James Jarvis

A couple of (hopefully useful) thoughts from my presentation at QuantMinds on the potential of structural corporate liabilities pricing framework to bridge some gaps in factor investing. #QuantMinds #StructuralFactorInvesting https://lnkd.in/esK4GBWM

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Genuine question for fellow QT nerds / financial plumbing experts. The BoE MPC voted to keep the pace of Quantitative Tightening unchanged at £100bn for the next 12 months, c. 90% of which will come through a passive run-off of existing holdings, and c. 10% from active sales. Bank reserves are currently upwards of £700bn, well above the BoE’s own estimate of even the £490bn upper bound of the Preferred Minimum Range of Reserves (which should delineate between what central bankers have started calling “abundant” and “ample” reserves). In other words, by the Bank’s own reckoning, it should have lots of room to shrink its balance sheet before bank reserves start to become scarce. Fine. However, this is happening against the backdrop of exponentially growth in banks drawing on the Bank’s Short Term Repo (STR) facility – not something you would expect in an environment where every bank has “abundant” reserves. If you were sitting on the MPC, would this give you pause? Are there any risks associated with moving out of "abundant" territory too quickly, or are gilt-backed reserves just going to seamlessly get replaced with repo-backed reserves?

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Informative midyear report from ETFGI Thanks to Deborah Fuhr, CFA fellow and Margareta Hricova ETFGI reports assets invested in the global ETFs industry reached a new record high of US$13.14 trillion at the end of June https://lnkd.in/es53YZAM LONDON — July 17, 2024 — ETFGI, a leading independent research and consultancy firm covering trends in the global ETFs ecosystem, reported today the global ETFs industry gathered US$136.17 billion in net inflows in June 2024, bringing year to date net inflows to a record US$730.36 billion, according to ETFGI's June 2024 global ETFs and ETPs industry landscape insights report, the monthly report which is part of an annual paid-for research subscription service. (All dollar values in USD unless otherwise noted)   Highlights We expect 2024 to be a record year for net inflows and for assets invested in the global ETFs industry Assets invested in the global ETFs industry reached a new record of $13.14 Tn at the end of June beating the previous record of $12.89 Tn at the end of May 2024. Assets have increased 12.9% YTD in 2024, going from $11.63 Tn at end of 2023 to $13.14 Tn. Net inflows of $136.17 Bn during June. YTD net inflows of $730.36 Bn is the highest on record, while the second highest recorded YTD net inflows was of $658.86 Bn in 2021 and the third highest recorded YTD net inflows of 462.53 Bn in 2022. 61st month of consecutive net inflows.   “The S&P 500 index increased 3.59% in June and is up 15.29% YTD in 2024. The developed markets excluding the US index decreased by 1.40% in June while it is up 4.60% YTD in 2024. France (down 7.88%) and Portugal (down 6.39%) saw the largest decreases amongst the developed markets in June. The emerging markets index increased by 2.97% during June and is up 8.09% YTD in 2024. Taiwan (up 10.09%) and South Africa (up 9.91%) saw the largest increases amongst emerging markets in June,” according to Deborah Fuhr, managing partner, founder, and owner of ETFGI.

