo que ha bautizado como la Paradoja del Gestor Activo. Veamos a qué se refiere y qué aplicaciones puede tener conocer los resultados de su estudio para el inversor de a pie.

La pregunta del millón es: ¿La culpa de que en la última década la gestión activa haya perdido terreno respecto a la gestión pasiva es de las altas comisiones que cobran, de la falta de habilidad de los gestores o por alguna otra causa?

Lo que se necesita para responder a esta pregunta con rigor no es una respuesta irreflexiva, especulativa ni apasionada por parte de los fans de unos u otros estilos de gestión. Por ello dicho estudio de basa en hechos sobre las decisiones que toman los gestores activos. Como se suele decir, difícilmente puedes gestionar lo que no puedes medir.

Panchekha ha analizado cómo los gesores activos generan alpha con su selección de empresas. Han llevado a cabo un estudio de varios años cubriendo 114 fondos de inversión norteamericanos pertenecientes a 57 familias de fondos distintas, y han evaluado más de 400.000 periodos de un año de rendimientos (al final de este artículo encontraréis el detalle de la metodología utilizada en el estudio). Combinando todo ello, la muestra del estudio representa 2 billones (trillones americanos) de activos bajo gestión.

La clave es el nivel de convicción de los gestores. Es decir, el nivel de certeza que los gestores tienen en cada subgrupo de empresas que tienen en sus carteras. Para poder determinarlo, el estudio distingue las posiciones sobreponderadas e infraponderadas en lugar de simplemente el volumen absoluto, que podría estar distorsionado por los pesos -de obligado seguimiento- en sus respectivos benchmarks. Por tanto el estudio distingue 3 tipos de acciones en carteras:

Las sobreponderadas o de mayor convicción
Las infraponderadas o de menor convicción
Las neutras

Se identifican los componentes de estas tres categorías midiendo diariamente sus carteras y pesos, rebalanceando cada grupo cada 14 días. Los datos los obtuvo la base de datos Hercules, de Turing Technology Associates. Los resultados, que podemos ver en el gráfico inferior, muestran el ratio de éxito de cada categoría comparado con sus respectivos índices de referencia durante periodos sucesivos de un año y las alphas anuales conseguidas en dichos periodos.

The Impact of High-Conviction Overweights, Gross of Fees

The Impact of High Conviction Overweights, Net of 85 bps Fees

Como se aprecia claramente, las posiciones sobreponderadas o de alta convicción, compuestas por las mejores ideas de los gestores, es la única categoría que realmente genera alpha por encima de los índices. En un 84% de los casos si miramos rendimientos brutos, y en un 74% de ellos si consideramos los rendimientos netos con un promedio de comisiones pagadas de 85 puntos básicos. En comparación, tanto las posiciones infraponderadas (de menor convicción) como las neutras, solo generaron un ratio de éxito del 50% bruto (puro beta), que caería por debajo de ese umbral después de pagar esas mismas comisiones.

Warren Buffett, carta a los accionistas 1966.

Las posiciones sobreponderadas de alta convicción, o sea en las que los gestores confían más y en las que tienen mayor certeza, son las únicas porciones de sus carteras que generan beneficios por encima de sus índices. Ahí está la paradoja, a pesar de que los gestores activos demuestran tener capacidad para superar a los índices al elegir sus acciones preferidas, pierden esa capacidad cuando diseñan el resto de sus carteras en su afán de completarlas, diversificarlas, compensarlas o reducir su «riesgo», confundiendo una vez más riesgo con volatilidad. En algunos casos es falta de valentía, falta de convicción o simplemente muchos de ellos tienen las manos atadas por los ratios vs los índices que deben por folleto seguir de determinada manera. No importa el motivo. Lo que el estudio evidencia es que sólo las acciones sobreponderadas y de alta convicción consiguen superar al Mercado. Cualquier otra asignación de activos va a reducir los beneficios.

Pero la cosa no acaba ahí. Además, según el estudio, el promedio de gestores auto-sabotean sus rendimientos reduciendo sus posiciones de alta convicción hasta un mísero 55% de sus carteras. La correspondiente asignación de activos infraponderados y neutrales de casi la mitad de sus carteras supone pues un lastre de beta insuperable. Para ilustrarlo Panchekha pone un ejemplo deportivo de futbol americano, pero el equivalente aquí sería como si el entrenador del Barça solo alinease a Messi el 55% de los 90 minutos de juego.

Desde luego ese lastre de beta tiene una explicación para los gestores que lo perpetran. Por ejemplo añadir el componente de market-neutral reduce el tracking error del fondo vs su benchmark, cosa sorprendentemente apreciada por el sector y algunos inversores. También reduce las probabilidades de que el rendimiento del fondo quede en evidencia ante la competencia, ávida de sangre para robarse los clientes entre ellos. Pero en cualquier caso, el estudio demuestra que todas estas acciones de «gestión del riesgo» que tanto preocupan a la industria del sector y a los inversores mal asesorados, van indefectiblemente contra rendimientos, y se demuestran actos de cobardía o, en el mejor de los casos, de inseguridad.

El resultado de este cocktail de falta de convicción (calidad de análisis) de los gestores activos, su falta de valentía para diferenciarse del resto de gestores y sus imposiciones normativas/corporativas, les llevan a hacer una gestión del «riesgo» tan -paradójicamente- arriesgada que les hace perder todo lo ganado y más. El siguiente gráfico refleja la cruda realidad, la mayoría de gestores activos no merecen las comisiones que los inversores les pagan para superar al mercado, puesto que casi la mitad de sus carteras no lo consiguen, y los costes hacen el resto. El problema es que la estadística no distingue las carteras diversificadas de las concetradas. Es decir, carteras cuyo 90 o 100% de las acciones son de alta convicción, respecto carteras donde, según la estadística, solo el 55% de las acciones son de alta convicción.

Actively Managed Large-Blend Mutual Funds vs. the S&P 500

Mientras que lo habitual en la industria financiera es culpar a las altas comisiones del pobre rendimiento de la mayoría de fondos de gestión activa, el estudio de Panchekha revela que las comisiones son solamente un causante secundario. O sea, que diluír la única fuente generadora de alpha en las carteras a niveles del 55% tiene un efecto mucho más letal a la hora de comerse sus rendimientos que las comisiones pagadas. Volviendo al símil futbolístico, mientras que los seguidores del Barça están culpando de la mediocre marcha del equipo a las primas desorbitadas que cobra el entrenador (o al estado de los terrenos de juego, o a la climatología, o a las lesiones, o a los árbitros, etc.), deberían más bien señalarlo por dejar a Messi en el banquillo casi la mitad de los partidos sistemáticamente. Panchekha afirma textualmente:

«While it is industry convention to blame these outcomes on higher fees, our research suggests that fees are only a secondary contributor. Diluting the sole source of stock-selection alpha to a minority component of a portfolio has far greater structural impact than higher fees.»

El ya histórico mal comportamiento de la mayoría de los fondos de inversión activa respecto a sus índices ha llevado a los inversores norteamericanos a retirar $1,3 billones (trillones americanos) de dichos fondos para colocarlos en la creciente indústria de fondos de gestión pasiva y ETFs, según datos de Morningstar.

El estudio muestra promedios y muestreos de fondos sin separar gestores de carteras concentradas de las diversificadas. Si separamos el grano de la paja, es decir seleccionamos gestores de carteras reducidas, compuestas en su totalidad por acciones cuya certeza y convicción es muy alta, encontraremos mucha alpha y muy poca merma, a pesar de sus comisiones que, como ya hemos dicho en el artículo anterior, suelen ser bastante elevadas. Los rendimientos NETOS de esos fondos de gestores estrella, con carteras valientemente concentradas y con conocimiento exhaustivo de los negocios en los que invierten, superan de manera clara y sostenida en el tiempo a sus respectivos índices de referencia, importando poco su TER. ¿O acaso a algún accionista de Berkshire Hathaway le importa el sueldo que tenga Buffett o cualquiera de sus directivos actuales? Y si en algún momento la rentabilidad de ese holding disminuye de manera alarmante, los accionistas deberían fijarse más en si sus directivos están comenzando a disminuír la calidad de su holding -por primera vez en décadas- y no en si Buffet o sus sucesores cobran sueldos altos o bajos.

Para los escépticos y demás groupies de los fondos de gestión pasiva y ETFs, el estudio que ha realizado Panchekha debería ser la prueba del algodón: La principal causa de la mediocridad de los gestores activos es su limitada capacidad y/o escasa valentía para concentrar sus carteras al 100% en sus «best ideas» o empresas de alta convicción. Y éste no deja de ser un secreto a voces que siempre han proclamado los mejores gestores value del planeta: Para qué vas a invertir en tu vigésima mejor idea si puedes hacerlo en tu primera, segunda y tercera. La única respuesta es por la escasa convicción, el miedo a equivocarse o las obligaciones corporativas o regulatorias. Las comisiones de gestión elevadas sólo son la puntilla a carteras excesivamente diversificadas y con insuficiente convicción y calidad. ¿Cómo si no se explicaría que los fondos activos con los mejores rendimientos NETOS del planeta (muchos de ellos ya cerrados a nuevos inversores) tengan comisiones sensiblemente superiores a los 85 puntos básicos que de promedio contempla el estudio? Veamos algunos ejemplos de alphas espectaculares en rendimientos NETOS en USD en las últimas décadas, el primero respecto al MSCI China, el segundo vs el RTS ruso y el tercero vs el mismísimo S&P500:

Encontrar fondos que superen la Paradoja del Gestor Activo es clave para el inversor. Pero también para la indústria de fondos activos es clave que cada vez más y más gestores superen el miedo a ser distintos a su competencia, que se superen las limitaciones autoimpuestas en sus prospectus y que dejen de ver la concentración y la volatilidad como un factor de riesgo. El verdadero riesgo que corren la mayoría de gestores activos que solamente se conformen con no ser los peores de su clase es que se acaben extinguiendo. Y su extinción, además de merecida, favorecerá más y más el crecimiento de fondos indexados con carteras que eligen empresas de manera mucho más simple y superficial. Fondos pasivos que actúan como si un comprador de un piso tomase la decisión de ir al notario simplemente teniendo en cuenta algunos ratios superficiales, sin conocer perfectamente el estado de conservación del inmueble, su eficiencia energética, su memoria de calidades o el vecindario, por poner algunos ejemplos. Obviamente es mejor comprar un piso teniendo en cuenta algunos ratios superficiales que simplemente comprar por recomendación de un amigo o aleatoriamente, claro está. Pero esa no es la manera en la que nuestras inversiones van a brillar a largo plazo de manera decuada.

