Summary by: Todd Eklund, CFA, CAIA
The “Separation” Macro Case
In his keynote presentation, Mark Yusko provided an overview of various risks in today’s macro landscape. Yusko is the Founder, Chief Executive Officer & Chief Investment Officer at Morgan Creek Capital Management, and was previously the Chief Investment Officer for The University of North Carolina at Chapel Hill.
Yusko was introduced by event organizer and CFANY Board Member Kris Thiessen, CFA, CAIA, EA, Managing Partner at Helix Management.
Top among the concerns Yusko expressed are the elevated levels of U.S. equity valuations, described as having reached “rarified air”. He also expressed caution around the lasting impact of recent tax cuts coinciding with the late stages of the economic cycle and predicted that risky assets will suffer when the transitory fiscal stimulus lift subsides, along with the Federal Reserve ending the era of easy monetary policy. Yusko described the escalating trade war between the U.S. and China as a competition that will crown no winners.
Yusko explained his view on how the unprecedented policy environment has impacted long held “rule of thumb” conclusions used by some investors. In particular, he identified the fallacy of yield curve inversion as a reliable risk indicator of recession, warning that that this rule of thumb breaks down in periods interest rates below 2%. Yusko noted that Japan has experienced five recessions over decades without seeing a yield curve inversion.
On where to deploy capital, Yusko expressed that he believes that some of the best risk/reward opportunities today can be found in asset classes outside of U.S. stocks and bonds. He specifically noted the appeal of asset class valuations in emerging markets, as well as attractive illiquidity premiums in private markets for venture capital and buyouts.
Yusko suggested that the investing success of endowments and foundations stems from their discipline to invest in the most attractively valued – and often more complex – asset classes.
The Haves and the Have Nots
Our investor and journalist panel discussion examined successful long and short stock picking as well as holding management teams accountable.
The panelists included:
- David Atterbury, President & Portfolio Manager, Whetstone Capital Advisors
- Ben Axler, Founder, Spruce Point Capital Management
- Charley Grant, CFA, Reporter, The Wall Street Journal
- Mark Spiegel, Managing Member & Portfolio Manager, Stanphyl Capital Partners
- Mark Yusko, Founder, CEO & CIO, Morgan Creek Capital Management
The panel was organized and moderated by Cory Lester, Managing Director at Morgan Creek Capital Management.
Lester was introduced by CFANY Board Secretary Kelly Ye, CFA, Director of Research at IndexIQ.
While discussing their views on challenges and opportunities for deploying an expanded toolkit that includes derivatives and shorting, the panelists described the increasingly competitive playing field to succeed in active stock picking. Seasoned talent among securities analysts devoted to short selling remains scarce.
Some methods for gaining an informational edge used in the past are no longer effective given the ubiquitous technology and analytical tools used by most investment professionals today.
Noting that success with short selling is uniquely challenging, the panelists commented on various methods for short sellers including activist shorting or forensically sifting to find rotten companies. The sustained low interest rate environment over the past decade has created an additional challenge to successfully shorting stocks given the lack of a generous short rebate.
Each of our portfolio manager panelists shared the key focus attributes they look for in companies to sell short, including:
- names with piles of debt and no compelling product or service to sell,
- companies that fail to realize that the moat historically protecting their business is diminishing and failing to adapt, and
- chaotic management, consistency in missing numbers and targets, and compounding losses while the business fails to scale.
Yusko highlighted a cross-section of certain companies as potential shorts. He noted that one-third of Russell 3000 companies are unprofitable, with many leaning on a pro forma measure of EBITDA, pegged as “earnings before bad stuff”. He also characterized the fragile nature of overleveraged companies, stating that 16% of Russell 3000 companies cannot cover their debt service burden, and may cease to exist once easy monetary policy ends.
The panelists also shared their views around the proliferation of passive indexing. They noted the sometimes overlooked company-level inefficiencies arising from governance issues – such as board composition, compensation packages and corporate objectives – that can persist with passive investing. The panelists suggested that such inefficiencies may create an opportunity for skilled judgement and stock selection.
CFANY Board Chair Jonathan Prin, CFA, Managing Director at Greylock Capital, offered closing remarks.
Special thanks went out in recognition of the event organizers, including panel moderator Cory Lester and CFANY Board Member Kris Thiessen, CFA, CAIA, EA.
The evening concluded with a networking reception.