RECAP: 2018 FOX Autumn Global Investment Forum

The Great Separation: What the Return of Volatility Means for Your Portfolio

Presenter:
Mark W. Yusko, Founder, CEO and Chief Investment Officer, Morgan Creek Capital Management, LLC  

Session Description: 

Since the end of the Global Financial Crisis, abundant Central Bank liquidity has created a global rising tide for financial assets. Stocks, bonds, and real estate have been locked into a relentless, low volatility “melt-up” in valuation over the past nine years, culminating in the extraordinarily low volatility of 2017. This year has ushered in a new volatility regime as global Central Banks move toward a more restrictive monetary policy framework. This session explored the beachfront of investment opportunities to see which are "swimming naked" (per Buffett) as the liquidity tide recedes, and which strategies may add value to your portfolio in the new volatility regime.

 

“There is no such thing as passive, it is just slow active. Today, there are more indices than stocks. That is not good for investors. They are guaranteed to have the worst investments at the wrong time."
- Mark Yusko​​​​​
Key Takeaways: 
  • Yusko forecasted a "Great Separation," as central banks raise interest rates and volatility returns to the markets, creating more dispersion across strategies, potentially rewarding both active managers and short sellers."
  • Portfolio returns will best be achieved through exposure to four different kinds of risks (in this view, risk is the way to view markets rather than a more return-based approach):     

    • Credit risk

    • Structuring risk

    • Illiquidity risk   

    • Equity risk   

  • Active management will be rewarded going forward in the more volatile markets and as the great bull market fades.    

  • There are several areas investors should consider as attractive opportunities in today’s financial markets, namely: 

    • Emerging markets (where demographics and cheap valuations stand out) 

    • Real assets (cheap compared to paper assets) 

    • Illiquids (illiquidity premia is above average making private investments attractive) 

    • Hedge funds (attractive returns per unit of risk compared to past several years) 

    • Blockchain (sector likely to usher in period of unprecedented wealth creation)     

  • Financial indicators are still strong late in the cycle, but risk comes on fast in such conditions and all investors should be preparing for increased volatility and other headwinds.  

  • In sum, Yusko warned the “smart money started trading in January [2018] and has been selling ever since” and “in the coming “Great Separation,” stock pickers and short sellers will be rewarded again.”
     

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