Truly there is nothing new under the sun. In conversation with a fund manager recently, I was particularly taken by his throwaway reference to ‘stealth alpha’, which has to be one of the coolest concepts in investment – ever. I was even more excited when he said he did not want to be quoted using the line as that meant I could pretend it was my idea in some column somewhere …
The manager’s reluctance was based on a point of principle. If your adherence to the value faith is of the more fundamentalist kind – I understand ‘Valiban’ is the technical term – then you do not believe in the efficient market hypothesis, from which alpha, beta and the rest of the Greek alphabet soup all flow. All very admirable, of course – unlike my intention to take credit for his idea.
According to my tireless research assistant Miss Google, however, the phrase has been used in a fund management context before – just once, in an institutional magazine in 2004. More galling still, it was only the title of an article that did not even deign to mediate on just how potentially rewarding a stealth alpha fund could be. And cool too – did I mention cool?
To my mind, such a fund would be interested less in assets the market had decided would never prosper again as assets the market had completely forgotten could ever prosper in the first place. OK, seeing as the market is hardly renowned for its feats of memory, that claim loses some of its drama but ‘Name the stealth alpha asset’ is still instructive.
The UK banking sector would have a strong claim as a core holding in my stealth alpha fund, with few investors actively heading in that direction since it went all VW – ‘very wrong’, of course, what did you think I meant? – in 2008/09 (which also puts a figure on how long it takes for the market to develop amnesia).
Thinking further ahead, I wonder how much longer the Fed will need to equivocate on US interest rates before investors go blank on any asset that could thrive in a rising-rate environment. According to Lucy O’Carroll, chief economist – investment solutions at Aberdeen Asset Management, the Fed needs to see three things happen just to persuade it to increase rates in December.
“First, the labour market must strengthen further, to provide policymakers with additional confidence medium-term wage and price pressures are building,” she says. “Second, even if market volatility remains higher than in recent years, history suggests the Fed will only raise rates if markets retain reasonable poise and negative feedback from recent market turbulence to the US economy is limited. “Finally, Yellen particularly flagged the risk of an ‘abrupt’ slowdown in China as a concern, suggesting the Fed will need greater confidence any slowdown is of the ‘soft’ rather than ‘hard’ variety.” Still, I am sure, if they think hard enough, they can find more excuses and give me time to raise my seed capital.
Julian Marr is editorial director of Adviser-Hub and co-author of Investing in emerging markets – the BRIC economies and beyond
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