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Acadian Asset Management has an interesting study on concentrated portfolios (“𝗖𝗼𝗻𝗰𝗲𝗻𝘁𝗿𝗮𝘁𝗲𝗱 𝗘𝗾𝘂𝗶𝘁𝘆: 𝗣𝗿𝗮𝗰𝘁𝗶𝗰𝗲 𝗩𝗲𝗿𝘀𝘂𝘀 𝗣𝗿𝗲𝗺𝗶𝘀𝗲” https://lnkd.in/eZsdkM9f ) Being a systematic manager which invests in very diversified portfolios, Acadia’s conclusions are not a surprise: “𝘉𝘶𝘵 𝘪𝘯 𝘢𝘯 𝘦𝘮𝘱𝘪𝘳𝘪𝘤𝘢𝘭 𝘢𝘯𝘢𝘭𝘺𝘴𝘪𝘴 𝘰𝘧 𝘢 𝘣𝘳𝘰𝘢𝘥 𝘴𝘦𝘵 𝘰𝘧 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘦𝘥 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴, 𝘸𝘦 𝘧𝘪𝘯𝘥 𝘯𝘰 𝘦𝘷𝘪𝘥𝘦𝘯𝘤𝘦 𝘵𝘩𝘢𝘵, 𝘪𝘯 𝘱𝘳𝘢𝘤𝘵𝘪𝘤𝘦, 𝘵𝘩𝘦𝘺 𝘰𝘶𝘵𝘱𝘦𝘳𝘧𝘰𝘳𝘮 𝘢𝘴 𝘢 𝘨𝘳𝘰𝘶𝘱.” Concentrated equity strategies have drawn considerable interest from institutional investors in the long-only universe: frustrated with active fees charged for closet indexing, the premise of investing with stock pickers who focus on a limited set of “high conviction” holdings has intuitive appeal. The main result from the study is “𝘵𝘩𝘢𝘵 𝘸𝘩𝘪𝘭𝘦 𝘥𝘪𝘴𝘤𝘳𝘦𝘵𝘪𝘰𝘯𝘢𝘳𝘺 𝘴𝘵𝘰𝘤𝘬 𝘱𝘪𝘤𝘬𝘪𝘯𝘨 𝘢𝘣𝘪𝘭𝘪𝘵𝘺 𝘴𝘶𝘳𝘦𝘭𝘺 𝘦𝘹𝘪𝘴𝘵𝘴 𝘢𝘮𝘰𝘯𝘨 𝘪𝘯𝘴𝘵𝘪𝘵𝘶𝘵𝘪𝘰𝘯𝘢𝘭 𝘮𝘢𝘯𝘢𝘨𝘦𝘳𝘴, 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘪𝘰𝘯 𝘪𝘴 𝘯𝘰𝘵 𝘢𝘯𝘺 𝘦𝘢𝘴𝘺 𝘴𝘰𝘭𝘶𝘵𝘪𝘰𝘯 𝘧𝘰𝘳 𝘪𝘯𝘷𝘦𝘴𝘵𝘰𝘳𝘴 𝘭𝘰𝘰𝘬𝘪𝘯𝘨 𝘵𝘰 𝘣𝘰𝘰𝘴𝘵 𝘢𝘤𝘵𝘪𝘷𝘦 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦”. Strategies with the most concentrated portfolios represent a disproportionate fraction of the best performers, but also of the worst performers: these strategies are either very good or very bad, no middle ground. “𝘛𝘩𝘪𝘴 𝘪𝘴 𝘪𝘯𝘵𝘶𝘪𝘵𝘪𝘷𝘦: 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘦𝘥 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴 𝘥𝘦𝘭𝘪𝘣𝘦𝘳𝘢𝘵𝘦𝘭𝘺 𝘧𝘰𝘳𝘨𝘰 𝘥𝘪𝘷𝘦𝘳𝘴𝘪𝘧𝘪𝘤𝘢𝘵𝘪𝘰𝘯, 𝘢𝘯𝘥, 𝘵𝘩𝘦𝘳𝘦𝘧𝘰𝘳𝘦, 𝘥𝘪𝘴𝘱𝘭𝘢𝘺 𝘩𝘪𝘨𝘩𝘦𝘳 𝘭𝘦𝘷𝘦𝘭𝘴 𝘰𝘧 𝘢𝘤𝘵𝘪𝘷𝘦 𝘳𝘪𝘴𝘬.” This is also common sense: no one ever said stock picking is easy and for everyone. However, I believe the reason for the aggregate underperformance is due not to concentration per se, but rather to execution (as discussed in this book review https://lnkd.in/eWuZ2X_u ): 𝘁𝗵𝗲 𝗿𝗲𝗮𝗹 𝘀𝗸𝗶𝗹𝗹 𝗶𝗻 𝘀𝘁𝗼𝗰𝗸 𝗽𝗶𝗰𝗸𝗶𝗻𝗴 𝗶𝘀 𝗻𝗼𝘁 𝗶𝗻 𝘀𝗲𝗹𝗲𝗰𝘁𝗶𝗻𝗴 𝘁𝗵𝗲 𝗯𝗲𝘀𝘁 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁𝘀, 𝗯𝘂𝘁 𝗶𝗻 𝘄𝗵𝗮𝘁 𝘆𝗼𝘂 𝗱𝗼 𝗮𝗳𝘁𝗲𝗿, 𝘄𝗵𝗲𝗻 𝘀𝘁𝗼𝗰𝗸𝘀 𝗲𝗶𝘁𝗵𝗲𝗿 𝗴𝗼 𝘂𝗽 𝗼𝗿 𝗱𝗼𝘄𝗻. 

