Overseas Asset Management – Q4 2021 Chairman’s Statement To Shareholders

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During the 23 years since inception, the Fund’s NAV compounded at 12.7% per annum, rising nearly 16-fold, while the MSCI Asia ex Japan (US$) index rose 285% or 6.0% per annum.

US equities are the principal asset class competing with Asian equities and the market capitalization of US equities is now well over half the value of all listed equities globally.

Money has to go somewhere, and today there are pockets of very good value, particularly in emerging market equities which are now a much despised and shunned asset class.

Khanchit Khirisutchalual/iStock via Getty Images OAM Asian Recovery Fund

Dear Fellow Shareholder,

The Fund’s NAV/share increased by 9.3% last year. By comparison, the Fund’s benchmark, the MSCI Asia ex Japan (US$) index, declined by 6.4% last year. During the 23 years since inception, the Fund’s NAV compounded at 12.7% per annum, rising nearly 16-fold, while the MSCI Asia ex Japan (US$) index rose 285% or 6.0% per annum. The benchmark figures used for comparison do not include dividends. We estimate that if dividends, net of withholding taxes, are included in the benchmark returns, the benchmark returns would increase by less than 2 ½ percentage points per annum. Competing asset classes

Whilst we are pleased with last year’s investment return, it pales in comparison with the 26.9% return of the S&P 500 and the 21.4% return of NASDAQ. US equities are the principal asset class competing with Asian equities. The market capitalisation of US equities is now well over half the value of all listed equities globally. The US stock market bubble continued to expand to epic proportions. I suspect that our children and grandchildren will be reading, watching and talking about this speculative orgy for decades to come. Other new competing asset classes have soaked up trillions of dollars of liquidity that would otherwise have been invested in equities, namely cryptocurrencies and non-fungible tokens.

Huge amounts of money are also flowing into venture capital and private equity on the strength of very high historic returns. Nearly 4 ½ years ago, the Cyclically-Adjusted P/E (CAPE)of US equities surpassed 30, putting valuations at that time in the 95 th percentile of historic monthly valuations for US equities using 150 years of data published by Nobel Laureate Robert Shiller. Today, the CAPE of US equities is 40, putting it in the 99 th percentile of valuations for US equities. The long-term average CAPE for US equities over the past 150 years is about 16. The extent of overvaluation gives no indication of the likely timing of a market crash, but they do give an indication of likely future returns which, based on historic correlations, suggest 10-year future returns for US equities of roughly zero.

A better guide to the likely timing of major market crashes is the degree of market speculation, particularly by gung-ho retail investors with no sense of how to value a company. Many of us have read about the shoe- shine boys on Wall Street in the late 1920’s and the Japanese housewives of the late 1980’s who were prominent players in the speculative manias in those markets before they collapsed spectacularly. Today, we have retail investors trading on apps like Robinhood, making effortless money, and in many cases, making highly leveraged bets through options (see OAM European Value Fund Chairman’s statement) and buying on margin.

All these speculative manias were stoked by a combination of low interest rates, strong growth in money supply, momentum trading, seductive narratives, and a general psyche that there is nothing as irritating as seeing your friend/neighbour/colleague getting rich through effortless speculation, also known as FOMO (Fear of Missing Out). Here are a few charts that I collected recently to illustrate the degree of what is happening in the US equity market. The first chart shows the more than a trillion dollars that flowed into US equities last year, exceeding the net inflows over the previous 19 years. The next chart shows the record allocation to equities by households. Investors have gone “all in” this past year on US equities as shown by these two charts. There is an inverse correlation between the allocation to equities by households and future equity returns. Previous peaks, shown in the chart below, of 30% at the end of 1968 and 38% at the end of Q1 2000 corresponded with major market peaks, and over the subsequent 10 years the S&P 500 index fell 7% and 22% respectively. Minor peaks in Q2 2007 (immediately prior to the GFC) and […]

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