At the Janus Henderson Global Media Conference, “New Investment Paradigm: Uncovering Opportunities and Challenges,” our senior leaders and key portfolio managers from around the globe shared their insights and outlooks for their markets. In this session, Portfolio Manager Aneet Chachra discusses short-term opportunities created by money flows, particularly around speculative stocks, special acquisition trusts (SPACs) and initial public offerings (IPOs).
Louise Beale: I want to introduce Aneet Chachra to discuss some new frontiers when it comes to navigating special purpose acquisition companies, IPOs, and new efficiencies. What a lot to get through. Aneet, can I hand over to you?
Aneet Chachra: Sure. Thank you. Hi. Thank you for being here today. I know this online thing is hard. We’re all tempted to go and check our email, or talk to somebody, or do something else, so I appreciate your time today. I’m going to be talking about money flows, particularly around speculative stocks, SPACs, and IPOs. And right now, we’re seeing that these money flows can be much more important than fundamentals, and that’s creating interesting opportunities.
But first, I’m going to admit something. Sometimes, I buy lottery tickets, and I’ll tell you why. I’ll be in the office and there will be a big Powerball jackpot, and somebody at work will be putting together a pool to go and buy a bunch of tickets. And I’ll join in because I have this tiny fear that what if everybody in the team wins the Lottery, except for me, because I didn’t participate?
So, we all have FOMO, fear of missing out, in some part of our life. And FOMO is part of what’s happening with stocks like AMC and GameStop. But when I talk to other financial professionals, they’ll say things like well, AMC is clearly overvalued, based on a discounted cashflow analysis. But really, that’s the wrong framework for looking at it, because when I actually talk to somebody who’s buying AMC, they’re not stupid.
They don’t think that the movie theatre business has a bright and growing future. But instead, they’re buying the stock because it’s fun, it’s exciting, and they don’t want to see their friends get rich without them. But there’s also something else that’s very different with these stocks, and that’s social leverage. With lotteries, it doesn’t matter how many tickets I buy or my co-workers buy, it doesn’t change the outcome, but that’s not true at all with stocks.
If a group of people are all piling into to a particular company, especially if they’re using options, that absolutely will push up the price. So, what you see is that people who get early into a trend, they benefit from the money flow that comes in after them. Now, when I talk to people who are older, they think this whole situation with new stocks is crazy. So, I’ll say to them, okay, would you buy the Russell 2000 Value Index? And people are, like, yes, sure.
Well, right now, the top two holdings in that index are AMC and GameStop. So, for every $100 you put into the index, about $1.50 goes into AMC and about $1 goes into GameStop. And these funds, they’re the real diamond hands. Because as money comes into these funds, they have to buy the entire basket, which includes these companies. And they can’t sell, no matter how high the price for AMC and GameStop go, as long as they’re part of the index.
Now, I’m not trying to pick on index funds. This is true for lots of different systematic strategies, and that includes vol targeting, factor funds, momentum, and many more. So, all these strategies, they have fixed rules, which determine what assets they own, when they buy them, when they sell them. And all these strategies that individually make sense, but their cumulative impact is pretty big, especially because flows into these funds are getting larger and larger.
So, if you have a whole bunch of different strategies and they all need to buy or sell a particular security on a particular day, it’s probably going to affect the price. Imagine you walk into a car dealership and you say I’m going to buy that car today. You’re probably not going to get the best price, compared to if you were more flexible or you’re willing to walk away. On the flip side, suppose you’re in a rush to sell your car. Again, you’re not going to get the most money for it.
Well, actually, that was true until recently, and then now, what’s happened is there’s a shortage of used cars and their prices have surged. So, just like used cars, assets go through periods of being more popular and less popular, and that brings me to SPACs, special purpose acquisitions companies. So, SPACs have actually been around for a long time, but it wasn’t until about a year ago that they suddenly got popular again.
And now you’ll see SPACs and SPAC sponsors on the cover of magazines. So, let’s think about the SPAC ecosystem. Who are the participants? What are the flows? And what are the incentives? If you’re a celebrity or you’re an expert on a topic, you have an incentive to sponsor a SPAC. You put up some cash up front, but in exchange for that, you get a pretty lucrative stake in the deal.
Now, if you’re an investment bank and you have clients who are eager to buy SPACs, your incentive is to underwrite them. And SPACs have a big built-in buyer base, and that comes from funds that recognise the different profile of them. So, SPACs are a very unusual security, in which they come with a sort of money back guarantee. If you buy a SPAC and it goes up in price, you can sell it.
If the deal is a dud and the SPAC doesn’t have a lot of interest, you have the option that you can redeem back and get back your initial investment. So, because of this asymmetry, there are many funds that are interested in buying new issue SPACs. Now, let’s see what happens next. The SPAC sponsor, they find a target company, propose a merger. And usually, they’ll put out some presentation, which shows very bright expectations for future growth, and they’ll schedule a vote.
So, now there are two big offsetting money flows. On one side, you have these arbitrage hedge funds. They’re trying to sell their shares for a profit in the market, if they can, otherwise, they’re redeeming. On the other side, you have investors, quite commonly, retail speculators, who are interested in buying SPACs because they’re looking for lottery like outcomes. Now, we don’t know what the outcome of SPACs are going to be over time, but we have a good sense, from looking at IPOs.
