Hedge Clippings | Friday, 14 January 2022

Welcome back to 2020. Towards the end of 2021 we were somehow under the mistaken impression that we were moving onwards and upwards from 2 years dominated by COVID, but in spite of (or maybe partly as a result of) certain politicians' enthusiasm and or naivety, we seem to be deeper in "it" than ever. Maybe it's just a stage we had to go through to get to the end - which seems to be as far, or further away than ever.

Traditionally at the start of each year we cover a blend of looking forward and looking back. Looking forward and markets can no longer ignore the threat of inflation, simply because it is real - and in the US at 6.8% is at its highest level since 1982. Importantly PPI has kicked higher as well which in due course will flow through to consumer prices and inflation. Jerome Powell is at pains to try to downplay the effect on interest rates, but the market may not be so sure.

One interesting aspect of the market's rise has been the dominance of - and potentially distortion by - the performance of major stocks on the underlying market index. While the Dow Jones is equally weighted across 30 companies, the S&P500, Nasdaq, and the ASX100 are weighted by the market cap of each of the underlying stocks. As a result, just 10 stocks in the S&P500 (dominated by the likes of Apple and Google) make up 1/3rd of the total market cap of the index.

In Australia, the top 10 stocks - dominated by the big miners, banks, and a few others - make up 50% of the ASX100. So indices only provide averages, and as we've always reminded ourselves and others, averages can be misleading. A 1% gain in the top 10 is equal to a 1% gain in the remaining 90 - or can cancel each other out.

The risk is that the trend of the underlying 2/3rds (in the case of the S&P500) or 90% of the ASX100 can be masked by the majors. This puts investors in ETF's at risk if the index is masking an underlying negative trend. It also makes an argument for ACTIVE managed funds and, if it comes to that, active ETF's.

Looking at the average performance of managed funds can have similarities, although we don't market weight funds' performances, otherwise, the well publicised recent performance of Magellan's funds (around $90 billion FUM) would overshadow all others. As the table below shows, manager selection is just as important as sector selection, or in the case of stocks, company selection.

What the returns in the table does show is that on average, over all time frames, actively managed funds tend to outperform the underlying index, and therefore index based ETFs or passive funds. But more importantly, careful selection of the best funds leads to significant outperformance - as shown by the average return of the Top 10 funds in each category or peer group, but particularly in the two "hot" sectors in 2021, namely Global Equity Large Cap, Australian Small/Mid Cap, and Australian Equity Alternatives.

Given equity markets as a whole have been performing strongly, doubling that by investing in the top 10 actively managed fund makes good research well worth the effort!

Our two manager interviews to start the year also emphasise the benefits of index unaware and unconstrained investment strategies. Both Collins St. Asset Management and Glenmore Asset Management are "stock pickers" first and foremost and invest in companies that they believe are well managed, undervalued, and have a strong runway for growth - irrespective of the sector.

That's it for the first week back! Stay safe, and best wishes for 2022 - whatever it may bring.

News & Insights

Manager Insights Video | Collins St Asset Management

Manager Insights Video | Glenmore Asset Management

Insync Strategy - Megatrends | Insync Funds Management

10k Words - December Edition | Equitable Investors

Fixed-income Alternative - Life Settlements (part 2) | Laureola Advisors

January 2022 Performance News

Bennelong Emerging Companies Fund

4D Global Infrastructure Fund

Insync Global Capital Aware Fund

Paragon Australian Long Short Fund

Cyan C3G Fund

AIM Global High Conviction Fund 

Collins St Value Fund

Bennelong Australian Equities Fund

Hedge Clippings | Wednesday, 22 December 2021

Welcome to the final Hedge Clippings for 2021. There's not much we can add to our previous comments of last Friday, given today is Wednesday, partly as not that much has changed since then, and partly as it seems odd to be writing this mid-week, rather than prior to winding down on a Friday afternoon.

The certainty of uncertainty persists, as does the realisation that COVID will be with us for some time to come. As such we'll all have to adapt and be flexible (I believe the "in" word or term is "pivot") as if we haven't had to do enough of that already over the past year or so.

And so we're just going to leave you with best wishes for Christmas from all the team at FundMonitors.com. We'll be back next year as usual and look forward to "seeing" you then.

