Pod Insights Masters in Business Team Favorite At the Money: Hot & Cold Investments About this episode What should you do when an investment suddenly becomes hot or cold? How should investors think about sectors that fall in and out of favor? Should you be looking at countries like India and Japan or technologies like AI? Jan van Eck, CEO of Van Eck Funds, which oversees $75 billion in ETFs, speaks with Barry Ritholtz about how to identify when an asset class falls into or out of favor.
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1:10 Barry Ritholtz? What's the hot sector of the moment? Is it A I, the metaverse, gold, oil? Why do some stocks and styles fall in and out of favor on such a regular basis? The challenge for investors is whether or not to jump into or out of these changing sectors and when. It's actually much harder than it looks. I'm Barry Ritholtz, and on today's edition of At the Money, we're going to discuss what to do with assets that have fallen out of favor with the markets. To help us unpack all of this and what it means for your portfolio, let's bring in Jan Van Eck, C E O of Van Eck Funds.
1:54 Barry Ritholtz? The company manages about $75 billion across a variety of E T Fs and mutual funds. Let's just start with a basic concept. Why do broad things tend to fall in and out of favor?
2:08 Speaker 03 Well, Barry. You know, the firm was founded in 1955 and our perspective on the markets is that markets, financial markets, live within a broader world of political trends, economic trends, and technology. Also, the game of investing is really an art more than a science. If you go back 100 years, Barry, people had 100% bonds in their portfolio. That was the prudent thing to do.
2:33 Barry Ritholtz? Didn't some people also have widow and orphan funds, some railroads, some banks, some telephones?
2:39 Speaker 03 Oh, yeah. Well, obviously, people have been chasing disruptive technology forever. And a lot of lessons to be learned if we want to go there. But I'm just saying, listen, if you look at institutional portfolios today, now half of them are in private equity and venture capital. So just the basic, what you put in your portfolio has changed a lot over the decades. So I take a very skeptical view and recognize that we're a point in time in history and you want to be conscious about how you put your portfolio together.
3:08 Barry Ritholtz? So let's talk about some of those asset classes that have either become popular or too popular, or have fallen out of favor and become so unpopular that they're becoming attractive again. Let's start with the basics. How do you identify when an asset class has fallen out of favor?
3:28 Speaker 03 These are great questions. I mean, I think the question is, what do you even feel comfortable putting in your portfolio? I'm going to be the radical skeptic. Let's start with US equities. We've been a very, a great economy, great place to be. That's the core of your portfolio. But people will say, oh, value investing is the way to go. And they'll show you a study of 40 years of data, Barry, and value beats growth all the time until it stops.
3:53 Barry Ritholtz? Right. Which has done over the past 15 years.
3:55 Speaker 03 So what we've learned, I think, right in the industry now is you better be very benchmark aware. Like, know where the market is saying that there is value and take it at face value. That should be your starting off point. And US equities are certainly the core. Right? Then the question is, well, are there other things happening in the world that might favor something like commodities? Or is fixed income going to be? In favor or not in favor, and that depends on some of the cycles that we're talking about.
4:24 Barry Ritholtz? Let's use money market funds as an example. For the longest time, money market funds were barely yielding anything. Rates were zero. You're getting twenty bips, thirty bips in a money market fund. Suddenly, you're getting five, five and a quarter, and literally six trillion dollars in cash flows into money market funds. What should an investor make of that asset class suddenly coming back into favor?
4:50 Speaker 03 Yeah, I mean, listen, my point is be skeptical about everything. So people say, oh, bonds are a normal allocation. Well, we know and have been reminded in 2022 that bonds are very subject to interest rate movements. And so we're sitting here at, let's say, four and a half on the 10-year. I'm very worried about our fiscal situation in the United States. We don't need to go into that. But that leads me to say, you know what? I'm very, very happy sitting in T-bills right now. I don't feel as the skeptic that I need to be that core position. I'm happy to get the same yield for a lot less interest rate risk.
5:27 Barry Ritholtz? So meaning you're looking at shorter duration?
5:29 Speaker 03 Shorter duration, any kind of shorter duration fixed income. So I bother with, you know, interest rate risk.
5:35 Barry Ritholtz? Let's talk about sectors that have rotated into favor. How do you identify these three to five-year trends that are a good place to park some capital for, you know, a couple of years?
5:47 Speaker 03 So let's take commodities. You had the industrialization of China, which was a super trend of commodities. Commodities, I would say, more of a tactical asset class. But we look at global growth as measured by PMI. And if PMI is over 50, which it only became now in Q1, that's what I think is driving commodity prices. And once you have, I think, sort of the China property implosion is behind us. I can't prove it, but because the global economy is now growing, that's an asset class where now the sun is shining on you.