Based on that, it’s pretty likely that some of the companies are going public by SPAC today, they’re going to end up being big, successful, and important companies, but most of them will likely underperform. And that brings me to traditional IPOs. There are lots of interesting money flows around them too. When a company first goes public, especially if it’s well known, its stock tends to initially do well. And the reason for that is there’s a lot of media attention, investor hype around companies when they first go public. But a big part of that is also flow.
So, when a company first IPOs, only a small portion of its shares become available and the rest are locked up. If you want to buy a hot company’s shares on opening day, you’ll probably end up having to pay up for it. Every year, when the Superbowl happens, there are news articles about how last-minute seats of the game are going for $5,000, $8,000, or more.
But that’s really only a tiny subset of seats, because if the NFL tried to sell every seat in the stadium, they could not get that kind of price. Now let’s fast forward six months to when the IPO lockup expires. At that point, the money flows actually reverse. So, what happens then? Imagine you’re an early employee, or you’re the founder, or you’re a venture capitalist who backed the start-up that went public. You’ve won the lottery.
Now your incentive actually is to sell some of your shares and collect your winnings. So, what we’ll see is a wave of block trades and secondary offerings. These typically get priced at a discount to market price, and that’s to incentivise new investors to come in and become shareholders. Also, as a new company grows and matures, it becomes eligible to be added to indexes. And as I mentioned earlier, these indexes, they’re the real diamond hands.
And we saw this last year with Tesla. In the fourth quarter, Tesla became the largest company to ever be added to the S&P 500 index. And because of that, Tesla stock did really well, there was a big pick-up in trading volume, because every passive fund that tracked the index was forced to buy Tesla. And right now, if any of us put $100 in the S&P 500, about $1.35 goes to Tesla stock. Now, this is true, not just for stocks, but for bonds as well.
One of the reasons why bond yields continue to be so low is systematic flows. When any of us invest for retirement, it typically goes into some plan that puts it in a mix of stocks and bonds. And we’re buying stocks because we hope and we expect that they have good returns over the long run. On the other side, we have bonds, which have extremely low yields right now, but we’re combining it with stocks, so that it reduces portfolio volatility and smooths the ride along the way.
And this is the biggest challenge that most investors face all the way from individuals to large institutions I talk to. It feels like I’m at one of those sinks where there’s a hot water tap and a cold water tap. And you turn them both on and one of your hands is burning and the other one’s freezing, and you’re trying to mix it together to get to an okay temperature to wash your face. Because in most plans, your only options are stocks and bonds.
What we do is different. We’re looking for opportunities that are created by these money flow effects. As I mentioned before, lots of strategies have to do trades because of fixed rules, or mandates, or regulatory reasons, and we understand why. So, we want to provide and meet an economic need that somebody has, and it’s a win-win for both of us. So, we’re taking a risk, that someone else is looking to offload.
And the reason we can do that is because we’re diversifying across hundreds of trades. And this diversification is really important. When somebody tells me that they’re buying a little bit of AMC stock, it doesn’t really matter. If it goes up in price, they sell it, they make some money, I’m happy for them. If it goes down, even if it goes to zero, for most people, it’s actually not going to matter, especially in the long run. But when you hear these stories about people who are taking their life savings or they’re maxing out their credit cards, and they’re pouring it into a single stock or crypto investment, that’s terrifying.
Now when I talk about all these flows, people will ask me how, as an individual, can I track or benefit from these flows? And it’s tricky. We’re capturing lots of different data sources and we model different participants, what are their flows, what are their incentives?
Particularly bubbles are very, very hard to bet against, because crazy things get crazier. But I will suggest that sometimes, it’s interesting to look, not for bubbles, but for the opposite of bubbles. So, look for good assets whose price is getting pushed down because of selling flows or neglect. My Dad tells me this story about when he first moved to this country. He was a grad student. He didn’t have a lot of money. He didn’t know how to cook.
So, a friend of his told him to go and buy cans of soup. They’re cheap, they’re east to make. So, he went to a big supermarket for the first time in his life and he sees there’s Heinz soup selling for a regular price and there’s Campbell’s soup and there’s a sign that says buy one, get one free. So, he’s confused by this. He thinks there must be something wrong with this Campbell’s soup that the grocery store is trying to get rid of it, so he buys the Heinz soup.
A week later, he goes back to the same supermarket and now the situation is reversed. So, now the Campbell’s soup is at regular price, the Heinz soup is on sale. So, that day he learnt a really important lesson that prices in a grocery store can go up and down, and that doesn’t relate to the quality of what you’re buying. And we see something like this in markets as well. Last year, all sorts of asset prices went down 30%, 40%, 50% or more.
But if you had a long-term view on them and you were patient, these were good opportunities to buy into these assets. But diversification is very important. Sometimes, a soup is cheap because it’s terrible. So, I’ve talked about a whole bunch of different asset flows so far. I’ve talked about IPOs, SPACs, indexes, speculative stocks.
If anything I’ve said resonates with you, please get in touch with me. I’ll be happy to talk afterwards. Thank you for your time and I’m going to pass it back to Louise.
Beale: Aneet, thank you very much, indeed.