Hedge Clippings | Friday, 28 August 2020

The choice between Sovereignty and Sovereigns

Australians politicians are for once united in their view regarding the importance of Sovereignty, with both Scott Morrison and Anthony Albanese supporting controls on governments at all levels, along with universities, from being subject to foreign (read Chinese) influence.

Inevitably, however, there are those who disagree, presumably not as much about the issue of sovereignty itself, but that any such stance is likely to have a severe effect on their future flows (to use an old term for pounds sterling) of sovereigns themselves. Or more accurately dollars, or currency of whatever denomination.

In other words, follow the money, honey. Or as Paul Keating said, "in the race of life, always back self-interest. At least you know it's trying".

Not surprisingly, given how leveraged his state is to China, and how little it is exposed to COVID, the WA Premier came out on the side of preferring the money, and to hell with the threat to Sovereignty.  

Meanwhile, his Victorian counterpart, Daniel Andrews, has a massive conflict of interest: His state is reeling, both in health, socially, and financially from COVID, made worse by an own goal while mismanaging Melbourne's hotel quarantine arrangements. But his conflict is even greater, courtesy of his secretive "Belt and Road" deal with China, which even the ABC took issue with in October last year, describing it thus:

"it is also designed to grow China's clout abroad by making countries economically dependent on Beijing, and has been written into the Communist Party's constitution as a sign of its importance.

China's Government is thrilled it can bypass Canberra by doing deals directly with a state government - and hopes more deals with other states could pressure the Federal Government to change its policy in future.

It would be unthinkable for a Chinese province to break ranks with Beijing on a major foreign policy issue like Victoria is doing, which also helps to explain the frustration of the Morrison Government having its diplomacy undermined."

If that was the case last year, imagine what the Morrison government thinks now - or maybe they now have the opportunity to act on those frustrations.

Undoubtedly the Morrison government standing up to China will significantly affect export and trade income, and thus cost Australian jobs. Today's announcement that another beef exporter has become a victim is likely to become part of a long list of retaliatory measures orchestrated by Beijing, joining four others, along with restrictions on Australian barley and wine previously announced.

So, the choice is commerce and money, or, in the longer term, our democratic way of life. This may seem melodramatic, but the Chinese Communist Government is certainly more concerned about influencing our sovereignty than how much it is going to cost them in sovereigns.

It's undoubtedly a tough call: Take a stand and the pain now, or leave it to another day, and another generation, when it will all be too late to reverse.

Depending on how much it hits one's hip pocket will probably determine your view. Those in WA such as Kerry Stokes and Andrew Forrest have probably already made their minds up.

From Hedge Clippings' perspective there could be a hidden benefit in China's stance on wine: will that leave more for Australian consumers, and/or drop the price? If so, maybe we'll vote with our hip pocket!
 

And now for something completely different: Meaning of American Pie by Don McLean

News & Insights

New Funds on Fundmonitors.com

Retail REITs Still Look Cheap by Vincent Li and Brad Potter, Nikko Asset Management

Hedge Clippings | Friday, 21 August 2020

Last week's Hedge Clippings pondered the difference between "complete" and "finished" - two words which unfortunately aren't going to be used in reference to the current focus on COVID. Having said that, we, like most others, have seemingly become obsessed with, or by, COVID, hanging on every update, briefing, newspaper, or bulletin on TV or radio. So much so that we'd like to propose a COVID-free front page or news bulletin day (or maybe a week?) where updates are relegated to a small "need to know" section somewhere towards the back, or end, as the case may be.

We certainly don't want to suggest the situation is not serious, or to trivialise the dangers or predicament of those directly affected whether by illness or lockdown, or the efforts of politicians and those on the front line. However, we're rapidly approaching the stage of being "completely over" the media's seeming obsession with it, including whizbang interactive charts showing trends of cases per day, curves, and sadly deaths. The reality is that life continues beyond COVID, and until there's a vaccine we need to get on with it as best we can, thankful that we're in Australia - even if in Victoria - and not Europe, the US or worse.

Equity and other markets have certainly got on with life, with punters (sorry, "day trading investors") reportedly flocking to open online broking accounts with the likes of Comsec and others, presumably because they can't get to the pokies or the race track. How much of the government assistance handed out since March or April, or how much of the $30 billion (expected to reach $40 to $50 billion according to one estimate by Rice Warner) withdrawn from Super by 480,000 Australians, over 80% of whom are under 35, will end up being put to "good" use? We can understand early withdrawal if the proceeds are used to say, pay down credit card debt which is accruing interest at around 20% pa, or for essentials, but it tells the story that most workers don't appreciate (or bother) with super until it is too late to accumulate enough to cover retirement.