En definitiva, la buena noticia es que los gestores activos en su conjunto crean valor. La negativa es que la inmensa mayoría de ellos lo pierden antes de que llegue a sus inversores. Los inversores tienen pues dos opciones: Informarse suficientemente para poder distinguir los gestores con mayor convicción y concentración en sus carteras; o simplemente culpar de la mediocridad de los resultados de los gestores activos a las comisiones pagadas, y arrojarse en brazos de carteras aún más diversificadas y de menor convicción pero con comisiones low-cost. Para los que elijan seleccionar los fondos activos con mayor convicción en sus carteras es casi imprescindible que amplíen su universo de inversión al 100% de los fondos existentes en el mundo y no se queden con sólo el 10% que se comercializa en España.

A continuación os dejamos los detalles de la metodología del estudio:

Research Design Methodology

This analysis is based on a proprietary database of daily fund positions and portfolio weights constructed and maintained by Turing Technology Associates Inc. The specific funds used in the research dataset include 114 unique US equity mutual funds, from 57 fund families, and represent $1.996 trillion in assets under management (AUM).

Fund Selection Process

The funds selected for use in the research came from the set of mutual funds included within a series of investment portfolios known as Ensemble Active Management (EAM) Portfolios. Turing licenses a series of proprietary technologies to clients to support their creation of such EAM Portfolios. Each EAM Portfolio is typically constructed from a set of 10 to 15 underlying mutual funds with a corresponding industry benchmark. As of early August 2019, Turing had 24 client-designed EAM Portfolios in live production.

All 114 funds used within the study were selected by clients or prospects of Turing related to the design of an EAM Portfolio. Because Turing’s clients selected the underlying funds and corresponding benchmark, the fund selection process maintained independence from the researchers.

Each paired fund and benchmark is a subject of the analysis. Benchmarks included the S&P 500, Russell 1000, Russell 2000, Russell 1000 Value, and Russell 1000 Growth. The time periods used were either January 2014 through July 2019, or January 2016 through July 2019, depending on available data.

Source of Daily Fund Positions

To access daily fund holdings, Turing applied its proprietary fund-replication technology known as the Hercules System. Hercules is a machine learning-based platform processing a multitude of publicly available data, with core concepts behind the approach in use and development for more than a decade. Hercules is not a regression-based approach. Daily estimated positions are generated by the Hercules System, with the out-of-sample portfolios rebalanced every 14 days.

For reference, the Hercules estimated fund holdings and weights for the funds used in this study typically generated a tracking error of less than 1%, and a correlation to the actual fund returns that was greater than 99.7%.

Isolating Manager Conviction

The focus of this research was to analyze the impact of manager conviction in security selection, and thus we embedded two critical design elements into the study. First, securities were categorized and evaluated based on portfolio weights relative to the benchmark. Rather than focus on actual portfolio weights, which are heavily influenced by benchmark weights, the emphasis was placed on a manager’s overweight and underweight decisions and the scale of the over or underweight positions. Second, we divided each fund into multiple, non-overlapping subportfolios determined by the level of Manager Conviction involved, and evaluated their performance separately. Each subportfolio was rebalanced every 14 days and treated as a distinct Model Portfolio. The three subportfolios analyzed were:

High Conviction Overweights: A subportfolio consisting of the largest overweight positions for stocks in the fund. The subportfolio was selected to cumulatively represent 80% of aggregate portfolio overweights relative to the benchmark.

Underweights: A subportfolio consisting of the largest underweight positions for stocks in the fund. The subportfolio was selected to cumulatively represent 80% of aggregate portfolio underweights relative to the benchmark.

Neutral Weights: A subportfolio consisting of overweight securities that are not included in the Overweight subportfolio and underweight positions that are not included in the Underweight subportfolio.

All subportfolios capture distinct choices by a fund manager. The dynamic portfolio weights for each subportfolio are in proportion to the original fund weights, normalized to 100%. Securities outside of the benchmark were excluded as they cannot be properly evaluated in relation to a benchmark. All performance data was calculated both as gross of any fees and after factoring in a hypothetical 85 bps fee. Neither result reflected transaction costs.

The performance data presented represents rolling one-year data (daily step), which was evaluated to capture the percent of rolling periods where each subportfolio was able to outperform the corresponding benchmark (Success Rate), and the average excess (or negative) relative return.

A subportfolio consisting of securities included in the benchmark but not included in the mutual fund (i.e., Zero Weights) was built and analyzed. This fourth subgrouping was not included in the research results because the only way to capture any potential alpha would be through a 100% short portfolio, which is not allowed in a traditional mutual fund. For reference, the Zero Weight portfolio underperformed the benchmark by 78 bps, on average. Unfortunately, even a frictionless short portfolio of Zero Weight securities would not be able to earn the fees of even a standard long-only mutual fund.

The downsides and dirty secrets of ETFs and index funds.

Index funds now account for more than 50% of the US equity fund market. And in Europe and the rest of the world, they are also gaining more and more followers. The main culprits for this are undoubtedly those pulling the strings of actively managed funds, whose mediocre net returns are driving disillusioned investors into the arms of passively managed funds. The reasoning of these disillusioned investors is simple: if we’re going to earn little, at least let’s pay low fees for it. But the fact that the majority of actively managed funds (between 8 and 9 out of 10) are mediocre and fail to outperform their respective indices does not mean that investors should settle for this and stop looking for that minority that outperforms them by a wide margin, as we explained in our article published on the COBAS website a couple of years ago. Here’s an example of the alpha in NET returns achieved by certain star fund managers, outperforming any index fund and with lower volatility:

Obviously, for investors who look beyond the products peddled by banks in Spain, there are gems like the one in the chart above, which outperform ETFs and other index funds by a mile. But what’s more, the comparisons are even more damning if we analyse in depth what is happening in the index fund and ETF industry. Let’s look at some of its shortcomings:

Just as a junk food manufacturer is a far cry from a good chef, those in charge of massive index funds such as those from BlackRock, Vanguard Group o State Street Corp They have nothing in common with good value fund managers. The former are only concerned with filling millions of cardboard boxes with something that looks like food, is cheap and appeals to shoppers. They couldn’t care less whether their customers end up with obesity, high blood pressure or any other health problems. All they care about is selling more and more volume every day at low cost. Similarly, index funds focus exclusively on pouring more and more millions into their portfolios, without caring in the slightest whether what they are buying are good or bad businesses, well or poorly managed, without caring about their fair value, let alone the long-term returns they will offer their shareholders. After all, why should they care, when more and more investors are turning away from expensive restaurants and resigning themselves to satisfying their hunger with cheap junk food?

What many people don’t realise is that these three giants of the index fund and ETF industry are responsible for keeping inefficient managers in the companies in which they invest. On reflection, the reasons may well be down to sheer carelessness, but if we scratch beneath the surface a little, hidden motives emerge, as we shall explain later. The fact is that its size is becoming such that their votes on the boards of directors are decisive to retain or replace management teams. The result is that not only do they invest indiscriminately in both good and bad companies (something inherent in passive or index-based management), but their votes also serve to keep poor managers in their posts. The million-dollar question is what interest these index fund owners could possibly have in retaining and paying out million-pound bonuses to inept managers. As always, the devil is in the detail.

A study carried out by Reuters through the company Proxy Insight (lower graph) shows that in the 300 worst Among companies in the Russell 3000 index where proxy votes were cast, BlackRock voted in favour of management in 931 out of 1,000 cases, Vanguard in 911 out of 1,000, and State Street in 841 out of 1,000. The study concludes that these three giants supported the management of the worst-performing companies only slightly less than that of the other companies in the index, in other words, without caring in the slightest whether or not the management was harming the profits and performance of their companies.

The litmus test is that the percentage of support given by large pension funds to management teams at poorly performing companies is falling significantly. Of course, pension funds do care about returns for their future pensioners.

Some might argue that active fund managers do not usually go against the management in place either, but the reality is that active managers no longer invest in companies whose management is performing poorly or with whom they disagree. In fact, that is the essence of active management: identifying good businesses run by good managers, whilst also taking into account their price relative to their intrinsic value, in the case of value investing (Compare these returns with those of any passive fund). What’s more, even if a mediocre, lazy or ill-informed active manager were to invest in a poor-performing company and, through their proxy vote, support a poor management team, the influence they would have on the vote would be infinitely less significant than that of a massive index fund or ETF.

Consequently, there is a very real risk that mediocre companies with mediocre management will continue to exist indefinitely, due to the proxy votes cast by giant shareholders such as ETFs and index funds. Why would those passive funds care about the performance of the companies in their portfolios if their aim is not to outperform the index but simply to track it? Why would they confront their incompetent managers, replace them or deny them a huge bonus, if their sole incentive is to grow the fund rather than maximise returns for investors?

