July 2020 – Mid Monthly Update
Since February, you may have been inundated, possibly bombarded with webinar invites, commentaries and opinions on financial markets predicting everything from doom and gloom and pessimism to outright optimism. At T. Bailey, we chose to increase communication with the aim of keeping you informed about our thoughts in the teeth of the financial market dislocations but more importantly, about how Dynamic and Growth were and are positioned. Throughout we are conscious of your limited reading time and we have no wish to clog up your email inbox. As a consequence, this mid-monthly update will be succinct.
Rather than roll the dice in one direction or the other or contribute pithy quotes to industry journals, it is always central to us that we are stewards of you and your clients’ wealth. As such, it is important to balance risk-taking with opportunity and tread carefully at the appropriate times. The end of March and April provided an opportunity to focus on the winning themes in the pandemic environment, notably the digital economy. It is just as important to know what you don’t know. At TBAM, we manage wealth, trying to create it and preserve it in real terms. We are not epidemiologists.
Indexation and Tesla
For those who like index investing, the following graph courtesy of the Wall Street Journal, may make you feel happy and nervous at the same time. You will have done well in performance terms, but six stocks make up just over a quarter of the S&P 500’s market capitalisation and the rise of those six has been startling.
Adding to any concentration concerns might be that Tesla could be about to enter the S&P 500 index if it posts a quarterly profit next week to make it four profitable quarters in a row. Assuming the accounting is in order, your index provider might be about to give you some exposure to the stock that divides opinion. Tesla has seen a meteoric rise from a low price of 361 in the pandemic induced market lows of mid-March to a close just below 1500 at the time of writing. It has been a popular short for some long/short funds. Some are struggling to explain that to their investors and some have resorted to being long-only investors. Some of Tesla’s recent stock price rise has been attributable to investors front-running the Tesla’s ‘probable’ inclusion in the S&P 500. Yes, really.
Source: Yahoo Finance
Both T. Bailey Funds have little exposure to the FAANGM stocks or Tesla. One of our providers in the Growth Fund has been a long-term holder of Tesla but it isn’t a big position. It does provide a topic of conversation at our semi-annual reviews with them. Our preference in equity investing remains in key themes, especially the digital economy, but also to unearth the next Amazon, Microsoft or companies that benefit from supplying companies like Tesla’s push into autonomous driving. It also pays to beware of companies that can disrupt the disruptors. For electric vehicles, the recently IPO’d Nikola and yet to go public, Rivian which recently completed another round of fundraising, are reminders of that influence. We remain conscious of lofty valuations but also of long-term thematic growth rates and the balance between the two.
July has seen a continuation of strong relative and absolute performance in the recovery from the end of March. It has seemed appropriate to begin to take a little of that off the table by raising some cash on both Funds – some of which has been added to gold as an alternative currency. The main source of cash has come from top-slicing those holdings that have done especially well.