TRINAAA and why it's time to focus on risk

TRINAAA: ‘There really is no alternative at all’.

What began as TINA, or “there is no alternative,” has expanded into TRINAAA. The term was coined to describe the unique situation in which investors from all around the world find themselves, as bond yields and fixed-income returns moved to zero, forcing risk-taking upon even the most risk-averse.

This evolution has been a key part of Talaria Asset Management’s renewed focus on measuring and identifying risk within its global equity strategy. Commenting in its latest quarterly review, the firm, which specialises in managing risk and generating income through consistent options strategies, highlights seven points in its “state of play” address.

It is clear to many that the lack of alternatives has driven the bull market in equities, Talaria says, but this has been exacerbated by “massive retail fund flows” with a particular preference for passively managed strategies. The result is that “investors are overexposed to US and tech,” and may have forgotten about the risks owning “too much of one thing”.

In its view, a significant amount of energy of fund managers and investors is being spent on forecasting or working out what might happen, when “more energy should be spent on managing risk.”

“One does not have to be a miserabilist to be cautious about the future,” says Talaria, particularly given that, by most reasonable assumptions, real long-term returns on US large caps, and many other markets for that matter, are expected to be negative. A major part of this issue has been driven by what JP Morgan describes as the “dominant force” in the bull market rally, being the boom in retail investors that resulted in the “meme stock” rally, all powered by zero-commission trading platforms.

With so many new investors choosing to use low-cost, easy-to-access passive ETFs, that give no consideration to value or fundamentals, Talaria concludes that “more and more people are on one side of an increasingly expensive trade.” In every bull market, market volatility comes as a surprise; and there is an unexpected event, small or large, which eventually creates a domino effect. This risk has been exacerbated by the proliferation of ETFs, where if a unit is sold, the underlying stock must also be sold on market.

As is always the case in bull markets, investors, both professional and amateur, tend to concentrate on guessing whether something will happen, rather than simply preparing for it. The team proffers a five-pronged approach to diversifying against the risk of negative long-term returns from the index:

• Pivot to income away from growth
• Move active away from passive
• Prefer other regions over the US, but particularly EM
• Move away from Australia
• Increase value at the expense of other factors

One recent addition to the Talaria Global Equity Fund is CF Industries (NYSE: CF), which has a distinct value bent. According to management, the company, which is a world leader in fertilizer manufacturing, will be a beneficiary of structural growth for fertilizer as growing urbanisation demands higher crop yields.

CF Industries has a unique market position, being closely located to natural gas resources that are key to keeping its cost base low, leaving plenty of headroom for an expansion in margins. It is traits like these that Talaria believes reduce the role of forecasting, and allow a focus on investing into the key themes that may be able to see out the volatility that lies ahead.

Drew Meredith

Drew is editor of The Inside Network's publications and a principal adviser at Wattle Partners.