Another reason – this one more Machiavellian and immoral – for not going against the bad managers of large corporations is that it is those very same executives who are promoting these passive investment funds to their thousands upon thousands of employees. How else can one explain the fact that Vanguard, State Street and BlackRock all voted in favour of doubling the salary of the CEO of the energy company PG&E Corp, just after its shares plummeted following indications that the company was liable for the California wildfires? Or that they approved astronomical bonuses for executives at the cosmetics company Coty Inc – including half a million dollars to pay for their children’s school fees– after the company had been reeling from its reckless acquisition of Procter & Gamble’s beauty division. They have also unanimously vetoed an attempt by the other shareholders to separate the executive powers of the CEO and Chairman of the Board of General Electric Co, following a decade of poor results, etc., etc., etc… Even in the few cases in the Russell 3000 study where shareholders managed to veto executive bonuses, in 601 of those cases BlackRock attempted to award them bonuses through its vote.

Bear in mind that the largest holdings in index funds and ETFs, just like the indices they track, are in very large companies – that is, those with the highest number of employees worldwide. This is a vicious circle, as those executives are, after all, fund managers in return for fund owners voting in favour of their million-pound bonuses at board meetings. A win-win for them, but a lose-lose for investors in ETFs and index funds, and for the economy as a whole.

As it is the investors in these funds themselves who are most affected by the poor quality of the portfolios, it might seem that this circle is finally closing with a certain sense of justice. But we must not underestimate the damage being done to the global economy, because every day the markets are channelling more and more millions into mediocre companies and teams, with no one seeming to care about this inefficient allocation of capital. Furthermore, Western central banks continue with their free-for-all of cheap money, and with these trillion-dollar injections, alongside those from passive investment funds, We are undermining Darwin's theory of evolution. In other words, propping up zombie companies and executives with money created out of thin air and from investors more concerned with saving on fees than with investing their money wisely.

La Era Keynesiana traslada el centro de la inversión mundial a los Mercados Emergentes.

Ya lo dijo Mark Mobius, ex-chairman ejecutivo de Templeton y fundador de Mobius Capital Partners en un artículo del mes de Marzo: Hay que invertir en las bolsas de los aún llamados países emergentes. Y esta vez es el think-tank financiero Gavekal Research quien publica un informe titulado «Wealth transfer to Emerging Markets» que no tiene desperdicio. En él se dice que la era Keynesiana, es decir, de represión financiera, de facilidades cuantitativas (QE) o en definitiva la Era en la que los principales bancos centrales del mundo (FED, BCE, BoJ, etc) reducen el precio del dinero para reactivar el crecimiento anémico de las economías Occidentales del planeta, son chutes de crecimiento económico directamente en las venas de las economías Emergentes.

Cuando el rendimiento del Oro supera al de las principales divisas desarrolladas del planeta, el mundo entra en lo que llaman una Era Keynesiana. Si a ello le añadimos una acción coordinada de los bancos centrales de las economías desarrolladas, las políticas actuales de quantitative easing y tipos por los suelos son la eutanasia del rentista. La cuestión es, ¿quién se beneficia de esta muerte anunciada? Los mercados Emergentes, sin duda. Y comprobaremos esa clara transferencia de dinero desde los mercados desarrollados hacia los emergentes en este gráfico núm 1:

El eje inferior determina el crecimiento del PIB per capita (a precio de USD constante) desde el fin del patrón oro. Vemos como, tanto en épocas Keynesianas como en épocas Wicksellianas (por Knut Wicksell, que abogaba por unos tipos siguendo la corriente del crecimiento económico y no como herramienta correctora), el crecimiento es el mismo si tomamos el mundo en su conjunto. Pero fijaos que si distinguimos los países emergentes de los desarrollados, la cosa cambia radicalmente. Ahí el crecimiento de las economías emergentes se ve claramente favorecido por las épocas Keynesianas, justo al contrario de lo que sucede con los países desarrollados. Y también al contrario de lo que en principio se pretende con la política Keynesiana.

¿Por qué sucede esto, cuando intuitivamente parecería que las políticas monetarias laxas en divisas occidentales debieran favorecer el resurgir precisamente de las economías de los países desarrollados y no las de los emergentes? La primera razón es que los emergentes, muchos de ellos exportadores de materias primas, aumentan sus beneficios debido al aumento de precios de sus exportaciones. Y es que los activos reales (commodities) tienden a encarecerse cuando las divisas occidentales se deprecian respecto al resto de activos y divisas, cosa que ocurre en las Eras Keynesianas de bajos tipos.

Lo vemos muy claro en el gráfico núm. 2, donde, por el contrario, las épocas Wicksellianas son poco menos que la ruina de los exportadores de materias primas.

La segunda razón es que la deuda externa en USD de las empresas de países emergentes se abarata con los tipos bajos de las eras Keynesianas, lo cual genera beneficios adicionales a dichas empresas. Muy especialmente de aquellas que pertenecen a países con economías saneadas, poco endeudadas y muy productivas, donde sus divisas se mantienen estables o incluso se aprecian.

El gráfico núm. 3 mide el exceso que pagan los depósitos en moneda local respecto al USD. Dicho de otra manera, el coste de financiación que esas empresas ahorran respecto al coste que tendrían en divisa local durante las eras Keynesianas. Concretamente el exceso de coste de moneda local está entre el 4% y el 12% anual en los países BRICS. El ahorro es muy significativo para los mercados emergentes, tanto como lo es a la inversa para los desarrollados, que a su vez se beneficiaran de esa era Keynesiana al colocar su capital en economías emergentes asumiendo el riesgo divisa local. O sea, que el capital vuela hacia las economías Emergentes por diversas vías en estos tiempos de dinero gratis en Occidente. Entre otras razones porque es un dinero gratis que en el propio Occidente no hay donde colocarlo para que rinda lo más mínimo.

Además, TrackMacro confirma que a fecha de este mes de Septiembre 2019, el ranking de riesgos de poseer acciones de empresas en los diversas economías mundiales es el que podemos ver en el gráfico núm 4. Es decir, que los países exportadores de materias primas empiezan a hacer su Agosto desde el pasado Agosto, liderando el gráfico en los últimos 5 meses. Notad que en el grupo de «Developing Asia» se excluyen los asiáticos exportadores de materias primas, que se computan como «Commodity exporters». Por tanto, obviamente no todos los países emergentes gozan de estos flujos de dinero, del mismo modo que tampoco podemos considerar al mismo nivel la economía alemana y la griega, a pesar de que ambas sean «desarrolladas europeas».

Para acabar de reafirmar la conveniencia de invertir en ciertos Mercados Emergentes, TrackMacro también publica que de acuerdo a los indicadores macro fundamentales, los principales exportadores de materias primas como Rusia o Brasil disfrutan de una atractiva relación valor/riesgo. Si a todo ello añadimos las medidas en la buena dirección que están tomando distintos gobiernos emergentes, como por ejemplo la bajada de impuestos de sociedades en India, que les permite su bajo endeudamiento y una demografía productiva, la recomendación es aún más potente. Hay que invertir en economías de paises emergentes con la naturalidad, la confianza y las mejores perspectivas, como antaño tenían los mercados desarrollados. Pero eso sí, haciéndolo a través de los mejores gestores de fondos de inversión locales, que conocen perfectamente no solo las empresas de su país sino también sus intríngulis legislativos, contables, fiscales e incluso culturales.

Invertir con el viento a favor de los mercados Emergentes y evitar los vientos en contra (endeudamiento, demográfico, recesión, escasa productividad, etc.) va a ser la clave en los próximos años. Para los tenedores de las típicas carteras de acciones españolas ahí va un dato demoledor: Hoy el Ibex35 está al mismo nivel que en 1998, la bolsa alemana se ha multiplicado en ese mismo periodo x2,5, la de USA x2,7 y la de India x10,5. Pero lo peor para unos y lo mejor para otros está por llegar.

Conclusión: Las políticas Keynesianas en las principales economías desarrolladas deberían en teoría luchar contra las inercias deflacionarias, estimular el crecimiento local y fortalecer a las compañías occidentales ante los competidores de países emergentes. Pero el resultado de dicha política de facilidad cuantitativa y tipos bajo cero puede ser exactamente el contrario. La depreciación de las divisas occidentales conduce a una inyección de ingentes masas de dinero hacia las economías emergentes (que por otra parte son de por sí imanes para la inversión natural, aún sin medidas desesperadas en Occidente). Los inversores hoy en día sufren una situación asimétrica, donde sus divisas principales han dejado de ser valores refugio a causa de los tipos bajos. Esta Era de los Bancos Centrales favorece a priori el oro, los activos reales y las acciones de empresas emergentes, y lo hace en detrimento de las economías desarrolladas, la deuda soberana y las acciones de empresas occidentales.

Como bien decía Mark Mobius en el artículo citado, a finales de los años ochenta las economías emergentes tan sólo pesaban un 5% del Mercado global, pero ahora suponen más de un 40%, y subiendo rápidamente. En esos años los inversores no podían invertir en más de media docena de bolsas, y sin embargo ahora tenemos más de 70 mercados abiertos a la creciente inversión extranjera, perfectamente dotados de los medios técnicos más punteros y supervisados por reguladores de alto nivel profesional. Esto permite en la actualidad una enorme diversificación y seguridad, y nos marca el camino a seguir: Es el momento de invertir en determinadas economías emerging - or already emerging donde se está produciendo una tremenda recuperación y crecimiento económico.Además, la guerra comercial USA-China no es más que oportunidad de oro para hacerlo a precios moderados. Y quien siga vendiendo el miedo a invertir en los mercados emergentes está desinformado y obsoleto, o bien obedece órdenes de sus superiores para vender un pescado deflacionario, recesivo y que huele muy mal ya desde que los bancos centrales abrieron el grifo para mantener en pie economías y empresas zombies.

