US valuations ‘astronomical’, warns Tempo

By Tim Stewart
 — 1 minute read

With the US bull market looking ‘long in the tooth’, investors should choose global equities strategies that weight countries on performance rather than liquidity, says Tempo Asset Management.

Speaking to InvestorDaily, former BT quantitative investment strategist Joe Bracken said his decision to found Tempo Asset Management arose from his dissatisfaction with global equity benchmarks.

Specifically, Mr Bracken said the MSCI World index – the starting point for all global equity fund managers, whether they are passive or active – "isn't really the world at all".


The index puts approximately 60 cents out of every dollar invested into the US; 10 cents both into the UK and Japan; and then 20 cents into another 20 countries, he said.

"These 'tiny' countries include Germany, which is the fourth largest economy in the world; France; and Hong Kong, one of the most dynamic economies in the world," Mr Bracken said, adding that Tempo seeks to "rethink, reformulate and repackage" the MSCI World index.

"What really set a fire under us was that the US, while the largest equity market in the world, is by no means historically the best performing," he said.

"We thought: Why do we have 60 cents in every dollar going into a market that’s pretty average?"

The US has returned a staggering 16 per cent per year over the past five years, Mr Bracken said, while the rest of the world returned six per cent.

"This is what makes us get up in the morning and think, 'This is the right strategy for the right time'," he said.

"The bull market in the US market is looking pretty long in the tooth. Valuations are astronomical," Mr Bracken said.

Rather than using the weightings in the MSCI World, Tempo has put together a strategy that equally weights the top eight countries according to two measures: momentum and valuation.

"We like cheap countries that are appreciating, and we dislike expensive countries that are depreciating," Mr Bracken said.

There is also scope for the fund to move 25 per cent of the portfolio into cash in the event of a huge drawdown, like the global financial crisis, he added.

Tempo, which is part of the Challenger stable of boutique managers, has been running the strategy since August 2014 and currently manages $50 million on behalf of a handful of superannuation funds.

Because the strategy is run at an aggregate country level it can use ETFs or futures, making the management expense ratio "quite competitive", Mr Bracken said.

It currently uses futures contracts due to the limited availability of Australian-listed single country ETFs, said Mr Bracken, who runs the fund with co-principal Robert Chapman, a former BT colleague.

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US valuations ‘astronomical’, warns Tempo
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