6:25 Barry Ritholtz? So when you mentioned the super cycle with with growth from China and commodities, you know, during the 2000s and 2010s, China was consuming all manner of raw materials, cement and lumber and copper and prices went up, but not crazy until the pandemic lockdown. Then we really saw prices spike. So what are you looking at on the commodity side? How do you look at an asset class like precious metals to decide whether or not this is not one of the many false starts we've seen over the past couple of years?
7:01 Speaker 03 Yeah, I look at gold as a financial asset more than commodities, which is driven by the real economy. Gold would fall into that category of we're worried about interest rates and our fiscal problems in the United States.
7:14 Barry Ritholtz? And hence the rise of gold in the past two years.
7:16 Speaker 03 And hence own some gold and God forbid Bitcoin. If you're ever going to own it, as I've been saying over the last year, this is the time to own it. We're in a bull market for those two assets. You will have big corrections, 20% corrections, but I think you're in a bull market for those two assets until our fiscal problems are solved.
7:34 Barry Ritholtz? Well, there's a follow up discussion. Are we ever going to solve our fiscal problems? You and I are not that far apart age wise. Our entire adult lives, we've been warned about the dangers of fiscal excess. None of the warnings have come to pass. There hasn't been a crowding out of capital. The dollar is still the strongest currency of the majors out there. There's been no crowding out of private investment. Why should we even care about the fiscal deficit?
8:03 Speaker 03 We're ticking to levels where we've reacted before. So under the Clinton administration, the cost of interest on our debt approached that of defense spending. It's now past that of defense spending. So you're right. The big question is, will the Fed do what the Japanese central bank did in Treasury, which is buy up all the debt, right? Who cares if there's too much debt, if there's a buyer of last resort? We've never had that in the United States, but you can't rule it out. That's why I'm like, you know what? There's all these scenarios. Just make sure you know what they are and that you're kind of comfortable with your portfolio, given those. So you're absolutely right. The way to kick the can is for the government to do what they did in Japan. I don't know. I don't see that happening in the US, but you never know.
8:44 Barry Ritholtz? What, what other asset classes have you noticed either coming into or out of favor that are worth talking about?
8:52 Speaker 03 What I like from a three to five year perspective, I think countries tend to trend because you have changes in governments that are either positive for the markets or negative.
9:01 Barry Ritholtz? So let's talk about two countries that have seen caught a bid over the past year. You mentioned Japan. Obviously their stock market has been doing very well lately and India is perennially in the running to either catch up or replace China. What do you think about those two countries as asset classes coming in or out of favor?
9:21 Speaker 03 A hundred percent.
9:23 Barry Ritholtz? Like them both?
9:23 Speaker 03 India is by far the best macro story. In fact, no one really debates that. It's just what's the PE ratio, what, how expensive are the stocks, how much are you willing to pay? But I've got a trade within that, which is the two technologies of our lifetimes have been the internet and AI. Right? Basically the mag seven, it's just one trade. It's the internet. It's the companies that stand between us and the internet, right? Giving us new capabilities. In India, there's now two companies. So they cheapen the cost of cell phones to below 10 bucks a month. They, competition beat their brains out and there's only two survivors. So it's a duopoly.
10:03 Speaker 03 Those two companies in India are serving 800 million customers and they are now the internet play in India. So I think that is like very high confidence that that's going to be a good investable trend over the next couple of years.
10:20 Speaker 03 You know, I think it's easy to pick a couple of countries where you may be wondering about your allocation there.
10:25 Barry Ritholtz? What, what other countries are of interest? What has fallen out of favor?
10:32 Speaker 03 Well, I think. I think China's obviously fallen.
10:36 Barry Ritholtz? I mean, if you're a US investor in China since the early 90s, you're lucky if you break even.
10:42 Speaker 03 Right. Whereas over the last 10 years, Indian equities, this will shock most people, have matched that of US equities.
10:50 Barry Ritholtz? Really?
10:50 Speaker 03 Over the last 10 years. Yes. And it's interesting that equity owners in India have been treated much better than in China. Obviously, there's a devaluation of the PE ratio, right? Valuation.
11:01 Barry Ritholtz? So, Europe as an investing region has been another underperformer for a while. What will it take to get Europe to be attractive to you as an area coming into favor?
11:15 Speaker 03 If the default is the benchmark, I don't see any tremendous internet or AI or technology plays that are large weights in those countries in Europe that would get me super excited.
11:30 Barry Ritholtz? So, to wrap up, if you're a long-term investor and looking to add to your core portfolio, you might want to consider some of these areas that have come into favor and are likely to persist in favor. We were talking geographically, Japan and in particular, India, but you can also look at things like semiconductors and AI as asset classes that have suddenly become much more investable than they once were. I'm Barry Ritholtz. This is Bloomberg's At the Money.
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