The China-US trade war as an investment opportunity.

We’re going to summarise the study carried out by three renowned researchers and professors from Princeton and Columbia who are affiliated with the research team at the Federal Reserve Bank of New York, Mary Amiti, Stephen Redding and David Weinstein. In this study, they highlight the unsustainable costs that Trump’s tariff hikes would impose on the average American household if they were to be prolonged. For this reason, the likelihood of these tariffs bringing down the two most powerful economies on the planet is virtually nil. And they should be viewed as mutual posturing between a headless chicken and one with a head, which presents us with a very good opportunity to position ourselves in the stock markets (particularly Asian ones, as Mark Mobius also suggests in this article). Let’s look at the figures:

The current tariffs imposed on Chinese goods stand at 10%, and were recently increased to 25%, albeit with a 90-day moratorium to allow room for negotiation (an old tactic). To determine the impact of that additional 15% in tariffs, which Trump is threatening to impose if no agreement is reached before the end of that period, the calculation is based on the preliminary study on the impact of the current 10% taxes applied in 2018. It concludes that the impact amounts to an annual cost of $414 per family, comprising the extra expenditure that average families will have to incur to pay the additional taxes, and what they call loss of efficiency o deadweight. It is worth remembering here that a huge proportion of goods come from China, and that the rest contain Chinese components and/or are manufactured using Chinese processes; therefore, a temporary blockade by Xi Jinping would lead to an unimaginable global collapse. In short, the Chinese have the trade ‘nuclear button’ and the Americans do not. But let’s get back to the figures.

The extent of these costs depends on how customs tariffs affect the mark-ups importers add to their products, as well as on the demand for goods imported from China. Various studies, including the one mentioned, have concluded that the tariff increases imposed by the US imposed in 2018 have directly led to higher import prices, meaning that Chinese exporters did not reduce their prices at all to offset the increase in the final price for their US customers. The ratio of the increase in the final price to that of the customs duty was therefore practically 1 to 1. What that initial imposition of 10% on Chinese products did produce was, logically, a 43% drop in demand for Chinese imports, as the first logical move for importers is to postpone purchases and subsequently seek alternative suppliers and routes.

US buyers of Chinese goods now pay an additional 10% tariff on top of the usual base price; in other words, an item that used to cost a US consumer or importer $140 now costs $150. This adds $10 to their individual cost but not the US economy as a whole, as the government collects that additional $10 in the form of tax. The government, in turn, should – or could potentially – reinvest that same $10 and use it for the benefit of its citizens (including those who do not buy or import Chinese products).

It is worth noting here that demand naturally shifts between those who continue to buy more expensive Chinese products and those who switch to less expensive alternatives. Consequently, some importers or consumers will reorganise their trade arrangements or purchasing preferences, so that they buy substitute goods at a price lower than the $110 that Chinese products currently cost them. For example, a Vietnamese or Malaysian substitute item costing $105. In this case, the importer’s/buyer’s cost has increased by only $5, rather than the 10$ it would cost to continue buying the Chinese product. But beware, in this case The US economy as a whole also loses out, as there is no return on those $5 in the form of taxes that can be redistributed to the population. Furthermore, it has been amply demonstrated that importers will end up importing substitute products at a price only slightly below that of the Chinese product. In other words, imports will be at $108 or $109 and not at $101 or $105, as the comparison prior to the purchasing decision will be based on the current price of the Chinese product, i.e. $110. This principle will also hold true because suppliers will use the Chinese price of $110 as a benchmark to set their prices for the North American market. This increase in production chain costs, caused by the rise in import tariffs, is known as loss of efficiency or dead weight.

Economic theory tells us that this deadweight tends to rise more than proportionally as tariffs increase, as importers and consumers are forced to accept ever higher prices when taxes rise. Furthermore, very high customs tariffs lead to a fall in tax revenue, as buyers stop importing products from a country affected by those tariffs/sanctions and seek other suppliers/items from other countries, which are cheaper in terms of final price but less efficient. Let us consider that, up until that point, their suppliers and goods were Chinese because they had chosen that option as the most efficient of all the options that importers and consumers had considered. Therefore, these second and third options, beyond $100, which they are now forced to trade in, are by definition less efficient (worse value for money, worse logistics efficiency, poorer build quality, poorer after-sales service, worse marketing, worse packaging, poorer reliability, worse returns policy, repairs, etc.) than the Chinese products they had been buying at $100.

We can see how these two variables play out by comparing the estimated costs of the 2018 tariffs with the increase recently announced by Trump of an additional $200 billion on Chinese goods. As can be seen in the table below, in November 2018, with the 10% of current tariffs already in place, US importers were paying $3 billion a month in additional duties and suffering an additional $1.4 billion in efficiency losses or deadweight losses.

The total cost to US importers was therefore 1.44 billion per month. If we annualise these figures, we arrive at 52.8 billion, or 414 per household per year. Of this cost, $282 per household corresponds to money that goes into the US government’s coffers, and is therefore relatively recoverable by US society as a whole. However, efficiency losses or deadweight losses amount to $132 per household per year, and represent the net loss to the US economy beyond additional tax payments.

Based on these figures, we can calculate the cost of the additional tariff increase announced by Trump for the coming quarter, rising from the current 10% to 25%. The table shows how tax revenue for the government will fall from $282 to $211 per household per year, as the tax increase on Chinese products will be so costly that American consumers will begin to buy substitute goods that are not subject to these tariffs, such as products from Vietnam or other emerging countries, as we mentioned earlier. Let us remember that these second and third imported options are less efficient (more expensive than the cost of the Chinese product before the tariffs), and furthermore, the government no longer collects those taxes. Some of you may argue that the American consumer/importer can substitute Chinese products with other local American ones and thus avoid the loss of efficiency or deadweight. But the reality demonstrated by the studies The reality of the situation is that it is other emerging economies that are coming out on top, as products from developed countries such as the US have much higher production costs. And not only are their costs much higher, but they also have very limited production capacity (adapted to current demand and market share), which would take years and years to meet demand, even if they were to achieve the unachievable, namely the value-for-money efficiency of emerging countries. Furthermore, the deadweight loss from reduced efficiency increases whether consumers switch to more expensive foreign goods or to more expensive domestic ones.

As a result of this change, which importers and consumers are currently facing and will continue to face for the time being (until Trump blows his top or the lobbies force him to back down, as we will explain below), it is estimated that an increase in efficiency losses per household from 1Q132 to 1Q620 on an annual basis, bringing the total burden to be borne by the average American family up to $831 per year, if the threat of additional customs duties under Section 15% is carried out. Consequently, this increase in tariffs on Chinese imports will lead to enormous economic distortions in American society, as well as a substantial reduction in government revenue. But it is not only ordinary citizens who will be seriously affected. Just imagine the losses that giant American tech (and non-tech) companies could suffer as a result of the trade war and software boycotts targeting giants such as Huawei. Remember that Jinping has absolute control over a market of more than 1.3 billion potential consumers, and an enormous and growing influence over the rest of the Asian and African countries. All of this is already generating tit-for-tat retaliation that is causing, and will continue to cause, endless collateral damage which, no doubt, Trump and his team of ultra-nationalist Republicans have never calculated.

The million-dollar question is: what will major corporations such as Google, Amazon, Microsoft, Apple, etc. do in the face of Chinese reprisals which, although more discreet, will be just as brutal—if not more so—than those of the US administration that have been trumpeted by the Western media? Well, obviously, Faced with imminent losses running into tens of billions, they will prefer to spend billions on lobbying that will force Trump to reverse the situation. And billions, without a doubt, will enable the lobbies, in a perfectly legal manner, to exert pressure that is absolutely unbearable for the Trump administration. Let us not forget that in the US, Congress, with a qualified majority, can force the president and his government to do whatever it wants. Put another way, they can prohibit the Trump administration from imposing any kind of tariff or sanction on Chinese products with 290 out of 435 members of Congress. Currently, the Democratic majority in Congress stands at 54.1 per cent, so they would only need to «convince» 12.61 per cent of Republican members of Congress, some of whom will come round of their own accord as soon as the tariffs start to seriously hit their voters’ pockets.

Ultimately, the trade war between the US and China is so damaging – particularly to the US economy – that it has an expiry date. And Trump knows it. In this game of chicken, whoever has a Congress that keeps them in check, whoever depends on votes and corporate lobbies – in short, whoever lives in a democracy – knows they have lost the game. The winner can be none other than China, whose president implements plans spanning decades without caring about the opinion of voters (sic) or his corporations, which are at the service of the government and, of course, without any lobbying. Neither Trump nor anyone else in the US democracy will ever be able to politically or commercially subdue the Chinese dictatorship and its planned economy. Therefore, although Trump will need to bring his adventure to a dignified close, selling it to the Western media with headlines such as «we have secured the best trade deal in history, blah, blah…», the trade war cannot last more than a few quarters. The big US corporations will not allow it, via lobbies and a qualified majority in Congress. Even this «trade war» may effectively be defused whilst people are still publicly talking about it, due to Trump’s electoral political interests. But the reality can be no other than that of not causing significant or irreversible damage to the US corporate giants, since they have more than enough money to convince enough members of Congress, who in turn will force the US government to back down, even if this is not publicly acknowledged and the perception of a trade conflict continues to be fuelled. After all, Every US president has needed and provoked a war of some sort – one that is low-intensity in reality but generates a media frenzy, during their terms in office, for electoral gain. Trump has opted for a trade war, which will also attract intense media attention but is bound to be of low economic intensity.

