He Made 6,400% But Can't Trade These Markets
Take a look at this chart, courtesy of the website ZeroHedge. It compares the 15-year performance of Martin Taylor's Nevsky Capital emerging-markets fund with various MSCI benchmarks against which money managers measure their investing skills:
If you'd have put a dollar into a fund tracking the best-performing index in March 1995, you'd have a bit less than $3. If you'd given your dollar to Taylor, you'd have more than $64. You might think that the career of a guy in his late 40s who's delivered returns for his clients that are more than 20 times better than his benchmark was unassailable. You'd be wrong. Taylor decided this week to shut up shop -- and not because he wants to spend more time with his money:
The decision to stop managing the fund, after just over 15 years, has been a very difficult one. This decision has been driven by a growing awareness that certain features of the current market environment, which we believe might persist for a considerable period of time, are inconsistent with the achievement of our goal of producing satisfactory risk-adjusted absolute returns.
Taylor cites a laundry list of obstacles to investing that make for worrying reading, especially in light of what's currently happening in Chinese markets. (Full disclosure: I've known Taylor for almost three decades since we were at university together.) As China and India become increasingly important on the world stage, the dishonesty of their economic data undermines any efforts to get a true picture of the global outlook:
China is the world's second-largest economy, but already much larger than the U.S. in a broad swathe of sectors. India will be the world's third-largest economy in a decade. Unfortunately, their rise is increasing the global cost of capital because an ever-growing share of the most important data they produce is simply not credible. This obfuscation and distortion of data, whether deliberate or inadvertent, makes it increasingly difficult to forecast.
China's stock market is suffering its worst start to the year in two decades, with worldwide repercussions. Global equities have lost more than $2.5 trillion of their value in the past week. So you can see why Taylor is so fearful of the opaqueness of Chinese data, both from the government and its companies.
Given the large number of known unknowns, investors hang on the words of legendary investors like George Soros, who has a track record of seeing through the fog of official obfuscations. He told a conference in Sri Lanka on Thursday:
China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.
The rise of computer-driven trading is also making markets more irrational, Taylor argues, while the growth of nationalism in countries from Russia to South Africa means politics can trump economics in increasingly unforeseeable ways. "Truly -- to mix metaphors -- butterflies flapping their wings now regularly create hurricanes that stop out fundamentally-driven investors who cannot remain solvent longer than the market can remain irrational."
In some ways, though, the most worrying element of Taylor's analysis of why he's throwing in the towel is the personal element:
"We could be caught up in an erroneous market trend, which could then persist for far longer than we could take the pain. This has made what we enjoy most -- the thrill of analyzing economic data releases and company accounts -- no longer enjoyable. It is therefore time to accept that what we have done has worked brilliantly for twenty years but does not work any more."
You don't deliver returns of more than 6,400 percent without loving what you do. If Taylor has lost his appetite for the daily fight to outsmart the market -- and he says the current unpalatable environment could last for years -- this first week of slumping stock markets may be just a taster of what the year has in store for investors.
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