News & Insights

What is a Life Settlements investment? | Laureola Advisors

Banning Unvaccinated Workers Could Impact Our Economy | Pendal

November 2021 Performance News

Bennelong Australian Equities Fund

Equitable Investors Dragonfly Fund

Delft Partners Global High Conviction Strategy

Bennelong Long Short Equity Fund

Frazis Fund

Insync Global Capital Aware Fund

Laureola Master Fund

Hedge Clippings | Friday, 17 December 2021

Certainty in Uncertain Times

Hedge Clippings' weekly email attempts to strike a balance between a mixture of news, performance, information and insights from a range of fund managers, commentary on what's irking us at present, (generally plenty) and an overview of what might be in the offing on the global economic and political stage. You might think that provides a plethora of opportunities, but trying to capture the week just gone while gazing into the future, and wrapping the result up in just a few paragraphs, is not as easy as it might seem.

Looking back over the past 12 months it has been a pretty extraordinary year - global economies and equity markets should have been devastated by the effects of COVID in 2020, and the fact that disruptions and lockdowns continued, should have done the same in 2021. As it is, growth has been maintained, as evidenced by Australia's unemployment rate falling below 5%, no doubt in part due to a widespread "cash splash" by the government, record low interest rates, and ongoing central bank support.

Equity markets performed well - particularly in the US where the S&P500 had advanced by over 27.92% on a total return basis over 12 months to the end of November, although in Australia the ASX200 more subdued with a total return of "just" 15.48%. Those numbers disguise the performance of individual names and sectors, as evidenced by the fact that while the average actively managed fund on the fundmonitors.com database returned almost 19%, the subset of Australian small/mid cap managers had returned over 34%. It's fair to say that 2021 will go down as a great opportunity for stockpickers - and for that matter, the crypto space, where Bitcoin (currently at $47,000) although trading around 30% off it's high of $68,990, is still 100% above its 52 week low of "just" $22,015.

Looking in the rear view mirror is easy, it is what lies ahead that's difficult. Hence the headline today - "Certainty in Uncertain Times". That may seem a paradox, but if there's one thing certain in the times ahead, it's uncertainty. It's certain that inflation is here, but uncertain as to whether it is transitory or not. It's certain that central bank support will be reduced or withdrawn, but uncertain to what extent, by when, or what the market's response will be. It's certain that interest rates will rise, (and it's even more certain they won't fall) as shown by the UK's lift of 0.25% overnight, but how many times, and by how much, and again how will the markets react?

On the geo-political front the uncertainty is even more certain. Both China and Russia are eager to push their respective boundaries, both militarily and diplomatically, and neither are likely to reduce the invasion threat, even if they don't act. China in particular will play the long game. And finally, on the domestic political front it's looking more and more certain that uncertainty will be the outcome of next year's election, with the prospect of a hung parliament and with independents of various shapes and sizes calling the shots.

And finally, the topic that has dominated nearly every facet of our lives since January 2020, COVID. It seems certain - in NSW in any case - that the Omicron variant will prove as virulent here as it has overseas in the UK, but uncertain if the health and hospital system will see, or be able to manage, the numbers. What also seems certain is that the NSW Premier's decision to ease restrictions on venue numbers, and abandon QR check-in just as cases are increasing, and against his Chief Medical Officer's advice, is probably the dopiest move since Donald Trump declared COVID wasn't an issue.

So there we are! We have almost reached the end of 2021 - and thus the last Friday edition of Hedge Clippings for the year. There'll be one final pre-Christmas edition next Wednesday, and then the FundMonitors.com and Olivia123 teams will down tools, and head off to recharge their batteries. We'd like to wish all our subscribers and readers, and their families, a happy and safe Christmas break, and a healthy and prosperous New Year, whatever that may bring. Thank you for your support, comments and feedback over the past year.

News & Insights

Manager Insights Interview | interview with Paragon Funds Management

Family Offices Open to Private Credit Defensive Strategies | Laureola Advisors

Investment Perspectives: Why the boom in household savings isn't going away | Quay Global Investors

November 2021 Performance News

Glenmore Australian Equities Fund

Longlead Pan-Asian Absolute Return Fund

Insync Global Quality Equity Fund

Airlie Australian Share Fund

Paragon Australian Long Short Fund

Cyan C3G Fund

Premium Asia Fund

Bennelong Concentrated Australian Equities Fund

Hedge Clippings | Friday, 10 December 2021

Warning bells have been ringing about the impending end of "easy money", low or in some cases negative interest rates, and the impending return of inflation for months, if not years.