For all these reasons, investors would do well to take advantage of the media skirmishes that trigger price falls to position themselves appropriately. In other words, they should go shopping for emerging companies whose figures will continue to grow beyond this fleeting, politically motivated trade war. For all the reasons set out in this article, The gloomier the outlook for the Asian markets becomes in the coming months, the closer their recovery will be. A golden opportunity to buy businesses, with the economic and demographic winds in their favour, at very attractive valuations. Remember that Volatility is a good investor’s friend and the enemy of bankers and other fearmongers, which strive to keep their customers trapped in schemes where the meagre returns are barely enough to cover the fees that are skimmed off along the way.

We simply need to be aware that the more heated the trade war appears in the media, the more we should invest in the best emerging-market-focused funds on the planet. Comparisons of the ‘fear funds’ peddled by the banks, with the best institutional fund managers on international stock markets are a pain. Volatility always goes hand in hand with double-digit annual returns over the medium and long term. And the best news is that There are funds of funds that provide access to these institutional funds, as we explained earlier in «Funds that make inaccessible funds accessible.»

The Chinese are well aware of the significance of the crisis Trump is creating with his trade war. It is no coincidence that there they define the word «crisis» as a synonym for «opportunity». And any self-respecting Western investor would do well to be less influenced by the Western media and more by the value criteria of the world’s best fund managers. This time is no different.

Investing in Medallion and Renaissance. The secrets of the world's best managers.

Most investors know little or nothing about the inner workings of what is considered the best investment fund in the world, due to its stratospheric performance over more than 30 years, the Medallion Fund. We have therefore decided to write this article unveiling the information we have gathered and the ins and outs we learned when we visited its management, Renaissance Technologies, a couple of years ago. Despite the length of the article, we believe it will be very interesting for readers to learn about the background, inner workings, curiosities and eccentricities of this great group of scientists, who have been recognised as the best managers in the world for their ability to beat the market for decades.

The first piece of bad news is that since 1993, Medallion has only managed money for its just over 300 employees and, of course, the owners of the management company. The good news is that Medallion's fund manager Renaissance, has 3 funds open to some institutional clients. But the second piece of bad news is that to invest in these institutional funds you have to have a minimum of $5 million, and also pass the due diligence that the fund manager performs on new investors. Yes, you read that correctly, to access Renaissance's institutional funds it is not enough to have a minimum investment of 5 million dollars, but the managers reserve their right of admission. But do not be discouraged, read on because At the end of the article we will explain how an investor with a minimum of 125,000 euros/dollars can access these funds.

According to Bloomberg, the size of the Medallion, which is the fund set aside for «...", has been reduced to the size of the Medallion.«friends & family».» The current owner's fund size is approximately $11 billion, which together with the other funds that Renaissance manages for an elite group of institutional clients, make up the $62 billion under management in total (figures as of January 2019).

We will now explain the origins and evolution of the world's best fund manager, and at the end of the article we will tell you about our personal visit to the Renaissance Technologies facilities, after passing both their due diligence and ours and thus becoming institutional clients of their funds.

The origin and evolution of Medallion and Renaissance performance:

On the north shore of the luxurious Long Island, just a couple of hours' drive from Manhattan, lies the area popularly known as the Renaissance Riviera. Not for nothing are the biggest billionaires in the area scientists working for Renaissance Technologies in neighbouring East Setauket. This elite group created in 1988 what has been the biggest money-making machine in the financial world, the Medallion Fund. A quantitative fund that has far exceeded the returns of other legendary managers such as Ray Dalio or George Soros. And what is even more spectacular is that it has done so in less time and from a smaller size.

This fund almost never loses money. Its worst 5-year performance has been -0.5%. According to Andrew Lo, professor of finance at MIT and chairman of AlphaSimplex, another quantitative fund manager, «Renaissance is the financial and commercial version of the Manhattan Project«. Andrew Lo praises Jim Simons, the mathematician who founded Renaissance in 1982, for bringing so many scientists and intelligence together in a single enterprise. «They are the pinnacle of quantitative investing. No one is even close to their level.». Very few companies generate so much fascination, buzz and speculation. Everyone has heard of Renaissance and the mythical Medallion but hardly anyone knows what goes on in there. Apart from Simons, a somewhat more public figure who retired in 2009 with a personal fortune estimated at more than $16 billion, little is known about the rest of its small group of founding scientists, whose wealth exceeds the GDP of several countries.

For those who are wondering whether such astronomical returns (see graph below) and such sustained returns over time are really possible, it is worth commenting here on the words of Simons, in his lecture last week at the Massachusetts Institute of Technology (MIT), when he was asked for the umpteenth time in his career whether he had ever been compared to the fraudster Madoff: «Of course, with our results and after what happened with Madoff, shortly after that the SEC (US regulator) looked at us and investigated us thoroughly. Of course they didn't find anything.». But this team of scientists who have been beating the markets for more than 30 years, with a fund closed exclusively to them, and 3 others with entry barriers of USD 5 million, really care little about the sceptics.

Renaissance is unique among hedge funds, institutional funds and closed-end funds. Its partners and managers are as cool as they are eccentric. Of the more than 300 employees, 90 are doctors (Ph.D) in disciplines such as mathematics and physics. Peter Brown, who co-heads the firm, used to sleep on a folding bed in his office. His counterpart, Robert Mercer, rarely speaks. And the identical twins, Stephen and Vincent Della Pietra, PhDs specialising in string theory, often argue loudly with each other. The rest of the staff can't be called typical office workers either. There is too much talent for vulgarity.

For the outsiders, the mystery is how Medallion has been able to win so close to the top of the table. an annual 80% before commissions, The fund, by the way, takes almost half of the return, although in reality almost all of it stays at home as it is a fund exclusively for members and employees. And the most surprising thing is that despite three decades of experience, they have not been able to copy them enough to come close to their results. The reasons are to be found in the power of its computational capacity, because the computers in their bunker basements are among the most advanced on the planet. Their talented employees have more and better data in which to find patterns and models that can be exploited. And they also fine-tune the costs of their transactions, of which there are many, while taking into account the consequences that their own trading generates in the markets.

But it should not be forgotten that the origins of most of its founders come from IBM back in the 1980s. There they used statistical analysis for the first linguistic challenges faced by mathematicians and computer scientists. Jim Simons, mathematical genius, professor at MIT and Harvard, winner of the Oswald Veblen Prize in Geometry and co-creator of the Chern-Simons Theory, was also a code breaker for the Institute for Defence Analyses (IDA).IDA) of the USA. (the current location of the Renaissance headquarters may not be coincidental, given that East Setauket was the area known as Culper Spy Ring, The birthplace of espionage, which enabled Goerge Washington to confront British troops with prior knowledge of their secret plans at the end of the 18th century). The aim of quantitative analysis is similar: to build models that find hidden signals in the «noise» of the markets.. Often they are just whispers, but some are able to predict how the price of a share, a bond or a barrel of oil will make a profitable move, however imperceptible it may be. The problem is complex. Prices depend on fundamentals and flows and the often irrational behaviour of the actors who are buying and selling. Despite (or because of) the fact that Simons lost his job at IDA after publicly denouncing the Vietnam War in a New York Times article, the cryptographic connections he researched helped him create Renaissance, and a few years later Medallion. On his way out, he sought out and surrounded himself with cryptographers and mathematicians such as Elwyn Berlekamp and Leonard Baum, former colleagues at IDA, Stony Brook and professors Henry Laufer and James Ax, for his initial project: Statistical price prediction.

The beginnings were bittersweet, and trend following and conversion to the mean caused them problems. Gradually they built models and more models. The initial results were mixed: +8.8% in 1988 and -4.1% in 1989. But in 1990, after explicitly focusing on short-term trading, Medallion achieved a profit of +56% net of commissions. The scientists went on to develop an internal programming language for their models. Today, Medallion uses dozens of «strategies» that run together as one. The computer code they use includes several million lines of code, which is soon to be said. Several teams are responsible for specific areas of research, but in practice everyone can work on everything. Every week there is a meeting where new ideas are tested and discussed to extreme limits by almost a hundred PhDs and other gifted minds.

In the early 1990s, spectacular yields became the norm at Renaissance: 39.4%; 34%; 39.1%. And customers began to flock to Medallion. The fund manager never bothered with marketing, in fact today its website still looks like a relic from 20 years ago. In 1993 Renaissance stopped accepting new customers. Fees were multiplied from 5% management + 20% success fee to 5% + 44%. Brutal, but even so, their net returns still stood out far above the rest. Not only that, but also In 2005, they had already expelled from the fund all former investors who were neither partners nor employees, leaving Medallion exclusively for them, and creating for the outsiders the first of the 3 institutional funds of which we will give details later: RIEF, RIDA and RIDGE.

Scientific background applied to markets:

The success encouraged Simons to hire more and more brilliant scientists. The next batch of gifted people to join the Renaissance family was a team of mathematicians from IBM's research centre in Yorktown Heights, NY, who were struggling at the time to get machines to recognise, emit and translate human speech. Let's just say that the parents of Siri, Alexa and Google Translate. At first mathematicians tried to rely on linguists to codify grammar, but they soon realised that the problems they faced were much better solved by mathematical probabilities than by language experts.. Mercer for example disappeared for months to type conjugations of French verbs into a computer. Processing his data allowed him to write an algorithm that found the most plausible translation for each sentence: «Le chien est battu par Jean» translated as «John does beat the dog», which was a dramatic improvement on the literal translation that systems without such algorithms were running up against. With every linguist they fired and mathematician they signed up, the system took a step forward. A similar thing happened with speech recognition: «Given an auditory signal x, the speaker probably said y«. «Recognition and translation are the intersection between mathematics and programming,» said Ernie Chan, who worked in the 1990s in IBM's research department and today manages QTS Capital Management.

