It is probably a good time, however, to be thinking about how to insure against a much more pressing risk: the increasingly frothy markets. A well-known investor said to me this week that at no point in his long City career had so much of his money been in alternatives, so fearful is he of the “complacency” surrounding equity market valuations. I tend to agree, although even those alternatives aren’t as cheap as they used to be – as James Norrington will discuss at next week’s seminar on diversification, years of cheap money have created “a bull market in everything”. And while it is possible to find pockets of value here and there – the UK market being one, thanks to our current political chaos – a US-led sell-off will surely suck the tide out for all markets
Indeed, while not quite in the Bitcoin league, the returns from the so-called FAANG stocks – Facebook, Apple, Amazon, Netflix, Google – over the past few years have been similarly eye-catching. As a quick glance at the newly launched NYSE FANG+ index will tell you – which tracks those five shares and five others, Tesla, Baidu, Alibaba, NVidia and Twitter – returns from the biggest global tech companies have far outpaced the wider market, up 62 per cent this year against a 21 per cent gain for the MSCI World Index.
As I said regarding Bitcoin last week, such stellar gains attract more and more money into such investments, and that money becomes increasingly less discerning for fear of missing out. It is classic bubble behaviour. The creation of the equal-weighted index by ICE is itself troubling, underpinning as it does a new futures contract designed to allow targeted exposure to high-growth tech stocks in the US and overseas on margin. Such futures contracts can be a useful way of hedging against downside risks, but I suspect retail investors will be more interested in them to gear up their tech exposure – fanning the FANG’s flames and pouring on petrol at the same time.
Thankfully there is a 19th-century remedy to these new-fangled developments: investment trusts. There are many reasons to like trusts, not least the sheer diversity of exposures they offer. But a key attraction in today’s markets is that they can often be bought at a discount, so even when valuations are excessive the trusts price may not be – a much-needed safety valve against current exuberance.
