Alpha = Pick the Right Stocks

  • According to new data analysis – the alpha generated by professional fund managers comes from one major source = research process.
  • Inalytics studied 752 portfolios, with at least three year performance data.
  • The average alpha was 308bps.
  • Stock research added on average 319bps while position sizing led to average alpha loss of 11bps.
  • Only 46% of participants delivered any positive alpha from sizing.
  • Stock picking is the primary area in which managers demonstrate skill
  • Source.

Future of Music Biz

  • Great contrarian podcast about the future of music streaming with Economist Will Page.
  • Page believes the music industry is transitioning from a “herbivore market” to a “carnivore” one. In other words, future growth will not come from brand-new customers — it’ll come from the streaming services eating into each other’s market share. Not only has subscriber counts possibly tapped out in Page’s opinion, but streaming services have also put a ceiling on revenues by charging only $9.99, a price that hasn’t budged in 20 years despite giant leaps in technology and music catalog size.” 

Keep Score with Football Clubs

  • Nice write up ($) from The Diff on Football Clubs or as he calls them “Meme stocks for the 0.01%”
  • The collective value of the top 20 clubs in the Premier League has risen from £50m in 1992 to £16.11bn in 2021 (Sportico has a neat interactive tool for this). A stand out return.
  • Part of the reason is the huge audiences they attract. Spotify recently signed up to sponsor FC Barcelona citing their own data that the team has 700m unique viewers per year.
  • KPMG actually publish a very interesting report on the value of football clubs with detailed analysis – unsurprisingly showing a Covid-related drop in value/revenues.

Social Media and Efficient Markets

  • Does Twitter make sell-side analysts better?
  • The answer, according to a new study, is yes.
  • Analysts are generally overly optimistic when presenting earnings forecasts (largely due to incentives).
  • As information technology has proliferated, the competition for information production has increased.
  • Negative and positive information are treated differently by human psychology – the former being valued more highly.
  • Analysts looking at Twitter succumb to this asymmetry, biasing their forecasts downwards i.e. negating their over optimism.
  • These are fascinating results (there a few others in the article).

EV and Gas Stations

  • The electrification of cars will have a big impact on gasoline stations.
  • This was a nice piece analysing this impact.
  • It is from Harding Loevner, using Circle K (owned by Alimentation Couche-Tarde) in Norway (which has electrified faster than other countries) as their case study.
  • Positives – charging takes a lot longer = higher conversion to spending customer + longer in store.
  • About 15% of gasoline customers venture inside to make additional purchases during their car’s few minutes at a Circle K pump, while 40% of EV drivers do so during the 20–30 minutes their vehicle is charging.
  • Negatives – three quarters of charging is done at home.

Mega-Cap Tech Growth

  • It may seem simple but often the main thing that makes stocks go up is defying the fade in forecasts.
  • This is true of mega-cap tech stocks.
  • Despite consistent forecast for deceleration they have maintained 20-30% growth for over a decade now.
  • NB solid line is actual revenue growth average for AMZN, AAPL, CRM, FB, GOOG, MSFT, NFLX and the dotted lines are average sell-side forward forecasts at those points in time.
  • Source.

ETF Performance Post Launch

  • Ben-David et al. (2021) tried to ask a simple question.
  • How did the model portfolios on which ETFs are built fare five years after launch when compared to three years before? measured relative to the benchmark selected by the managers themselves.
  • The results aren’t pretty.
  • Thematic strategies that added 3-5% a year pre-launch, lost 4-5% a year in the five years after.
  • It seems that hype in various areas, leads to a launch of ETFs which then don’t add any alpha.
  • So be careful when you invest in the next hot thing via ETF.
  • Note this is just the model portfolio performance (e.g. index) and NOT the ETF itself (though it should track very closely after costs).

Elliott’s Changing Nature

  • If taking a minority public stake and pushing an activist agenda doesn’t work? … why not just take the company private.
  • This is the transition that has been going on at Elliott, the famous hedge fund, over the past several years.
  • Apart from Citrix and Athenahealth (the recent sale made them $5bn of profit) they have done a bunch of other deals (see table).
  • Interestingly, this is all being done out of one fund. The lines between private and public markets continue to blur.
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