Mercer and Brown then made a bold proposition to IBM: «Let us build a computer model to manage a part of your pension fund».». At the time IBM was managing a $28 billion fund for its employees. IBM rejected the proposal, thinking what would language programmers know about the investment world? But Mercer and Brown were already determined to apply their knowledge to making money in the financial markets. IBM was also at a low ebb, and it was easy for Simon, Mercer and Brown to recruit talent at the time. Renaissance was created by mathematicians who learned to program, not the other way around. They learned how to build large systems where many people were working at the same time. That was another competitive advantage of Renaissance.

Talented additions came and went, the Della Pietra twins (String Theory), Lalit Bahlt (responsible for human speech recognition algorithms), Mukund Padmanabhan (digital signal processing specialist). Almost all of them had worked together at IBM. They soon realised that tackling the market was much more demanding than the advances required at IBM. Either your algorithm was better than the rest - which were starting to flood the markets - and you made money, or it was worse and you went broke. High pressure was tremendously productive. Renaissance spent a lot of resources collecting, sorting and cleaning data, and making it accessible to its researchers. «If you have an idea, you want to test it quickly. And if you have to get the data you want to use right first, it slows the process down enormously,» said Patterson, another code breaker who worked for British intelligence and was part of Renaissance until 2001. But intellectual challenges are not the only incentives for this group of data-hungry brains. They also enjoy something more intangible: The feeling of a family of top-level scientists and the complicity and satisfaction that this brings them. Simons was like the benevolent father figure who added emotional intelligence to a group as diverse as they were geeky.

When the IBM scientists joined Renaissance, Medallion was already earning more than 30% net of commissions. And almost a third of that came from futures trading. In those early days, the inefficiencies of the market were more visible and exploitable than they are today. For example, one of their scientists noticed that there was a 15-minute gap between the close of options and futures, which allowed them to create a specific system to exploit that for a time. The market was full of aberrations, and the scientists investigated each one to death. The sum of all of them generated very large amounts of money for them. In the beginning it was millions, but after a few years it was in the billions. But as the financial system became more sophisticated with the proliferation of other quantitative funds, inefficiencies became scarce.

When Mercer and Brown came to Renaissance, they started working separately, but soon realised that they were more powerful working together. They fed off each other: Brown was the optimist and Mercer the sceptic. «Peter is very creative with a lot of ideas, and Bob says, I think we need to go deeper on this one,» Petterson said. They took over the group working on listed stocks, which were losing money. It took no less than 4 years to make the system work.. But Jim Simons was very patient. The investment paid off, and even Today, listed equity managers, through their derivatives and leverage (let's not forget that inefficiencies today are much more subtle) still generate the lion's share of Medallion's profit.

Simons explained in an interview in Institutional Investor back in 2000 that a winning [quantitative] system must be highly layered. «With every new idea you have to determine: Is it really new or is it somehow implicit in something we've already done? Once that's determined, the team has to figure out how much it should weigh in the mix.» He explained that signals can cool off at any given moment, but that vigilance must be maintained because they can emerge again at any time, or even withdrawing that vigilance can have an impact on the performance of the whole. The trade can be in any asset class and last for fractions of seconds or many months. In a lecture Brown gave in 2013 he explained an example that they shared with outside investors at the time, and was therefore public: By studying the weather in financial centres around the globe they found that local markets have a subtle tendency to rise more on sunny days than on cloudy ones. «It turned out that if it is cloudy in Paris, the French stock market is less likely to rise that day than if the sun shines during the opening hours of its market».» he said. It was not a big money maker, as that only happened slightly above the 50% of the time. But with the right tools and system in place, they are exploitable signals, along with many others. Brown continued: «The point is that there can no longer be obvious and powerful signals, because they would have been exploited by others as soon as they were incipient. What we do is look for huge amounts of signals, and for that we have 90 PhDs in mathematics and physics, who just have to sit there every day to distinguish them from the noise of the markets. We have over 10,000 processors (year 2013) down there who are constantly gutting very diverse data in search of those signals». Nowadays the methods of profiting from the market are as secret as they are difficult to imagine. A couple of years ago information was leaked that they were planning to use GPS (atomic) clocks to synchronise buy and sell orders in different markets, through nearby servers that manage to take massive positions without their purchases altering the market price and before even the HFT (High Frequency Trading) funds have time to react. We cannot even imagine what they will (or do) with quantum computers.

In addition to language specialists, Astrophysicists have been especially successful throughout history in deciphering systems. Such scientists shine above the rest when it comes to finding patterns in a sea of data. noisy. String theorists have also been particularly successful in filtering data. And the Della Pietra brothers, who along with others of their team at IBM were involved in the listed equity area at Renaissance, were among the first to shine in their field. These identical twins, now 58 years old, have never been apart from each other. Both attended an advanced honours programme at Columbia at the age of 16, graduated from Princeton with a degree in physics and received their PhDs from Harvard in 1986. They always sat next to each other, recalls his former professor of abstract algebra at Princeton. «Their conversations were full of argumentation. They were passionate mathematical discussions, and they were always correcting their professors». The fact that they are identical twins seems to take them to another dimension. «They are almost telepathic,» says Ernie Chan. At Renaissance, the Della Pietra's have always had adjoining offices with a large window for constant communication. «They are very creative and competitive with each other,» adds Patterson, to whom they reported directly for a few years.

The IBM team focused on constantly improving system efficiency and performance. As the Renaissance models were essentially short term, focused on fine-tuning transaction costs and how their own movements affected markets, both very difficult problems to solve, according to other fund managers. quants. They also ensured that trades and profits were in line with the system, since a bad price or any other crack could spoil the whole outcome of that particular operation.

Medallion reserved exclusively for members and employees:

The amount of money invested by an employee in Medallion depends on his or her overall contribution to the company. And collaboration with the environment is seen as key to having a bigger slice of the pie. Employees are allowed to buy a limited number of shares in the fund. In addition, a quarter of their salary is invested directly in the fund for at least 4 years. They all pay, of course, the tremendous 5% mgmt fee + 44% performance fee. Simons made it clear from the start that the size of the fund matters, and that too much money hurts performance. Renaissance currently limits the size of Medallion to 10-12 billion, which is double what it was a decade ago. It is therefore not uncommon for partners and employees to disinvest large sums of money to maintain a manageable fund size. Profits are also usually distributed on a semi-annual basis.

Thanks to Medallion, Simons, who still owns the company's 50%, amasses a fortune of 16 billion, according to the Bloomberg Billionaires Index. The other Renaissance heavyweights such as Laufer, Mercer and Brown have unquantified fortunes publicly, but have probably amassed many hundreds of millions each. But in a way, money, like the family atmosphere among the partners, keeps them together, with the exception of a few scientists who, already wealthy, have preferred to devote their intellect entirely to research or philanthropy. In general, few employees and partners leave Renaissance over the years. Why should they? The intellectual challenges are as attractive as they are constant, the colleagues are top-notch and the salaries are astronomical.. As all the employees have become wealthy, their lifestyles have changed. Trains to Manhattan have given way to private helicopters. Scientists have traded in their Hondas for Porsches, and expensive hobbies have become the norm. Simons' cousin Robert Lourie, who heads the futures research team, built stables and a riding arena for his daughter. State-of-the-art yachts are also the order of the day, and spending on company trips for team building activities is unmentionable. Simons, a heavy smoker, even took out a fire insurance policy with his favourite restaurant to allow him to continue smoking his beloved Merit after dinner. You will understand better now why the coast where the management company is located is known as the Renaissance Riviera.

However, the money has, of course, also brought them some displeasure. In 2001 they hired a Russian scientist, Alexander Belopolsky. Patterson was reluctant to hire him because Belopolsky had previously worked on Wall Street, where he had jumped from one job to another. His fears were well-founded. In 2003 Alexander and another Russian, Pavel Volfbeyn, announced that they were leaving to work at another hedge fund, Millennium Partners, where they would be working on a new project. had negotiated multi-million dollar bonuses in exchange for trying to copy Renaissance's know-how.. Of course, both the Russian scientists and Millennium were sued in court by Renaissance, and the matter was subsequently settled by a financial settlement of which no details are known.

However, not all Russians were unhappy at the company. Around that time, another scientist named Alexey Kononenko, who came out of the former USSR and received his PhD from Penn State in 1997, was promoted and moved up the Renaissance organisational chart with a bang, raising some eyebrows among the more senior staff. Kononenko was seen having dinner at Simons' house, and that was a sure sign that the Russian had a gift that made him more special than the rest of the company's gifted brains. Time proved him right, and Medallion achieved returns in excess of 40% per annum net after that dinner.

Building on the crash of 2007 and 2008, what is the secret of Renaissance?

When competitors or former investors are asked how Renaissance can continue to achieve such impressive results, the answer is unanimous: They run and evolve more than the rest.. Even so, they have not been without their scares. According to sources close to the fund manager, in August 2007 the mortgage market crashed, wiping out many hedge funds along the way, which literally disappeared from the map, including the 30 billion giant managed by Goldman Sachs. The disasters of so many trapped investors and leveraged quantitative and non-quantitative hedge funds flooded the markets with sell orders, making the situation much worse. Medallion suffered a loss of almost a billion in a matter of days, almost 20% of its size at the time.. This, which had never happened before in the fund's almost 30-year history, gave the team of scientists food for thought. They even considered whether they should reduce risk to ensure the fund's survival by selling off some positions. Fortunately, the scientists put their hearts aside and focused on their brains, letting the systems do their job. In the last four months of the year, they not only recovered their losses but closed the year with a brutal profit of +85.9% net. But it doesn't stop there. In 2008, the year of the stock market crash, profits were even higher, close to 100% net. The Renaissance partners reaffirmed their principles: «Don't mess with the models». And they also learned a lesson: the damage that large third-party bankruptcies can cause to the market must also be calculated.