While the media, and most of the rest of us, have been distracted by our daily dose of COVID, that certainly can't be said for ASIC, in spite of reportedly finding that ex-AMP chair Catherine Brenner had done nothing wrong in spite of her successor Mike Wilkins offering an unreserved apology at the company's AGM in May 2018 for AMP's behaviour, which he described as "absolutely unacceptable". Not so lucky this week was Westpac, who declared they would not be defending ASIC's charges relating to fees for no service at Westpac's BT Funds Management and Asgard. Meanwhile, ASIC has commenced proceedings against RI Advice for failing to have adequate cybersecurity systems following illegal access to a server containing sensitive client information.

Elsewhere in the naughty corner this week was the colourful founder of Mayfair 101, James Mawhinney, who according to the AFR was defending his accounting treatment of various expenses which involved writing up the value of investments based on expenses such as office rent, flowers for staff, and wine. Many moons ago in a previous edition of Hedge Clippings we mentioned the antics of Mayfair 101, the IPO Wealth Fund and Mawhinney in not particularly glowing terms. There's an old adage - "when something sounds too good to be true, it probably is", although we're disappointed we weren't the recipients of Mawhinney's generosity in the wine department.

News & Insights

Webinar Invitation: Understanding Life Settlements with Tony Bremness from Laureola Advisors

VIDEO: Interview with Craig Racine from Gyrostat Capital Management

VIDEO: Interview with Monik Kotecha from Insync Fund Managers

Hedge Clippings | Friday, 14 August 2020

There's not much new that Hedge Clippings can add to the focus - some may say overload - that COVID has created over the past six months. It has come to dominate all our lives as we hang on for good news instead of bad, and most pertinently, when the search for a safe and effective vaccine will be completed, so the current restrictions will be finished, over, finito!

In reality, we doubt the battle will ever be complete, or finished.

Which got us to thinking about the ever changing nature of both the funds management sector, and particularly fund performances. Over the past 15 years or so that AFM has been researching and monitoring actively managed funds, we have seen an extraordinary change. For instance, pre-GFC hedge funds were considered secretive (which some were) and risky, and some downright dodgy (thankfully no longer in business), and overall purely the domain of wholesale investors and institutions and therefore out of reach of the retail sector (which most were).

During the GFC (for those who can remember back that far), hedge funds were blamed for causing volatility, as was short selling, with Gerry Harvey infamously declaring that "all hedge fund managers should be put up against a wall and shot", and ASIC, along with other regulators around the world, banned the practice, which incidentally didn't put a halt to the volatility.

Common sense eventually prevailed, and with some regulatory control, hedge funds were allowed to operate, and as a result, flourished not only for the big end of town, but for the benefit of retail investors as well. Over the following 10 years some thrived, some survived, and inevitably some failed, as have their long-only peers. That's how the market, and capitalism, works.

Over that time we have seen some spectacular successes - both from a business building perspective (for instance Magellan, with close to $100 billion in FUM after just 13 years in operation) and risk mitigation and performance, such as those we regularly feature. The point is that, like COVID, the funds' management story is not complete, nor finished, and never will be. New managers will come, and old ones go. Meanwhile, the performance of individual funds, and sectors or strategies, will also continue to fluctuate - such as the value vs. growth scenario that has been unfolding over the past few years as disruption and technology takes the lead.

Even Hedge Clippings' week is not complete, or even finished, until yours truly has hit the "send" button. Which is a neat segway into the difference between the meaning of the words complete and finished, which most readers would assume mean much the same as each other.

However, would you believe that on the website quora.com there's a whole section devoted to the topic of the difference between the two, presumably frequented by English language scholars and the occasional pedant (who? Moi?) who devote their time to examining the nuances between the two in minute detail.

The final word is left to an Indian gentleman by the name of Gopalkrishna Vishwanath, a retired structural engineer and scholar, who posted thus:

"No English dictionary has been able to adequately explain the difference between complete and finished.

However, in a recent linguistic conference held in London, England, and attended by some of the best linguists in the world, Samsunder Balgogin, a Guanese, was the clear winner.