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ESTR Futures and Liquidity... Two different exchanges, two different approaches. A question I'm fielding a lot is, where is the most liquidity? My attached grid shows outrights and the basis side by side for each expiry. ICE, the leaders by Open Interest at first glance appears to have the liquidity. What I find interesting is that each exchange has a different approach to their stacks. ICE has adopted the pro-rato model. This encourages you to show more size to do more trades. Eurex is using FIFO, first in, first out. A queue system that means should you want to trade you are rewarded for keeping your interest in the book as you make your way down the line. The question is which is the better way? #markets #futures #option #estr #ice #eurex

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My thanks to Citywire and Baroness Ros Altmann for the below article, which Baroness Altmann has written in response to Henry Cobbe, CFA’s article earlier this week. See below. Two key points are as follows: 1) everyone is calling for transparency and full correct disclosure. Investment trusts (or listed closed ended investment companies - LCICs) disclose all expenses via their reports & accounts, as they always have done. 2) LCICs share characteristics with OEICs but they do not have “ongoing charges”. Ongoing charges are deductions from investor capital that occur annually. For LCICs, there are recurring operating expenses (part of which is analagous to ongoing charges of OEICs), but these are known in advance and impact the NAV not the share price. The share price discounts (encapsulates) theses expenses. The value of the investment with a LCIC is the share price not the NAV. In a lively and good-natured comments section to my LinkedIn post earlier this week, Mr Cobbe called for a consultation. But first we need to wait for the results of the extensive consultation on HMT’s Statutory Instrument taking the UK out of the PRIIPs regime and into the new UK-only Consumer Composite Investment (CCI) regime. 329 signatories (the most significant response to a HMT consultation ever apparently) signed the LSEG (London Stock Exchange Group) response calling for LCICs to be excluded. LCICs are not “CCIs” (or even PRIIPs). Investors have no contractual right to receive a share of NAV at a time of their choosing (as they have with OEICs). Prospectuses are usually clear on this point. The value of the investment in a LCIC is the share price. If HMT decide to keep LCICs in scope of CCI, the FCA will surely consult on the disclosure regime. Incidentally, our arguments apply to ALL LCICs, even those investing in vanilla equities. I have long characterised LCICs has inhabiting a spectrum from ordinary listed operating companies to OEICs. Some are closer to either end, but none are at either end. We need a disclosure regime that is bespoke for LCICs and we mustn’t crowbar them into either category. Our campaign group has come up with a “Statement of Operating Expenses” that we suggest all LCICs could disclose. This surfaces expenses correctly and in a way that will aid comparison between LCICs & OEICs. Finally, our campaign group share some of the aims of the The Association of Investment Companies (AIC) but we do not agree with their back up proposals. We believe ongoing charges of OEICs, ETFs should be aggregated in the OCFs of fund of funds. These are deductions from capital. LCIC expenses should not be aggregated for the reasons outlined above: they simply do not have ongoing charges. Thanks again to Baroness Ros Altmann and Henry Cobbe, CFA for shining a light on this wonderful sector. https://lnkd.in/eB96qPrG

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Paper: "Systematic tail risk [of assets]... proxied by a generalized tail dependence coefficient... is compensated with an economically sizeable and statistically significant premium." https://lnkd.in/e4CKna3Y

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"We propose an algorithm to capture emergent patterns in the cross-correlations of financial markets, highlighting regime changes on a global scale... [It] combines detrended cross-correlation cost analysis and the minimum-spanning-tree filtering approach." https://lnkd.in/e-XF7Are