Quantitative managers often say that there is no system that is effective forever. The variables are infinite and the markets as changeable and diverse as the human race and its globalisation. So one wonders how much longer Renaissance will be able to deliver these superior returns. The reality is that almost a decade after Simons' official retirement, the money-making machine is still running, and the old ex-IBM team is still between 50 and 65 years old.

The visit of Cluster Family Office to the Renaissance facilities:

We will now tell you our impressions of the visit we made a couple of years ago to the Renaissance bunker in Long Island (images below from google maps). We will start by saying that, once they passed their due diligence to be accepted as institutional investors, we had to insist that we were allowed to visit their headquarters., The majority of those selected are only shown their Manhattan offices, which are more «than the Manhattan offices".«commercial»but also spectacular. About 40 people work in Manhattan on a regular basis, but the offices are large enough to house the more than 300 employees who work at renaissance. Why is that? Well, because in Manhattan they have a backup and servers equivalent to the equipment they use in the bunker, and from time to time they practice a drill as if it had been rendered inoperative, moving all personnel for a day or two to Manhattan., in order to ensure that they continue to work perfectly in the event of an emergency in the bunker. That's how geeky and rigorous they are.

Why do we call the Renaissance headquarters on Long Island a bunker, if it appears to be a building (or several), large, yes, but just like any other? Well, because in addition to the access control on the road and the fact that it is surrounded by a lush forest that naturally conceals the facilities, inside there are a multitude of access controls, depending on the degree of restriction desired for each part of the building. Some doors were crossed when our companions swiped a simple magnetic strip through the reader, but others, closer to the heart of the company, required additional codes and even their fingerprints.. In addition to its two-storey height and its whimsical shape, which is slightly reminiscent of the Pentagon building, the main block also has two underground levels which house, among other secrets, the computer room. They agreed to show us around for a few minutes. It was a huge, white-walled, perfectly cooled space with a double-height ceiling. In the centre of the room, half a dozen 2-metre-high columns were lined with processors lined up on either side, forming long corridors between each column. The length of each column was impressive - we estimated at a rough guess that they must be between 50 and 60 metres long., The processors, as they allowed us to walk down those aisles from one end to the other. Obviously the figure of more than 10,000 processors that Brown talked about in 2013 was no exaggeration. Inside that room was another smaller room, to which we did not have access, which must have contained other mainframe computers. Interestingly, all the cooling machinery was outside that large room, so that even the air-conditioning maintenance technicians didn't have to enter the computer room at all. We had never seen anything like this before, and probably very few private companies have such a computer arsenal. We immediately understood what other big names in quantitative management were talking about when they said that «...the new system is a new way of doing business.«No one is at Renaissance's level in terms of data processing and analysis, not even close.»

During the visit to the rest of their facilities we could see that indeed all the individual offices are identical in size and decoration, following the guidelines of the partners. We did not see a single closed office door, everyone works with their door open to facilitate interaction and the exchange of ideas., as Simons states in an interview. They explained some of their internal processes, such as the challenges that rapporteurs of new proposals to be incorporated into the system have to overcome. Any new idea must overcome a huge number of Ph.Ds (PhDs in physics, mathematics, etc.) trying to smash it mercilessly. Y the proposal of the rapporteur(s) will only progress if it overcomes the criticism and convinces the eminent. The next step is to test the proposal with models for a period of time. If it continues to work, it is tested with operations and real money in small amounts for another period of time. And if finally all the results are positive and there is no affectation or interference with the rest of the systems, it is implemented. The process can take months or even years, It is not fully implemented until it is empirically well proven and tested. It was impressive to see the challenges, where these new proposals are debated to death. There was a large screen presiding over a huge oval table with about forty seats, and around it a second ring of chairs for a total audience of more than a hundred. Imagine that room full of Ph.Ds arguing vehemently and trying to find the cracks in any new proposal. Truly, nothing that does not certainly improve the existing system will make it through that first theoretical filter and subsequent practical implementations.

The comments and behaviour of the managers we met that day confirmed to us that indeed the motivation for scientists to stay at Renaissance is not primarily money - once they have become rich enough, what keeps them there is the attraction of an intellectually challenging environment and being surrounded by the best. And what better place than here, they said. They also told us that the intellectual challenge of working surrounded by 90 Ph.Ds of the scientific elite not only serves to retain the talent already working at Renaissance, but also to attract eminent people who are bored in their university research positions. These profiles, tired of no professor or university colleague daring to contradict them on anything, fit perfectly in the fun that an environment such as Renaissance offers them, where they can the challenges they constantly subject each other to are at a level they could never find in any university in the world.. The concentration of talent, not to mention the impressive semester cheques, acts as a real intellectual magnet to retain and attract the most prodigious minds.

Funds open to institutional investors: Renaissance Institutional Funds

In addition to the legendary Medallion, which is reserved exclusively for members and employees, as mentioned above, the fund manager has 3 funds open to institutional investors with a minimum of 5 million to invest and who have passed the fund manager's internal due diligence: Renaissance Institutional Intitutional Equity Fund (RIEF), Renaissance Institutional Diversified Alpha Fund (RIDA) and Renaissance Institutional Diversified Global Equities Fund (RIDGE). They explained to us how they discriminate the management of Medallion compared to that of the RIEF fund, the oldest of the 3 funds that are still open to institutional investors (you can see its track record since 2005 in the table below). They readily admit that their «best ideas» are applied to the Medallion, and that their «second best ideas» are used in RIEF.. The other two institutional funds, RIDA and RIDGE, are different animals. The latter two are seen as tests or platforms where other (apparently more conservative) ideas are applied, they are perfect laboratories for their research, although for many other fund managers they would be their own funds. flagships or flagships, without a doubt. After analysing the 3 funds, from Cluster Family Office We decided to invest for the moment only in RIEF, which we could define as the most similar quantitative fund of the three to Medallion, essentially focused on equities from all over the world and long-biased. In the graph below you can see its performance since its launch in 2005, when -as we have already said- all external investors were definitively expelled from Medallion.

In our long career in wealth management, we have visited many, many asset managers around the world. We have seen them in all shapes, sizes and colours, but the visit to Renaissance a couple of years ago was the most special. It was like visiting the Mecca of quantitative management. That feeling of seeing how the best in the world work in their field. Having said that, we have to confess that quantitative funds are not our cup of tea, The majority of us feel much more comfortable investing in good value managers who focus on finding shares in good companies at attractive prices. Quantitative managers are still black boxes that, when they stop making money (as is the case with the vast majority), there is nothing to hold on to. However, we must surrender to the evidence of the Number Ones, who have not stopped earning money to date and far above the others.. That is why the RIEF combination in portfolios of more than 10 million together with the other leading international Value managers is, in our opinion, the best option.. We are convinced that this is the perfect mix for the coming years in equities: a percentage of the best Value managers and a percentage of the best quantitative fund on the planet. The proportions to suit the consumer, or rather adjusted to the needs and circumstances of each individual.

The good news for junior investors, as we mentioned at the beginning of this article, is that can access funds of funds that slice these combinations starting at 125,000 euros/dollars., although logically paying an additional commission, as we explain in «Funds that make inaccessible funds accessible«. Medallion will certainly remain reserved exclusively for Renaissance partners and employees forever. But investing in the substitute RIEF The minimum amount of 5 million and the due diligence carried out by Renaissance itself to decide whether or not to grant access to the aspiring institutional investor are insurmountable barriers for the vast majority. This is why being able to enter through the back door via a fund of funds is an extraordinary opportunity. The only one.

Disclaimer: This article does not represent an investment recommendation for the products mentioned. The funds referred to in the article are not registered for marketing in Spain and are only suitable for qualified investors, with minimums ranging from €125,000 to €5,000,000.

Where would Mark Mobius invest a million dollars today?

Today we are going to refer to an article published by Bloomberg where a panel of 5 experts give their opinion on which assets they think are the best to invest in at the moment. One of these experts is Mark Mobius, founder of Mobius Capital Partners and former executive chairman of Templeton. His recommendations have particularly caught our attention because they coincide with our strategy, which we have been implementing for some time now. Cluster Family Office. We will therefore summarise and comment on Mark Mobius' arguments and proposals to Bloomberg readers, to which we fully subscribe.

In the late 1980s, emerging economies accounted for only 51Tbp3T of the global market, but now they account for more than 401Tbp3T and rising. In those years investors could not invest in more than half a dozen stock exchanges, yet now we have more than 70 markets open to growing foreign investment. This now allows for enormous diversification, and points the way forward: Now is the time to invest in certain economies emerging - or already emerging where tremendous economic recovery and growth is taking place.

For example, Brazil's stock market has risen 40% from its lows. And it still has a long way to go, as every sector is set to benefit from the reform being implemented by the new Bolsonaro government (political-ethical discrepancies aside). The country's entire political environment is being radically changed as a result of the relentless pursuit of corruption that is taking place. Take Petrobras, one of the largest oil companies, which is changing its entire organisational structure from top to bottom to make sure that no more corruption cases take place in order to be in tune with the new government. All the companies have been getting their act together on corporate governance issues, along the lines of stamping out corruption so that the state does not take a fatal look at them. This is very positive for international investors, since with more rigour and order, the Brazilian consumer sector will benefit and will do particularly well in the coming years.