His final challenge was this: "Some say there is no difference between complete and finished. Please explain the difference between complete and finished in a way that is easy to understand."

His astute answer: "When you marry the right woman, you are complete. But, when you marry the wrong woman, you are finished. If the right one catches you with the wrong one, you are completely finished."

His answer was received with a standing ovation."

And while talking of completely finished, here's a flashback to the times when Hedge Clippings included a segment to finish the week on a much needed lighter note entitled, "And now for something completely different". Some of you might find this video of an Italian auction tickles your sense of humour - or horror as the case may be.

News & Insights

Australian House Prices: How Worries Should We Be? by Nikko Asset Management

VIDEO: Interview with Dean Fergie from Cyan Investment Management

VIDEO: Introduction to the L1 Capital U.K. Residential Property Fund IV

Hedge Clippings | Friday, 07 August 2020

Although Hedge Clippings tries to steer a steady course between seeing the opportunities that abound when looking into the future, and concerns about the risks that are all too apparent, the current relentless stream of seemingly negative news particularly re COVID, does provide some challenges.

Possibly it is the reversal into lockdown in Victoria and the seemingly impossible task of eliminating COVID there that fans the negativity. Meanwhile, on the positive side, the relative absence of infection in SA and WA to the West, and Queensland to the North (with NSW hovering dangerously in the middle - literally) gives one confidence, albeit with some trepidation.

And so it is with many of the fund managers we talk to or meet. Actually, we don't meet that many of them in the current environment, but Zoom has become such a way of life and business that it's now a new normal. Depending on their view, and no doubt their strategy and current performance, they're either a glass half full, or a glass half empty of confidence.

Occasionally there are those who, far from being merely half full of confidence, are overflowing with it. This may be due to their age, or relative youthfulness. It might be their fund's performance - it being difficult to remain confident while losing other people's money. It might be the sector they invest in - which in the case of tech and disruption probably equates to good performance.

But more likely, and more often than not, it's about their attitude and approach, which in turn no doubt dovetails with their fund's strategy and therefore performance. We're in a changing world where, for example, Tesla is worth more than Ford and a range of other manufacturers because it is looking to the future and, love him or loathe him, is run by one of the great enthusiasts of the corporate world. To be long Tesla requires conviction, and an eye for the future. Doubtful? You're probably short, and financially painfully so.

Next week we're interviewing a young and exuberant fund manager, Michael Frazis, who embodies the positivity and enthusiasm referred to above. Michael's fund is just 2 years old, and it endured a torrid first six months in 2018 before posting returns of 24% in 2019, and 25% YTD in 2020. There are others who embrace change and disruption as a strategy or theme. Invariably they're full, or overflowing, with positivity.

Finally for this week, a mention of a book - available as an audio download - we've recently read - or listened to - called Black Box Thinking by Matthew Syed. Highly recommended. And certainly likely to raise the positive views in any pessimist!

News & Insights

Will the US Dollar Become Another Casualty of COVID-19? by Arminius Capital

Hedge Clippings | Friday, 31 July 2020

The rapid rise in the number of cases of COVID in Victoria, and to a lesser degree (so far) in NSW, is a stark reminder - if needed - that there's a long and winding road ahead before we're out of the physical and medical dangers of the pandemic. Far from the numbers declining, or even being under control, they're increasing rapidly, while in the US and Europe they seem disastrous.

And just when it looked as if the government would be able to start selectively weaning sections of the community off their Job Seeker and Job Keeper payments at the end of September, there's every chance that, in some states at least, they're going to become more dependant. And with Victoria and NSW having the largest populations, the flow-on effects of border closures will prolong the impact and damage on the tourism sector in Queensland in particular.

In the short term, investors and fund managers will not only have to consider the geographic effect on companies, but will also have to navigate the upcoming reporting season. In the longer term, governments, and all who live under them, will have to consider and navigate the debt mountain that COVID has created.

These are sobering, and worrying times, but as always there will be winners and losers. From the investor's perspective, investment and fund selection decisions are going to be more critical than ever. High yielding investments - provided they're not also high risk - will appear on more approved product lists. One would suspect that dividends will be reduced further, with the trickle-down effects on investors' spending habits having further negative effects on the economy.

