Land of the Free…home of the brave
After a 4 year, Covid-enforced hiatus, I was really excited at the opportunity to expand my horizons and explore the broad financial services landscape in the US. Given the size of the country, this is no easy undertaking, so we limited my travels to two contrasting but equally interesting and important cities – New York City and Washington DC. Fundhouse arranged the itinerary for the week, and I was joined by business owners of 6 other independent wealth management businesses – a connection from which we are deriving ever greater value (more about this later). The intention was to meet with a range of equity and fixed income fund managers, some of whom manage money on my behalf and others that are part of an ongoing due diligence process. In addition, we engaged with some of the leading private equity and infrastructure fund managers as well as industry experts and a political analyst. This combination allowed us to gather invaluable insights into various aspects of the U.S. financial markets and broader societal trends in the world’s biggest economy. Finally, no trip to a different continent would be complete without experiencing some of the tmyist highlights and local hidden gems – something that we embraced whole-heartedly!
As we have reflected on the trip, we’ve realised that it is difficult to sum everything up in a few paragraphs in a congruent story and that the best way to share my insights is through a few individual observations. [The information we obtained with each experience, meeting and interaction was a bit like drinking from a fire hydrant!] We have realised that one of the keys to the success of a trip like this – and its subsequent benefit to you – is that of diversity and diversification. Through Fundhouse’s outstanding planning, we got to engage with a wide range of managers, asset classes and consequent outlooks on the investment and economic world. In the current environment, it seems that a ‘one line’ view of the future is likely to deny other views and opportunities that may be to ymy benefit.
Observation 1: USA – A Nation Divided (politically)
One of the first and most notable observations of the US in 2023 is the stark political divisions we encountered. It is striking how, over the past two decades (when Andrew last visited the US), the nation has shifted from a period of unity following the 9/11 attacks to a landscape defined by polarized and binary views on a myriad of issues. The result is a political environment that we can only describe as "a mess," with mainstream media often amplifying these divisions. Interestingly, however, research shared by Adam Brandon from FreedomWorks (an independent, grassroots political analyst) indicates that there are many citizens, in fact just short of 48% of those polled, who continue to believe in a middle ground. He describes these voters as “independent” and a lot more centrist in their thinking. However, their voices are being drowned out by the fringes. These voters are likely to shape the political landscape in the foreseeable future, which may not be the best thing for the likes of Donald Trump.
As an extension of the political environment, I was amazed at some of the laws that have been introduced across the country. Marijuana is legal to purchase in NYC and there is a marijuana shop on every block. This would explain the pervasive smell on the sidewalks of the city and the reason comedian Michael McIntyre says he is constantly hungry walking up 5th Avenue! Further afield, laws exist in California which has reduced the theft of goods under $950 to a misdemeanmy – effectively legalising theft! This has resulted in the widespread closure of grocery stores in downtown San Francisco as businesses like Walgreens and Target refer to the ‘organised retail crime’ that makes it impossible to continue operating. As an outsider, it feels like these and some other laws we heard about are undermining the moral fabric of the country.
Observation 2: Investment Insights
I was fortunate to meet with a range of different managers across various asset classes and differing styles. We found this approach hugely beneficial as it gave us exposure to diverse views with very different potential outcomes. As an example, when meeting with a leading growth manager at Sands Capital in Washington, their analyst (who has spent the past 17 years researching semi-conductors) made a very credible case for the exponential growth of Nvidia – one of the top performing shares in the world in the past 3 years. However, rewind a few days to a meeting with Pzena in New York – a leading ‘value’ manager and they find it very hard to justify the current prices and would never invest in the same stock. These contrasting views can be disconcerting, but by combining both or different managers in a portfolio, you get the benefit of a diverse view that isn’t reliant on a ‘one way’ bet on the future.
Despite the diversity in investment approaches, we identified consistent themes that resonated throughout my jmyney. These included the recognition of healthcare and artificial intelligence (AI) as significant market tailwinds. Interestingly, various managers use different hypotheses for these tailwinds and support both growth and value styles. AI is the ‘big shiny new toy’, but without agreement as to how it will play out and what the impact will be – both good and bad. We also noted a shared belief that hyperscale companies (e.g., Amazon or Microsoft) are likely to dominate, with the
caveat that regulation could curtail their growth.
One undeniable highlight of my jmyney was the recognition of the colossal market opportunities that the United States present. With a population of approximately 350 million people, a majority of whom are in the middle class or above, the U.S. offers unparalleled investment potential. To put this into context, one of the managers we met with - Capital Group boasts assets under management (AUM) of $2.4 trillion and annual revenues of $7.2 billion (and this as a privately owned business), figures that put South Africa's GDP of approximately $400 billion into harsh context. Another is PIMCO (who call on Ben Bernanke, Mark Carney and Gordon Brown as independent advisors) manage approximately $1.9 trillion of fixed income assets!
