How much is something really worth if you can get it for free and would you take it without knowing the risks? These are the types of questions that have been bugging Lazard Asset Management’s Steve Wreford during these past months.
Interest rates around the world currently stand at record lows and billions have been pumped into markets by quantitative easing (QE) to tackle the economic impact of the Covid-19 pandemic.
Wreford is one of the managers of the recently launched $39.2m Lazard Global Thematic Focus fund, which invests in four secular and structural changes that the managers believe will shape and dominate the global economy for the next decade. One of which is monetary policy.
He said historically low interest rates after a decade of ultra-low rates will change people’s relationships with money going forward.
“It’s a fascinating point that the monetarism of the last 40 years is probably coming to an end and that money costs zero at the moment. And the trouble is that if something costs zero it’s probably not worth very much,” Wreford (pictured) said.
Not that the Lazard manager disputes that extreme efforts were needed to help deal with the heavy human and financial impact of the coronavirus, but he said the full effect of this plan has not factored in inflationary risks.
This inflation risk is a key issue, according to the Lazard Global Thematic Focus fund manager, because after a decade of QE it has yet to emerge.
UK consumer price index (CPI) annual rate over 10yrs
Source: Office for National Statistics
As the above chart shows the consumer price index (CPI) rate of inflation has regularly been below the target of 2 per cent over the past 10 years.
The approach by governments to limit the spread of the coronavirus with lockdown measures has forced them to also take action to limit the economic impact, embracing fiscal stimulus and infringing on central bank independence in some cases.
“What we’re seeing from this is the governments’ reactions all across the world is to print as much money as possible and to just hand it out in whatever way they – the governments – think it should be handed out. So, that’s an absolutely staggering thing,” he said.
This breakdown between the independence of central banks and governments is another key element to the changing relationship with money, Wreford said.
“We have to be very careful what we wish for here, because coming out the other side of this it’s a different transition mechanism,” said Wreford. “It means that instead of markets allocating where money should be, governments are allocating money.
“And what we may well find is that governments allocate money in ways which are very inflationary.”
Wreford added: “It seems that now money is to be free because it’s being printed without any inflation risk – which is the perception at least in the short run – and the aim is to try and prop up asset prices as much as possible.”
However, while this might stand in the current situation where inflation is and remains low, it could be storing up problems for the future.
“You can print as much as you want and that’s ok, but what’s going to happen at some point is there’ll be this multi-generational inflection point when inflation will return with a vengeance,” he warned. “And the idea that all this money can then be withdrawn to prevent that inflation, [well] it might be what happens in the textbooks but it’s not what happens in reality.
“Because realistically no politician or no central banker is going to be the one who says that we’re in a place now where we want to pull this money away.”
He added: “In various countries people are being sent cheques in the mail or there’s a direct deposit in their bank accounts, directed by government.
“Well no politician realistically wants to be the one taking that money back again.”
As such, Wreford intends to make sure his fund is on the right side of this theme.
The Lazard Global Thematic Focus fund – which he manages alongside John King and Nicholas Bratt – is a concentrated version of the five FE fundinfo Crown rated Lazard Global Thematic fund and invests with a 10-year time horizon based on the trends they believe will dominate the next decade.
Wreford said coming into the crisis he had been willing to “tear up our whole framework” if he felt that its four cornerstone areas – technology, sustainability, geopolitics, and monetary policy – were shown to be ill placed positions.
But after some weeks after the major equity sell-off Wreford said the four original secular and structural themes remain intact.
Within these four areas he identifies six themes to invest in: asset efficiency, ‘bits of chips’, empowered consumer, software as a standard, digital runways and data networks and profits.
Performance of fund vs sector & index since launch
Source: FE Analytics
Since launch in February, the fund has made a loss of 8.77 per cent fairing slightly better than the losses for both the FO Equity-Ethical peer group (9.00 per cent) and MSCI ACWI GTR index (11.01 per cent). The fund has an ongoing charges figure (OCF) of 1.10 per cent.