Fortune Favors the Diversified

May 14, 2023

“The only way you get fired from a pension fund is if you innovate.”

– Ashby Monk

RESEARCH

As many investors are underweight foreign stocks after 30 years of US outperformance, AQR makes the case that international diversification is still worth it based on both theory and long-run evidence. They note the main driver of the US outperformance versus the MSCI EAFE Index since 1990 has been rising relative valuations.

The end addresses why, even if you believe diversifying internationally is the right decision, it doesn’t mean it’s easy to do so.

  • “A diversified portfolio that you hold today might look completely sensible; tomorrow, it will look full of mistakes.“

  • “The long-run winning investors will be those who can do more of what’s right while surviving…“

  • “Many people have only a limited capacity to take pain and lack the energy to defend a concept that’s underperformed for decades from those two levels up in the organization.“

  • “…historical returns are often an input investors use—intentionally or not—in forming beliefs about expected returns.“

NOTES: Country-level CAPE (cyclically adjusted price-to-earnings ratio) metrics are created by comparing the recent equity index price with 10-year past average earnings. The EAFE composite is created by taking country-level data and weighting it according to the  MSCI weights.

SOURCE: Bloomberg, MSCI, Consensus Economics.

FT Partners looks at the state of FinTech, which is dealing with the effects of higher inflation, higher interest rates, and most recently, turbulence in the banking industry. Some key takeaways:

  • Stripe’s $6.5 billion Series I round is the second largest FinTech funding round ever, (and accounted for more than one third of the total financing volume in the quarter)

  • The actual number of financing rounds increased from 681 deals in 4Q22 to 794 deals in 1Q23, but still remained below the levels reached in 2021 and early 2022

  • With very few large deals, M&A volume in Q1 only reached $9.2 billion, the lowest level since $9.1 billion in 2Q20

Cash and checks are forecasted to fall to 14% of total payments in 2023 (down from 42% in 2010). Link

“Funds marketed with a sustainable label were hit with $12.4bn in net outflows in the US in the past 12 months even as green funds in Europe added $126.3bn, according to the data provider Morningstar.”  Link

“Combined, First Republic, Silicon Valley Bank and Signature Bank held more in inflation-adjusted assets than the 25 U.S. banks that collapsed in 2008.”  Link

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First Republic Bank’s deposits were down over 40% in the first quarter. Link

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The amount of gold bought by central banks rose by 152% YoY in 2022 to 1,136 tonnes, according to the World Gold Council.  Link

55+ years of Berkshire Hathaway vs. the S&P 500 Index.  Link

SPONSORED BY ACRETRADERAn Investment That’s Historically Beaten Inflation

Let’s talk about correlation.

When you’re trying to build a well-diversified portfolio, correlation is typically not something you want—except in the case of inflation.

Farmland is an asset that historically correlates very closely with inflation:

According to a 2020 study from the TIAA Center for Farmland Research, land values in the top 32 agricultural states showed a 65% correlation with the Consumer Price Index (CPI) between 1970 and 2019.1

In other words, when inflation has risen in the past, generally farmland values have as well.

That’s largely because farmland produces food and commodities, which are factored into CPI.

If you’ve been looking for a hedge to potentially combat the persistent inflation we’re seeing these days, take a look at farmland.

It’s easy to access using the AcreTrader farmland investing platform.

PODCASTS

Todd Combs shares led him to Berkshire, his investment process, lessons from Warren Buffett, & more.

CAZ Investments’ Christopher Zook shares why he believes the US will have a “manufactured recession,” why he doesn’t believe the Fed will cut rates before the end of the year, and what assets he likes today.

Show Us Your Portfolio: Mike Green[5/4/23 – 68 minutes]Apple | Spotify | Google

Mike Green shares his macro-based approach to investing, how working in the investment business impacts how Mike builds his portfolio, the benefits of ETFs, and more.

Here’s Another Great Newsletter To Read

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The information contained in this communication is of a general nature for informational purposes only, and does not constitute financial, investment, tax or legal advice. The information contained within this communication reflects the opinions of those referenced herein, and do not reflect the opinions of The Idea Farm, L.P. and its affiliates.  Such opinions expressed herein are as of the date of production and are subject to change at any time without notice due to various factors, including changing market conditions or tax laws. Where data is presented that is prepared by third parties, such information will be cited, and these sources have been deemed to be reliable. Any links to third party websites are offered only for use at your own discretion. The Idea Farm L.P., and its affiliates, are separate and unaffiliated from any third parties listed herein and is not responsible for their products, services, policies or the content of their website. All investments are subject to varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy or product referenced directly or indirectly in this communication will be profitable, perform equally to any corresponding indicated historical performance level(s), or be suitable for your portfolio. Past performance is not an indicator of future results.