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Expert Perspective

News, research and market insights from our team of experts.

Investment e.Perspective

Current Issue | April 27, 2017

Warning: Tourist Trap!

By: James Mahoney, CFA, Senior Investment Strategist & Oxford Investment Fellow


We've all been there. We don't really know where else to go and this is where the people are. We pass racks of t-shirts and shelves of handicrafts (likely made in China) and ultimately buy something because we have to – we're supposed to. If you are wondering where "there" is I'm talking about tourist traps. Tourist traps may be a nifty way to burn time while your cruise ship is in port, but they are not places to linger for long. They are characterized by large crowds, long lines and a lighter wallet.

Apart from summer vacation on the horizon, what do tourist traps have to do with investing? While valuation is a great indicator of long term returns, the short term is ruled by the herd. "You gotta buy something" is what I often hear from the average investor. And it's true – just as tourists feel compelled to hit the Main Street gift shops and pay high prices, investors have to put capital to work somewhere, even if conviction is on the low end.

The savvy tourist does two things well: (1) they avoid the hot attractions in peak season, and (2) they get off Main Street and find undiscovered gems. The same is true of the astute investor. Don't get caught up in the crowd.

So what's an investor to do today? For starters, investors should spend some time off Main Street and allocate capital outside mainstream asset classes (US stocks and bonds). Additionally, while international equities may be more attractive on the margin than their domestic counterparts, investors shouldn't stop there.

We recommend capital allocators seek out the niches of the investment world – hangouts like natural resource equities, to take advantage of the recent dislocation in the energy sector. Dives like frontier markets, where markets are far less efficient and skilled managers can generate superior returns.

Unique trading strategies also can play a major role:

  • Long/Short equity managers can take advantage of the increased dispersion in stock and sector returns. Opportunity especially exists in the energy, technology and healthcare sectors.
  • Activist and event driven strategies are able to take advantage of merger and acquisition activity, foster change with management and drive companies to be better capital allocators.
  • Relative value and macro-oriented managers can trade around recent volatility in currency, commodity and interest rate markets. Their ability to take advantage of relative mispricing provides a source of return that is much less dependent on market direction.
  • With the world's central banks moving in different directions and at varying speeds on the monetary policy front, the environment may continue to generate persistent trends in various markets that trend following strategies can exploit.

It's more important now than ever to stay truly diversified and to find differentiated sources of return - strategies that march to a different beat than the mainstream markets, yet stand on their own from a return perspective. Investors should avoid making capital allocation decisions based on what the crowd is doing or the path of least resistance, but rather should seek out less discovered sources of return to achieve their goals moving forward.