Dare to Go Against the Crowd!

ibbotson_rogerRoger G. Ibbotson, Professor at Yale University and successful portfolio manager, warns the Hungarian investors from blue chips, the stocks of major companies.

Making use of his academic research in practice, he sold his first asset management company to Morningstar – an investment research firm listed on Nasdaq – in 2006. Four years ago, he founded another company, Zebra Capital, in order to prove his investors: it is always possible to achieve stable, positive returns on equities.

In his interview to alapblog.hu at the Uhlenbruch Verlag’s yearly conference of portfolio managers in Frankfurt, he says that the equity investments are better than any other capital market investments. Furthermore, the securities of smaller companies beat those of the larger ones – independently from any political event, central bank decision, or currency movement. Robert Ibbotson believes that the euro will inevitably weaken against the dollar.

Zentai Péter: How can you coordinate your academic activities, your profession as a researcher and the speculation-based portfolio management, the chase after profits?

Roger G. Ibbotson: That is the beauty: there is a lot of overlap in the two fields. As a professor my job is to do research, which has applications at Zebra Capital. Our theories can immediately be tested in practice.

Aren’t your fellow professors envious of you?

Some of them are, of course. It is not so unusual. Very few professors own businesses although the way lies open for all of them.

Do you also manage the – as far as I know, massive – wealth of Yale University?

They would consider that a conflict of interest. But the university is very happy, they like my research.

How large is the portfolio you manage?

At the moment, Zebra Capital manages 620 million dollars, out of which forty percent is in hedge funds. Most of our investors are institutions and a few private individuals. Predominantly, we deal with equities. Our beta zero product gives a stable, positive return for the owners. It is designed in a way that market fluctuations do not influence its performance. All of our products – most of them running for four years – have beaten the benchmarks. Last year, for instance, the zero beta hedge fund had a return of 9.5 percent.

We are living in a unique market period. Zero key interest rates, deflation danger in Europe and in other parts of the world. What does capital market history teach us investors?

Every period is unique in some way or another. What is special about the more recent period from a financial perspective is that – similarly to the 1930s – the recovery from the crisis was very severe. Having a low-interest-rate environment is not a new phenomenon. The world has seen it from time to time. We certainly had zero interest rates in the ‘30s…

These events are usually followed by big disasters, aren’t they?

Zero interest rates do not cause disasters. Actually, the disasters are what cause zero interest rates. I see it as a reaction to the financial crisis. It is another matter that it has made the central banks’ balance sheet so large that they have cut it back. This process is called tapering, which will take a number of years. During this period, recovery is going to be very slow.

What do you suggest Hungarian and other portfolio managers, investors? What assets should they focus on in order to make money in this situation?

Whether they like it or not, they still need to buy equities. They simply cannot stay out of such an important part of the market because this is where they can achieve the highest profit.

In my lecture in Frankfurt, I showed that despite the future uncertainties, it is possible to put together less risky stock market portfolios that pay better returns than those including corporate bonds and governments bonds. In the long-term, the equities are better investments than bonds.

More specifically? What should – for instance – the portfolio managers purchase?

If I have to give you a single principle, you have to buy securities that other people are not interested in. In order to achieve higher returns than the benchmark, you have to invest in less well-known companies. This might be difficult because you go against your nature and buy securities that are feared the most.

Why would people take such a risk, while they have the opportunity to purchase blue chips?

Because the blue chips will pay a lower return. Investors have to overcome their fear and go against the crowd. Personally, I like the panic situations like the one in March 2009. These are the best times to buy stocks. The more scared people are, the better positions can be established.

The very popular, large companies tend to be more volatile than the less well-known ones; therefore, we can expect poor return on them. Zebra Capital avoids this type of securities. Market capitalization is major consideration for us, when selecting companies to our portfolio. The large trading volume is a negative indicator, meaning that we choose micro cap stocks over the shares of more heavily traded companies.

Are you primarily doing business on the American capital markets?

The stocks of the companies we are interested in are traded in many different markets around the world. However, we are not active on the emerging markets due to poor, insufficient, or unreliable data. Also, a special feature of these markets is that either big, non-transparent, government-owned companies or way too small micro-businesses are listed on their stock exchange. This makes it very difficult for us to study these securities in a more systematic way.

For that reason, we focus on the small and medium enterprises of North America, the United Kingdom, the Eurozone, and Australia. Although they have a little higher transaction cost than the traditionally larger firms, it does not matter in the long-term because they pay higher returns. The point is that they are fundamentally strong, value companies.

Are your decisions influenced by geopolitical changes: for instance, the adverse developments of the Ukraine-Russia conflict? Or the possible development of an inflationary or rather deflationary environment?

Some people are concerned with that but we are not. Although the possible deflation or international politics affect some of the companies we are picking, these are individual cases. We invest in so many companies that we do not have to worry about every company. The overall performance of our portfolio tends to be very stable over time because it is not influenced by environmental changes: it works the same way in a high inflation environment as in a high deflation environment.

What about the currency movements?

Neither do they impact us. Actually, we also have some currency positions. I believe that the euro will fall relatively to the US dollar. The European currency is definitely overvalued. This has to change.

Experts have been saying this for a long time. But the correction did not occur. Similarly, they predicted significant fall on the equity market.

The general market correction has to be preceded by a common positive mood, when everybody is bullish. At the moment, we cannot speak of something like that. Some people are quite optimistic, some are strongly pessimistic but the majority is waiting. Once the correction occurs, once everybody believes it is happening, it will be already late to make the right decision. My advice is: be courageous and do the opposite what most people want to do!