After generating 13% performance in 2013, Rothschild’s New Court fund fell behind global equities, dropping -0.2 in the first quarter of 2014, according to an investor letter reviewed by ValueWalk. Odd for a banking reputation that conspiracy theorists claim controls the financial world.

“This time it is different” is red flag

Expressing a degree of doubt in the current economic environment, Mark Kary, head of Rothschild’s UK Wealth Management division, displayed a skeptical dose of traditional wisdom.  “Whenever asset prices are rising, investors often get caught up with the latest popular fashions or theories about why ‘this time it’s different’,” he wrote in their fourth quarter investor report.  “Here, the valuation of assets (and the price you pay for them) is much more important than rates of economic growth.”

What’s guiding the market higher? “Investors’ willingness to pay more for these profits that has propelled markets higher.”

Rothschild April 2014

Noting the current rise in stock prices, Rothschild made a stunning admission relative to value of the equity markets. “This leg of the equity market rally has not been driven by higher corporate profits. Instead, it is investors’ willingness to pay more for these profits that has propelled markets higher.”

Moving from the equity markets to the yield curve, the letter noted how QE has produced the unintended consequence of investors stretching for risk to gain yield. “Amid the scramble for yield, many investors seem willing to lower their standards in ways that are reminiscent of the credit bubble that inflated before 2008. From the old rogues’ gallery, we have seen a return of ‘covenant light’ loans (which don’t contain the usual protections for lenders), second-lien corporate loans (offering extra yield for taking on high risk) and payment-in-kind agreements (which pay interest in debt rather than cash),” the letter said, noting what are considered by some to be signs of a bubble. “There has also been a surge in issuance of Collateralize Loan Obligations, debt structures that repackage high-yielding loans.”  The letter also noted the global market for junk bonds is “booming,” with volume on the verge of surpassing $2 trillion.

Fund not defensive, notes positioning

Looking at value, the investment firm said “it is currently hard to find compelling value among the developed equity markets (the emerging markets are a different story),” the investor letter said, saying they still see opportunities.  “The return assets we hold are either individual equities or specialist equity-related funds,” they wrote, defending their current returns. “For the funds, we are allocating capital to talented managers with proven track records – we see no need to tinker with our positions, as we are backing great investors for the long haul.”

Rothschild April 2014 positions

Noting a balance of 65% in return assets and only 35% in diversifying assets, the fund manager concluded the report by imparting classic contrarian wisdom on investors.

“At times of fear in markets, when anxious sellers are pushing valuations down to attractive levels, we seek to act with confidence, seeing the long-term opportunities among the short-term unrest. By contrast, when investors are optimistic and complacency dominates, we believe it is prudent to proceed with caution,” noting advice that investors might heed on a day when the NASDAQ suffered its worst loss since 2012.  “Whenever risky assets are soaring, a balanced investment approach may not seem exciting, and diversifying assets may feel like a drag on performance. Yet the direction of the economy and financial markets cannot be predicted with consistency and accuracy, and so we always seek to stay protected against major risks.”