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Is the UK facing another bond market implosion? Yields on 30Y Gilts have been rising steadily since September and recently edged *higher* than during Truss' ill-fated 2022 fiscal event, while the pound touched a new 12 month low. I've seen a lot of commentary suggesting this is somehow reflective of the unique set of challenges the UK is facing. I guess you can read the data different ways, but I would argue quite vigorously *it isn't*. At our Macro Breakfast this morning, I made the following points: Slide 1) Most of the move in Gilt yields has simply followed similar moves in global bond markets; the rise in the 30Y Gilt yield has tracked the move in the 30Y UST almost bp by bp since September - the US/UK spread has remained almost completely flat. Contrast this with Truss, when the rate differential blew up by almost 200bps in what was very clearly an idiosyncratic move. Slide 2) For the first 10 months of 2024, GBPUSD followed moves in the US/UK rate differential fairly closely. The two then uncouple from the time of the US election onward. I don't think this is a coincidence; the decline in GBPUSD probably has more to do with Trump's tariffs than anything happening in the UK. The fact that sterling has actually *appreciated* against the euro while losing value against the dollar further suggests this is a greenback story more than a sterling story. The rise in yields still has real consequences, the most obvious being that the chancellor's £10bn fiscal headroom is probably all but gone, which could force some hard policy choices come her March budget. But it is not the damning verdict over UK assets some pundits have made it out to be, and I'm not seeing signs of implosion yet. --- Complete aside, but would you rather hold 30Y USTs at 4.9% or 30Y Gilts at 5.3%? I might be in the minority, but given that the UK... ...has traded at a yield discount to the US for most of the last decade... ...has similar or better inflation outlook... ...has lagged US GDP post-covid... ...faces slower long-term growth potential... ...arguably has the more attractive fiscal profile... ...the relative pricing doesn't make a ton of sense to me.

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Passive aggressive... The improving trend in midcap fund flows is encouraging. The bad news is that this is all in passive funds. This is not a negative on passives, but it is important to remember that passive funds have very little exposure to smaller companies and hardly any exposure to AIM companies. In addition, passive funds do not invest in IPOs or actively support fundraisings. (source EPFR, numbers cumulative in $m)

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"Dynamic Asset Allocation with Asset-Specific Regime Forecasts": "Our framework leverages both unsupervised and supervised learning to generate tailored regime forecasts for individual assets... Results consistently show outperformance across various portfolio models." https://lnkd.in/d9cMd428

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"Asset Pricing with Cognitive Biases and Deep Learning": "Biased expectations can explain two central puzzles in the asset pricing literature: the equity premium puzzle and the excess volatility puzzle." https://lnkd.in/euFNTFM7

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https://lnkd.in/eDg_YmhM The FX strategy team at JPMAM have held a long-term view that a global slowdown would not necessarily lead to broad US dollar strength, largely due to a huge shift in global capital flows since the GFC. We update our thinking below.

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ESTR Futures Update: A sharp uptick in ICE's ESTR as it marches towards the 500k mark. Eurex crosses 200k. With just under 65k on CME that makes almost 765k O.I cumulatively. Euribor open interest remains a steady ~4m Drop me a message if you're curious on where we are seeing the flows etc. #markets #futures #cme #eurex #ice #trading