Political data has even aligned with technical analysis, as many markets have drawn a double bottom long trend. In terms of fundamentals, the most defining data for the investor, we still see attractively low price to earnings and book values in many of the emerging economies, which let's not forget are the economies that are riding the wind of economic growth and demographics in their favour. Russia's P/Es are only in the multiple of x5, that is even below Pakistan's valuations. If we add to that the advances in corporate governance that Putin is implementing, the Russian stock market is very, very cheap indeed.

Moving on to the fundamentals, we like India's domestic consumption oriented companies, whose economy is already practically growing at 8% per annum. India's software sector is very large (like everything else there) and we like the medium-sized companies that are embracing new technologies to, for example, start/increase their online sales. India's byzantine distribution system is being modernised radically by technology, tax reforms and the elimination of taxation between the different regions of this sub-continent. This will be vital and will greatly boost the movement of goods and trade. Despite the intrinsic difficulties that still exist in India, Amazon and Walmart are getting local businesses into their game.

It is true that there is still a lot of bad credit hurting the books of the big banks in India. And the government is going to bail them out and recapitalise them properly, which will have an impact on the value of the currency. But this weakening of the Rupee will be short-lived. Let's not forget that the central bank, despite its stormy relations with the BJP, has historically been effective in stabilising the currency. Mobius says he would put a 30%, of the $1 million referred to in the article, in India.

And what about China. Its potential is enormous, both for Cantonese companies listed in Hong Kong and A-shares listed in Shanghai. And its market economy, perfectly planned by the Jinping government, is an oasis of prosperity for Western investors in the growth desert of Western developed markets. It is also more than interesting to look for companies that are particular winners in a trade war with the US that has more political than real economic overtones. One of the clear winners to look out for, although we were already looking at it on the merits of its own growing economy, is Vietnam, which is welcoming southern Chinese companies to relocate or simply expand. In fact, and as a significant anecdote, the failed summit between Trump and North Korean President Jong Un was held in Vietnam because the US government wanted to show Jong Un the Vietnamese model as an example for North Korea to follow. The model evolution, from an iron communist economy like Vietnam's, to a growing and prosperous market economy, without loss of government control. And all this praised by the US president, live to see.

And the same is true for the rest of Southeast Asia, where everything is still to be done and the middle class has a tremendous future ahead of it. Mexico is also benefiting from its recent agreement with the USA and Canada. World trade is like a big balloon: if you push on one side, it inflates on the other.

In short, Mobius is fully in line with our positioning in Russia, Vietnam, China, India and Brazil. And this positioning is materialised through the management companies of local institutional funds who know the political, legal, accounting and economic characteristics of their respective countries inside out. The result is in the form of alphas spectacular and consistent. And fortunately options are beginning to emerge fund of funds so that smaller investors (with a minimum of $125,000) can access these large institutional funds. emerging who do not even have retail classes.

The reasoning, then, is clear: traditional markets belonging to developed economies must be abandoned because they have and will have the wind against them for at least a generation. Their economic growth is and will be anaemic, and their ageing and unproductive demographics are and will be an insurmountable drag on their companies' future share prices. It is true that some Western companies are desperately and painstakingly turning to Asia in their search for revenue. But it should not escape anyone's notice that it is far more productive to invest directly in Asian companies that concentrate all their turnover and growth in domestic economies with overwhelming GDP growth and demographics.

Why do they call it Risk when they mean Volatility? The fable of the 3 neighbours.

For the investor, the definition of risk linked to volatility is not only misleading but also totally counterproductive. However, a large part of the financial sector and practically the entire banking sector determine - legally and in practice - the risk of investments through their volatility: The higher the volatility, the higher the risk (sic) and vice versa. But the worst thing is that this is how they qualify the risk profile of their clients, a profile that will determine the assets in which they will be able to invest, according to this volatility. As a result, we find aberrations such as considering an insolvent and expensive fixed income portfolio as a proposal suitable for conservative profiles. And we see how many investors are deprived of buying stocks simply because valuations are volatile in the short or medium term. And it does not matter to them that over the medium to long term the certainty of stock market returns is much, much higher than the likelihood that the bonds in the insolvent and expensive fixed income portfolio will return principal and interest without any credit event (unless bailouts with public money, which we will pay back in the future in the form of taxes, avoid permanent losses, as we have seen in the last decade).

Francisco García Paramés explains it perfectly in his book «...".«Investing for the long term«From it we have extracted the graphs, which are devastating in terms of the fallacies instilled in investors by a large part of the banking and financial sector. As you can see in the graph above, the risk of long-term stock market losses is nil, while the risk of permanent losses in fixed income persists. Moreover, even volatility is lower over the long term in equities! In other words, by investing passively in listed equities, we will not only achieve higher returns over the long term, but we will do so with lower volatility and no downside risk. If we also do so actively through managers of bright backgrounds that outperform benchmarks on a consistent and sustained basis over time, we conclude that this is our best option as investors who want to preserve and grow our investments over the long term.

This is and should be the investment criterion: to preserve and increase our financial capital while avoiding permanent losses. What is a permanent loss? It is a loss from which we will not be able to recover before the opportunity cost, currency devaluation and inflation eat us to death.. In other words, a loss that will reduce the progression of our wealth so decisively that only inflation, devaluation and the passage of many years will allow us to recover it in nominal terms, but which will have crippled our purchasing power over a large part of our investment life. For example, a permanent loss is a credit event on a bond or debt asset, or the purchase of a property or share in the middle of a price bubble. In other words, paying far more for an asset than it is worth and will be worth for many years to come. Although obvious, it is worth remembering that a permanent loss is not a temporary short-term loss. Short-term temporary loss is simply volatility that affects us momentarily in an apparently negative way, but which will be recovered with greater or lesser speed depending on the intrinsic value of the asset relative to the fall in price.. And we say «apparently negative» because, as we shall see below, such a permanent loss provides us with golden opportunities.

Here are a few examples of the difference in risk that the same volatility can have, taken from the reflections of Didier Darcet about it. Let's say three neighbouring homeowners in the same neighbourhood, with three identical houses, suffer a major fire in the neighbourhood that completely destroys their properties. They thus have the same initial volatility, since their assets have depreciated identically in value and time:

The former has no insurance to compensate him for the losses, so he will suffer them permanently. It is true that over time inflation and the devaluation of your currency can make your empty plot of land worth nominally the same as your house was worth before the fire. But that inflation/devaluation and the opportunity cost squandered over a good part of his investment life will mean that his losses will have been permanent despite recovering the same nominal amount of money over time. For this first neighbour, suffering a fire was a real risk. And after the trauma he will probably decide to sell his plot of land unthinkingly or out of necessity, to move to another cheaper neighbourhood or to a rented house, where he believes he is safer from future risks.
The second neighbour does have fire insurance equivalent to the cost of building the house, so, say in the medium term, he can replace the asset and recover the loss suffered in the short term. Therefore, although he has the same short and medium-term volatility as the first neighbour, his risk would be virtually nullified by insurance. Some would say that he is a homeowner with no medium/long-term risk, but with undeniable volatility if a loss occurs. Would such a homeowner consider that he is at risk of losing part of his equity? In the short term yes, but no one in their right mind should consider them to be a risky owner or risk taker, if they are insured and will be recoverable with full certainty in the medium to long term.
The third owner also has insurance that covers the cost of construction and will allow him to replace his house. But he will also want and be able to take advantage of the current circumstances, and will buy his uninsured neighbour's plot at a good price, taking advantage of the need and/or fear that the latter may have because of the fire (temporary loss or volatility) suffered in the neighbourhood. Therefore, he will convert his temporary loss into a higher profit in the medium and long term. And the most curious thing is that the volatility of this third case will be even higher in the short and medium term than that of the two previous cases, while maintaining practically zero risk. In the case of a financial investor, buying the neighbour's house would be the equivalent of buying back more shares of good Value funds or shares of extraordinarily cheap companies, i.e. taking advantage of the fear and/or need of others to buy assets with high Value at a low price.

Here it is worth remembering that the first graph is based on investors (owners) as the second neighbour, i.e. they will recover their temporary losses in the medium and long term. But imagine now what this same graph would look like if the investor is also able to take advantage of moments of volatility (of fire) to invest more and additionally buy assets at unusually low prices. Obviously, recoveries from temporary losses would be much faster, dramatically shortening short-term loss periods and very substantially increasing long-term returns. This is easy to say but difficult to do, as the natural primitive impulse is to flee from loss-making assets, like the first neighbour flees the neighbourhood where there has been a fire.

Readers should therefore consider their financial investments in the same way as the third neighbour, provided they are able to invest in actively managed funds that consistently and permanently outperform indices. If they do so, their volatility and returns will be high, while maintaining zero risk of permanent losses. And if investors are unable to find such funds, they can always emulate the second neighbour through passively managed funds, assuming short to medium-term volatility in exchange for zero risk of permanent losses.

Fortunately for neighbours like the third, most behave like the first. Without these obfuscated and/or needy investors there would not be a massive supply that would plummet prices after the fires. That is why the big managers pray and put candles to Saint Volatility, so that Mr. Market's schizophrenia will bring them opportunities. The higher the short-term volatility (fires), the more investment opportunities will occur and the higher the long-term returns with less risk of permanent losses, which are the only losses investors should care about. These are concepts that are radically opposed to the slogans of most professionals in the sector, who remain obstinate in placing their more conservative clients in assets with low volatility and, paradoxically, a greater real risk of permanent losses. Perhaps this is because for banks, as for politicians, the long term is science fiction. Some with the end of the legislature, and others with the collection of the variable or the obligatory sales figure at the end of the year, but both with a galloping myopia. And because when they talk about risk, they are referring to the risk they themselves have of losing their clients as soon as their portfolios, without the fire insurance of a good Value stock market fund, start to smoke.