And yet, with the exception of the occasional short dip or correction, equity markets have, by and large, carried on regardless. As a result we assume that the market doesn't believe the warnings will ever some to pass, ("tell 'em they're dreamin") or that if they do, the outcome won't be as negative as the doomsdayers are predicting (possible). Of course there will always be some who think they'll make it to the exits in time before the rush (dream on).

The reality is that excessive exuberance always come to an end sooner or later, with the question only surrounding the timing. And it's worth remembering that the larger and longer the party, the greater the hangover (although Hedge Clippings sometimes forgets this in spite of frequent hangovers suffered over the years, but that's another story).

Back to markets: This time, as always, there are differences. The rise of the technology sector. The emergence of cryptocurrencies as an asset (as well as an alternative to the track or casino). The sheer weight of funds in passive investments and ETF's. But chief amongst them - or possibly in part the cause - are the unprecedented levels of liquidity thanks to central bank intervention, and interest rates that a generation ago were unthinkable.

So Hedge Clippings was interested to read in the AFR that ratings agency S&P Global had conducted a stress test to examine how the world would handle a rise in interest rates of 3%, particularly focusing on the $US44 trillion of corporate debt built up over the past decade or so, and in particular that of the loss making "new economy" darlings.

The answer of course is "not very well". However, the question is how likely is it that interest rates will rise 3% from their current levels of 0.25%?  For anyone who remembers interest rates in double figures, and mortgage rates of 18%, a rise of 3% might seem trivial. The issue is that a rise of even half this - say 150 bps will be enough - and possibly more than enough - to spoil not only the equity party, but also the highly leveraged property market as well.

News & Insights

Manager Insights Interview | video by  Premium China Funds Management

Stocks Up; Bonds Flash Warning Signs | article by Laureola Advisors

November 2021 Performance News

Bennelong Kardinia Absolute Return Fund

Collins St Value Fund

Bennelong Twenty20 Australian Equities Fund

Surrey Australian Equities Fund

4D Global Infrastructure Fund 

Quay Global Real Estate Fund

Bennelong Emerging Companies Fund

Hedge Clippings | Friday, 03 December 2021

As we crawl towards Christmas, Hedge Clippings wonders if we're the only ones wishing the days would go a little faster. After all, it has been a funny kind of a year - although we use "funny" in the odd rather than the amusing meaning of the word. It has actually been a grind thanks to not only COVID itself, but also to all the ramifications that COVID added to daily life, such that for the most part "checking in" and mask wearing became the norm.

And it is not only daily life that seems to have been grinding along - the S&P/ASX200 seems to have found the going tough as well, having started the year at 6,757 it rose by 871 points or almost 13% by the beginning of August, only for the index to have lost almost half of that rise as it grinds towards 2022.

November was dreary with the ASX200 losing close to 1%, making it the third negative month in a row, taking the market's YTD increase to just over 10%. Add in dividends and the numbers become a little more respectable YTD (+14.10%) and whilst early days for November fund returns, actively managed equity funds have broadly, and in some cases significantly outperformed the market, with numerous examples of +40% YTD, particularly in the small and medium cap sector.

While more difficult to accurately measure, Australia's residential property market also seems to have a softer tone to it, as either the weather, the time of year, an increase in supply, or the threat of increased interest rates take effect.

Or maybe, like Hedge Clippings, everything is slowing - or grinding - down as we head towards Christmas. And just when the "double jabbed" vaccination rate inches towards - or over 90% - along comes a new variant to dampen spirits.

But it's not all - doom and gloom. Crypto as we've mentioned for the past few weeks, has been buoyant, even though Charlie Munger, the 97 year old vice chairman of Warren Buffett's Berkshire Hathaway considers it crazy.

And on another positive note, there's great news with the experts predicting that the 2021 Australian wine vintage will be a "unicorn" with a record crop of 2.03 million tonnes (+31% over 2020) after a season charaterised by near-perfect growing and ripening conditions across most states and regions.

At least there's something to keep Hedge Clippings' spirits up!

News & Insights

Manager Insights Interview | video by Cyan Investment Management

Fixed Income Dilemma | article by Laureola Advisors

4D podcast - the role of infrastructure in reaching net zero | article by 4D Infrastructure

Green hydrogen is central to plans to achieve net zero | article by Magellan Asset Management

Global infrastructure and global real estate set to shine | article by 4D Infrastructure and Quay Global Investors

November 2021 Performance News

AIM Global High Conviction Fund

DS Capital Growth Fund