Just as well - there's not much most Victorians can do, or places they can go, to spend what income they have anyway. Maybe one of the few bright spots will be Dan Murphy's (and others') online ordering and delivery services...

Which reminds me, it's Friday, and nearly drink o'clock.

News & Insights

The Rise of Restoration: A Focus on Oil and Economic Reality by Nikko Asset Management

Hedge Clippings | Friday, 24 July 2020

Everyone loves a list - and Hedge Clippings is no exception, provided of course we're near the top, and it's a list one would want to be on. In other words, if the list is "This Year's Best..." then most people would like to be there. On the other hand, if it's the bottom of the list, or it's titled "This Centuries Worst..." then most would duck for cover. Some people seem to love being on the "Rich List". However, possibly because yours truly is never ever going to make the tail end of that one, it does not hold much more than a passing interest. It's probably of more interest to Lamborghini salesmen, or possibly potential kidnappers - there's another couple of reasons to justify not being on it. Even if one's not actually on a list, people love reading them - good or bad. Lately, we've become used to the daily COVID results, and Hedge Clippings avidly reads the email we receive each night from Longview Economics in London, updating us on which country is doing well, and vice versa. Closer to home, but still on the COVID theme, we eagerly await the daily stats from each state - such is the world we live in. Of course, at AFM we're a party to the LIST game, namely lists of the best performing funds in one category or another, and as recently as last week in Hedge Clippings we supplied the Top 20 All funds over 12 months to June 2020. We might be accused of keeping up with the Jones's - or in our case, Morningstar's or Mercer's - but in our opinion lists of best performing funds (and sometimes the worst ones) can be misleading, and dangerous. And by dangerous, we mean costly if one doesn't do a little - or a lot - of digging. So, let's dig back a little in time: If we look at the Top 10 funds over 1 year to June 2015, it was quite a year: Even the one at the bottom of the list returned 36%, whilst number 1 came in at 61%, for an average return of almost 48%. Pretty good, given the ASX200 returned just 5.68% and the S&P500 7.42%. Of those 10 funds, 7 had a five-year track record at that time, with an average return p.a. of 18%, and 9 had at least a three-year track record, averaging 31% per annum. Pretty impressive! Except that winding forward to 2017, only one of the 2015 Top 10 was still in the Top 10 list for the 12 months to June 2017. And only 6 of them made it in the 2017 Top 100, and 3 didn't make the Top 200! Roll forward to June 2020, and of the Top of the Class in 2015, none made the 2020 Top 10, none in the Top 20, although 4 did make it into the Top 100, 2 into the Top 200, and 3 into the Top 300. Let's try again, this time looking at the "Class of 2017". A tighter range, number 1 returned +36%, through to Number 10 at +27%.  Average return for the Top 10 was just over 30% - impressive enough, but in a market where the ASX200 put on a more respectable 14%, and the S&P500 almost 18%. All but one had a 5-year track record at that stage. Only one featured in the 2015 Top 10 list. Of 2017's Top 10 (and you can probably guess what's coming) none made it to the 2020 Top 10. 4 were in the Top 100 (one by the skin of their teeth at 99), 3 into the Top 200, and the remaining 3 in the Top 300. So, what does this say about the Top 10 - or 20 - for the 12 months to 2020? You could be excused for thinking that we're giving them all the "kiss of death" normally reserved for those award recipients at gala managed fund industry evenings (there goes our invitation to this year's do). However, digging down, and analysing rather than just scanning or compiling lists, a few things come to light: 4 out of the 2020 Top 10 (and 5 of the Top 20) have less than 3 years track record, and only 3 have 5 years or more. Only 9 of the Top 20 have a track record of 5 years or more. This seems to confirm our previous research that early stage and small managers provide good returns, in spite of the fact they're excluded form most APL's. Against that, 7 of the 2020 Top 20 have over 15 years track record, so Hedge Clippings is pleased to see that age doesn't automatically exclude quality. The average return of the 2020 Top 10 was +31% with a Sharpe of 1.65 against a market backdrop of -7.68% for the ASX200 and +7.51% for the S&P500. Every PDS and IM warns that past returns are no guarantee of future performance, BUT, we do like to think that if a manager can navigate the volatility of the past 12 months and perform well, it augurs well for agility and being able to perform in a variety of conditions. And as an avid (albeit old and conservative) believer in disruption and the future, Hedge Clippings also points to the fact that markets, or more accurately, economies, have changed, as have business models and valuations of stocks such as Afterpay and Tesla. For the record, an equally weighted portfolio of the Top 10 Funds in 2015, 2017 and 2020 would have returned the following in the 12 months to June 2020:

We fully accept that selecting funds AFTER the results are known only proves what we all now know - the known knowns. Hedge Clippings is a devoted disciple of selection based on low correlations by blending funds for diversification to produce results targeting RISK, rather than returns.

