Fees matter, plus bankruptcies surge and relative value
Fees matter, plus bankruptcies surge and relative value
The Sandbox Daily (7.9.2024)
Welcome, Sandbox friends.
New York City paid McKinsey $4,000,000 to perform a study on trash cans, Tesla is up 50% this month, and the S&P 500 index logged its 5th consecutive all-time high and its 36th ATH of the year.
Today’s Daily discusses:
for investors, fees matter… alot
bankruptcies surge in June
relative valuation framework
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +0.07% | S&P 500 +0.07% | Dow -0.13% | Russell 2000 -0.45%
FIXED INCOME: Barclays Agg Bond -0.09% | High Yield -0.12% | 2yr UST 4.624% | 10yr UST 4.297%
COMMODITIES: Brent Crude -1.07% to $84.83/barrel. Gold +0.35% to $2,371.8/oz.
BITCOIN: +2.63% to $57,937
US DOLLAR INDEX: +0.11% to 105.114
CBOE EQUITY PUT/CALL RATIO: 0.51
VIX: +1.13% to 12.51
Quote of the day
“I've failed over and over and over again in my life, and that is why I succeed.”
- Michael Jordan
For investors, fees matter… alot
Investors tend to gravitate towards funds with the lowest fees.
Funds in the lowest quintile (blue line below) by expense ratio – ETFs with an expense ratio ≤20bps – pulled in over 75% of total ETF inflows in each year over the period ranging 2014 to 2024. However, the past year’s 77% flow share for the lowest fee quintile was the 2nd lowest over this period, thanks to strong inflows to actively managed and option-based funds.
The most expensive funds (purple line below) continued to see limited investor interest over the past year, as ETFs in the highest fee quintile (fees ≥85bps) recorded net outflows overall.
Source: J.P. Morgan Markets
Bankruptcies surge in June
The pace of U.S. corporate bankruptcy filings accelerated in June, marking the highest number recorded in a single month since at least 2020.
The 75 bankruptcy filings culminate a “historic surge” per S&P Global Market Intelligence’s reporting. Filings have been steadily increasing throughout 2024.
The tally of 346 U.S. bankruptcies for the year through June month-end is the highest at the halfway mark since 2010.
After the high total number of bankruptcy filings endured in 2023, this trend does not seem to be cooling. In fact, it’s quite the opposite.
Source: S&P Global Market Intelligence, Daily Chartbook
Relative valuation framework
Relative valuation is an important step along the investment selection process in which the investor can identify what assets are best to invest capital towards, and perhaps more importantly, what assets to avoid. Relative value determines the approximate worth of an asset by comparing it to assets with similar risk/return profiles and fundamental traits, then establishes screening and ranking criterion to score what assets are deemed most attractive.
One shortcoming with relative valuation analysis is how like assets can have a diverse range of macro exposures and company-specific characteristics. Meaning, fundamental attributes – like valuation – can have enormous variation across similar assets, despite the bunch being grouped together under a common category or theme.
Take, for example, the chart below that illustrates the significant range of P/Es within each sector of the S&P 500 index. When an investor wants to invest in the Industrials sector (“IND”), it’s important to understand there is a P/E multiple attached to the sector (like $XLI) but it’s equally crucial to understand that valuations down at the group level and company-specific level are quite disparate. Some sectors have a wide range (tall bar charts like Industrials and Consumer Discretionary), while others are tight (Real Estate and Utilities).
Below is another example of this variance – here we look at what an investor should expect when investing in Tech stocks.
While an investor may be interested in gaining exposure to the broad sector ($XLK), the underlying components would suggest that some have sky-high expensive valuations while the large majority look cheap on a relative basis.
This analysis is only comparing companies within one sector, something rather narrow.
As one broadens the aperture to perform relative analysis against other sectors, indexes, styles, and factors, the nuance tenfolds. Then consider going across geography and asset classes and well… it gets messy.
Bottom line: like assets can have enormous variation among them – know what you own and why.
Source: Piper Sandler
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.