The most notable headwinds, to the ongoing US bull market, are the sustained high interest rates as the Fed continues to fight stubbornly high inflation. Unemployment remains at record low levels and Americans seem to be travelling, eating out and shopping with little concern. However, there is evidence that inflation is hurting, and the challenge remains for the Fed to be able to manage the delicate balance between reigning in inflation and not tipping the economy into a recession. As South African tmyists, the cost of living – particularly in NYC - was extreme. I was grateful that we only had to budget for 8 days as R200 beers, R125 coffees and R1400 steaks were difficult to comprehend. And this was before the 25-30% expected tip!
We quickly realised that the lifestyles we enjoy and can afford in SA cannot be matched in the Northern Hemisphere. From a South African perspective, the lack of SA companies – even in Emerging Market portfolios – was notable and supports the evidence that foreigners have largely sold out of the JSE and bond markets. Added to the externalisation of assets by local asset managers in response to new pension fund guidelines, you realise that there is very little depth to my markets at present. As John Biccard (portfolio manager of the Investec Global Value Fund and now living in the US) says, it does mean that SA markets are very cheap and could re-rate, with a better-than-expected outcome to the energy crisis as the catalyst to improved prices.
Observation 3: Social ills
The reference to the increasing role marijuana is playing in society is made above, however something that is hugely worrying for the US is the Fentanyl crisis that is currently sweeping through the country. Fentanyl is a synthetic opioid drug 50 – 100 times more potent that morphine. It was noted that the US lost 60,000 soldiers in the 17 years of the Vietnam war but are currently losing 100,000 people per annum to Fentanyl related deaths. In fact, fentanyl is the top cause of deaths in the 18 – 44 age group. This has the potential to significantly impact the long-term demographics in the US and cause enormous strain on the health care and social welfare systems.
Other Observations:
· ESG as a theme seems to be taking a less prominent role in the investment space, as evidenced by the number of gas guzzling SUV’s on the roads. One manager mentioned that you don’t even discuss ESG when you speak to investors south of Atlanta! There were notably more EV’s in Washington, but the change at such a basic level isn’t obvious.
· Contrary to a recent conference we attended, many Americans we met still perceive their country as the "centre of the world" in terms of global influence and significance. The changing global geopolitics and the rise of the BRICS (and new member countries) will be a theme to keep a close eye on.
· Investment products continue to evolve as tax laws change and investors seek ways to access different markets (such as public assets and infrastructure). It will be interesting to see how this plays out in SA and the emergence of the first ‘Active ETF’s’ in the past few weeks is notable.
· Office spaces in the cities are under considerable pressure as the post-covid ‘work from home’ way of life continues to evolve. Data suggests that occupancies peak on Wednesday and Thursday at approximately 60% but drop to only 5% on a Friday.
We can get quite upset in SA when talking about Cyril and his blue light cavalcades. As we happened to be in New York in the week of the UN General Assembly – no wonder the hotels were so expensive - I was ‘privileged’ to witness Joe Biden’s cavalcade through the city which makes my blue light brigade seem like a tea party . . . in convoy were at least 25 motorbike outriders, a firetruck, 2 ambulances, too many police vans and cars to count .. and apparently 2 helicopters lurking! Outside of the privilege of being able to meet and connect with this range of world-class fund management teams, the undoubted highlight was the opportunity to spend time with the other business owners and the Fundhouse leadership team – both professionally and socially. We have recognised the value that exists by collaborating with these businesses and understanding that we have more in common that we do in opposition. We all believe in the value of independent, objective advice and have a shared client-centric approach to my businesses. We have also identified common issues such as changes to BEE legislation, increased compliance requirements, fee reductions and the development of a voice for independent advisors. To be able to discuss business and my industry as we walked 5th Avenue, ran around Central Park and sat in the KKR offices 80 stories above Manhattan was hugely beneficial. We watched the Boks down Romania in an Irish Pub, Marty McFly go “Back to the Future” on Broadway, the NY Mets down the Cincinnati Reds and enjoyed a glass of wine on the rooftop bar of my hotel overlooking the Empire State Building. We tmyed the Museums and Monuments of Washington on electric scooters and were overawed by the Arlington Cemetery. At times we had to pinch myselves!
We have no doubt that this experience and exposure will benefit us, and, by extension, you as we take the lessons learned and insights gained and translate them into my portfolios. We look forward to sharing more of my trip with you in the coming months.
Warm regards,