It’s been a while since I last posted anything. I’ve been spending a good bit of time researching some new investments and writing my semi-annual letter to clients. Here are some interesting charts and trends I’ve come across over the past couple of weeks.
1) Rent vs wages – inflation in all the wrong places
2) Income for young adults ages 25-34, 1989 vs 2013
3) Asset Class Correlations, pre- & post-2008 Great Financial Crisis – a nightmare for traditional portfolio diversification models as global Central Bank QE distorts asset prices
4) Blockchain Protocol
The Depository Trust & Clearing Corporation (DTCC) is planning to rebuild it’s CDS processing platform in 2017 using the blockchain protocol. This is big news! The blockchain protocol and “smart contracts” are going to be one of the most disruptive technologies in the years ahead to everything from brokerage, banking and real estate transactions, to logistics and insurance. It’s going to improve the efficiency (time and cost) by cutting out all of the excess waste in the middle, but also put a lot of people out of work…
5) Internet of Things (IoT) Connected Devices
New Investments
I purchased stock in Palo Alto Networks (PANW), a network and cyber security company, as a Growth investment last week. I’ve been tracking PANW for a while and I’ve been happy with the progress in the business by staying ahead of the curve and continuing to put up strong growth by winning new contracts. We are rapidly becoming more and more of an electronic/digital world, making it increasingly clear that electronic data is the most valuable resource for so many companies today. Collecting, storing, analyzing, predicting and protecting that data are key elements of focus in this digital age. It is estimated that there will be over 50 billion connected devices through the Internet of Things (IoT) by 2020 (see chart above) with total spending reaching over $1.6 trillion. I think perhaps one of the best investment themes (meaning highest conviction) over the next few years will continue to be cyber security. More connected devices means more potential access points for hackers. This transition to the connected, electronic, IoT/digital age is only possible if it’s secure.
PANW’s stock is trading at less than 20x free cash flow while the company continues to post year-over-year growth in excess of 30%. The past 2 years have been a consolidation of the huge run from the 2 years before that. This looks to be a continuation wedge pattern in a multi-year growth story.
Palo Alto Networks (PANW) – 4 years, weekly
Managed Futures
I also added a position in a managed futures fund. Managed futures are funds that trade futures contracts on just about every asset class – bonds, stocks indexes, currencies and commodities. They’re considered an asset class in terms of portfolio construction in that they add value by not having a high correlation to more traditional assets like stocks and bonds (which tend to make up the core of most long term investment portfolios). Most managed futures funds are trend followers and tend to do well during periods of high volatility that lead to large price trends, but can lag during periods of choppiness. For example, most managed futures funds did well in 2008 when just about every asset class other than treasury bonds did poorly.
I’ve been looking for a solid managed futures fund for about 3 years now and finally found one that I like enough to incorporate in portfolios. I started a position last week in the Catalyst/Millburn Hedge Strategy Fund (MBXIX). Millburn started way back in 1971 and has been operating as a hedge fund ever since. At the end of 2015 they teamed up with Catalyst Funds to convert this hedge equity strategy from a hedge fund structure to a mutual fund which now opens it up to smaller retail investors. They invest a little over half of the money in passive equity ETF’s and the rest is the managed futures component. This gives the fund a positive correlation to the stock market with a hedged component during times of stress. I would have preferred the managed futures strategy by itself but it’s hard to argue with their performance track record – only 1 down year (2011) in the last 20 years. Because it has an equity component, I’m using it in the Growth allocation in place of some stock exposure.
This managed futures fund is unique in that the strategy has evolved over the years. The managed futures component was originally a trend following approach, like most others, but the firm has been adapting the strategy with the advent of AI. They’re now using a multi-factor approach that analyzes not only price trend but other fundamental data (like supply/demand data for commodities) as well as market data (asset class correlations, etc.) in real time to create predictive models that measure which inputs are influencing price changes the most. It’s basically machine learning that adapts the strategy as market’s evolve to better stay ahead of changes. In a quickly changing geopolitical world, with high correlations between traditional asset classes, allocating a part of your portfolio to managed futures should act as a buffer against volatility.
Thanks for following!
-Nick