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Had a great conversation with Magdalena Torfadóttir at Icelandic daily Morgunblaðið this week about global macro and markets. A few takeaways: -Inflation has mostly been brought under control without severe output losses and we’re likely to see a slow but synchronised monetary easing cycle starting in H2 following the ECB’s lead in June. -After firefighting for 4 years straight, policymakers will need to reckon with the deeper long-term challenges facing economies, chief among them elevated debt-levels and bloated deficits against the backdrop of higher interest spending, increased defence outlays and aging populations. -Revamping growth and productivity will be key to addressing these challenges, but I’m worried the rise of neo-mercantilist policies along with increasing fragmentation in the global order will weigh on both. -Nevertheless, European growth is set to recover, as real wages are finally recovering and rate cuts support consumption. Meanwhile, the US economy is starting to gradually slow down as pent-up savings and fiscal stimulus fade. I would expect growth rates in the US and Europe to start converging in 2025 and 2026. -I‘m increasingly worried about how narrow the tape in the US market is becoming. Ten companies constitute well over a third of the S&P 500. Some of these are being traded at valuations which leave no room for disappointment in upcoming earnings seasons. This makes me uncomfortable and heightens the risk of relative broadening taking place in a down market (I’m less nervous about valuations in Europe and UK, which trade at increasingly deep discounts to the US). -I love Nvidia and it’s combination of advanced GPU chips, network capabilities and CUDA software platform make it uniquely placed to benefit from the AI boom for years to come. However, no company is so incredible you can’t overpay for it. Current valuation of 40x EV/Sales feels… rich. Think about what it means: Its revenue could quadruple, and it would still take you 10 years to break even on the investment if the company passed every single buck it made on to investors with no costs, capex or taxes. -However, I also admitted I would have said the exact same thing 6 months ago and the index has returned 17% since then and Nvidia 170%, so you would’ve lost out massively holding cash. Having concerns about valuations and profitably trading them are two very different things. -We’re starting to see less dramatic shifts in bond markets as investors are finally settling on a monetary policy story which anchors the curve (notwithstanding political turmoil ahead…). Curves are still distorted by large central bank holdings of longer-term bonds, which have squeezed term premia out of the biggest bond markets in the last 10 years. As central bank balance sheets are gradually normalised, I would expect to see steepening, generally favouring shorter-term paper for now.

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𝗘𝗧𝗙 𝗶𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀’ 𝗼𝗻-𝗼𝗳𝗳 𝗹𝗼𝘃𝗲 𝗮𝗳𝗳𝗮𝗶𝗿 𝘄𝗶𝘁𝗵 𝘁𝗵𝗲 𝗠𝗮𝗴𝗻𝗶𝗳𝗶𝗰𝗲𝗻𝘁 𝗦𝗲𝘃𝗲𝗻 Last month, I noted that #ETF investors in the UK had shifted their US bets away from mega caps. In October, £2.52bn of £5bn, or 50.4%, invested in Equity US on the LSE has gone to equal-weighted ETFs. That was not just unusual, it seems to have been unprecedented. Was this the start of a trend? It seems not (or, at least, not yet), and investors in US equities have largely resumed their edgy affair with S&P 500 mega-caps. In October, only 19.25% of the £5.5bn of assets going to S&P 500 ETFs went to equal-weighted products (see chart). Like any edgy affair, it may well end badly – but, as someone once said, while the music is playing, you have to keep dancing. I’ll be using Lipper data to take a deeper look into the increased concentration in US and global equity indices over the next couple of weeks. Katya Nelyudova, Rebecca Chesworth Jamie Gordon, Richard Philbin 𝗘𝗾𝘂𝗶𝘁𝘆 𝗨𝗦 𝗖𝗮𝗽- 𝘃 𝗘𝗾𝘂𝗮𝗹 𝗪𝗲𝗶𝗴𝗵𝘁𝗲𝗱 𝗟𝗦𝗘-𝗹𝗶𝘀𝘁𝗲𝗱 𝗺𝗼𝗻𝘁𝗵𝗹𝘆 𝗳𝗹𝗼𝘄𝘀 (£𝗯𝗻)

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We have included commodities in multi asset funds at Royal London since 2016, making us one of the largest commodity investors in the UK. My own experience in commodities goes back to my time at Merrill Lynch in the early 2000s. As with other core asset classes, we pay attention to the strategic case for investments in commodities as well as shorter term tactical drivers. Likewise, we look to blend passive exposures with active strategies that consider environment, social and governance (ESG) factors where possible. Commodities bring inflation resilience to a portfolio and they’ve been particularly valuable in the post pandemic cost of living crisis. Tactically we’re positive. Supply is tight almost everywhere we look, there are geopolitical risks that could tighten things further and demand is stronger than anyone expected a year ago, with upside risks if the global manufacturing cycle continues to pick up.

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