This week our portfolios have had a tough time. According to Nobel Prize winner Eugene Fama, markets are efficient and reflect all available information. Therefore, the move in prices we’ve seen this week are rational. In my opinion, trying to understand the rationale for day-to-day market moves is impossible. However, a lot of people are paid to try and understand the reasons behind day-to-day market moves. The moves seen this week are supposedly reflecting the new information that inflation is rising in the US. This rise in inflation could increase long-term interest rates and reduce the value of future cash-flows, so prices fall.
I don’t believe that markets are efficient. Some markets are more efficient than others, however market prices are driven by investors, i.e. humans and we all know that humans are emotional and often irrational. There are lots of examples of markets behaving irrationally. If you’re interested in this, look up the work of Richard Thaler and his discussions with Eugene Fama on this topic. I think we saw a few examples of markets behaving irrationally this week.
In our portfolios, we own shares in Allianz Technology Trust, which is a £1.1bn London-listed company investing in technology companies. The below graph shows the performance of the net asset value (NAV, in red) over the last week or so and the share price (in blue). As you can see, the NAV has fallen by 6.73%, whereas the share price has fallen by 12.92%. Why?
A 12.92% fall in a week is significant for a trust that has 68 underlying holdings. It’s the equivalent of the largest three holdings (Alphabet (Google), Micron and Expedia) all going bust, which they clearly haven’t. The new information that Eugene Fama suggests makes market prices efficient must be significant to create this size of move, which this week was supposedly a change in US inflation expectations. There are different ways to look at inflation expectations but taking the ten-year US breakeven inflation rate is one way and this moved from 2.45% on 6th May to 2.54% on 12th May (source: Federal Reserve Bank of St Louis). So inflation expectations have risen and it’s at levels rarely seen in the last decade, however we’re not talking about a huge jump in inflation expectations or levels that are significantly above the Federal Reserve’s 2% target. Does that justify a weekly fall of 12.92% in the share price of Allianz Technology Trust? Maybe we are moving into a new part of the economic cycle and earnings will be under pressure?
All available information should be reflected in the red line (NAV), so you could argue that even if I don’t understand the reason why, the 6.73% fall in the NAV is the reflection of market information and is ‘efficient’; but why has the share price fallen by nearly double that of the NAV? In my opinion it’s down to sentiment, i.e. human behaviour, nothing to do with the performance of the assets that the company owns. For whatever reason, investors were willing to sell the assets for a lower price than they are worth.
I don’t know if the NAV of Allianz Technology Trust is going to rise over the next day, week or month. However, when prices dislocate from the value of the assets it becomes interesting and this week we’ve been adding exposure to the company for those clients with available cash.
This is just one small example of what we do at WKM and how we view markets. I’m not claiming to be more intelligent or expert than Eugene Fama. All investors have got access to the same data and information, it’s just how we interpret and use that data that makes us all different. With hindsight the decision to add to Allianz Technology Trust this week might be a mistake; only time will tell. However, when we make these decisions, we try and evaluate the risks we’re taking and whether we are paid to take them and currently we think those risks are worth taking.
Thanks for reading and