News & Insights

VIDEO: Interview with Spatium Capital

Singapore's Legacy for the Fourth Generation of the People's Action Party by Delft Partners

Hedge Clippings | Friday, 17 July 2020

For some reason Hedge Clippings is not feeling as perky as usual. This is no doubt due to the resurgence of COVID-19, although looking back at our previous prognostications in this regard we could be excused for saying "I told you so!". There was never going to be a quick fix to the mess the world is in, although to be fair, by global standards the outbreak in Victoria is minute, and the one in NSW is miniscule. The issue of course is that, unless drastic measures are taken, that will no longer be the case. So on to brighter subjects, although that might be relative subject to where you might identify your fund investments. In the graphs below we cover the performance of strategies, funds and the ASX200 over the past financial year to June 2020. To put things in perspective to start with, the "market" - namely the ASX200 Total Return Index (i.e. including reinvestment of dividends etc.) recorded a pretty dismal negative return of -7.68% for the FY 2020. Against this, the average of all equity-based funds in AFM's database fell fractionally by -0.13%, and while that number is negative, it's still 7.5% better than being invested in the market overall, or an ASX200 Index based ETF. However, as the chart below shows, averages can be deceptive, as shareholders in Australian banks, and Afterpay, would be aware. Over the past 12 months, 84% of funds covered by AFM outperformed the "market" and 61% produced a positive return after fees, and while the RBA cash rate is yet to go into negative territory, it's not far off it. The challenge - for investors in direct equities and managed funds - is to avoid the losers and pick the winners. No easy task both for investors and professional fund managers, with fund performances ranging from -80% through to +50%. Similarly, most strategies outperformed the ASX200 as well, as shown by the next chart. Credit and Fixed Income understandably were the top performers, but Equity Long-Short and Equity Market Neutral were not far behind, while Global Macro and Equity Long held around zero. Once again, as above, averages can cover a wide range of returns. Picking strategies - and for that matter funds - is often a case of ensuring a portfolio is suitably diversified, but the correlation between strategies frequently aligns in times of market panic. Of course, everyone loves a winner, so for those who always ask, here's a summary chart of the Top 20 performing funds ALL strategies and ALL global regions over the past 12 months. There are some familiar names amongst the list as well as some relatively unknown newcomers. We include this chart along with the caveat that looking at one year in isolation, even one as volatile and varied as the past 12 months, is not the way to make a full assessment of a manager's performance. And while including caveats, just selecting top performing funds on the basis of 12 months - or, if it comes to that, 3 or 5 year returns - is not the solution to constructing a top performing portfolio of funds either. The full analysis of risk factors such as volatility, Sharpe and Sortino ratios, drawdowns, up and down capture all play a part, followed by correlation analysis of the final selection. Next week AFM will be publishing our full report on the performance - including the above KPI's - across funds, strategies and geographic regions. To request a copy, please click here.

News & Insights

Infrastructure Spending Emerging as the Focus by Delft Partners

Not having cash can be costly, but so can sitting on it - how not to make that mistake by Monash Investors

Hedge Clippings | Friday, 10 July 2020

News & Insights

Healthcare - An attractive opportunity by Alphinity Investment Management

Corporate bond investors should be careful what they wish for by Ardea Investment Management

Hedge Clippings | Friday, 03 July 2020

News & Insights

Will COVID-19 Cripple the 4 Banks? by Marcel von Pfyffer, Arminius Capital

Surviving the Dividend Drought by Malcolm Whitten, Nikko Asset Management

Is There Something Systematically Wrong with Victoria's COVID-19 Performance? by Christopher Joye, Coolabah Capital Investments

Hedge Clippings | Friday, 26 June 2020

News & Insights

VIDEO: Interview with Kristiaan Rehder of the Bennelong Kardinia Absolute Return Fund

Why I'm not a fan of the Fed buying corporate bonds by Roger Montgomery, Montgomery Investment Management

New Funds on Fundmonitors.com