NEWS
25 Mar 2022 - Hedge Clippings |25 March 2022
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Hedge Clippings | Friday, 25 March 2022 Exactly one month ago, Vladimir Putin announced that he had made the decision to launch a "special military operation" in eastern Ukraine, with no plans to occupy Ukrainian territory, and that he supported the right of the peoples of Ukraine to self determination. Both of these claims were of course rubbish. As it turns out, it looks as if the Ukrainian resistance is likely to ensure Russia's occupation will fail, and the country's self determination will prevail - both of which have surprised everyone outside Ukraine, Putin included. Exact details are difficult to confirm, but as of 4 hours ago Reuters were reporting "at least 20,000 deaths" including 5 generals - 5,000 more than Russia lost in nearly 10 years in Afghanistan. In a previous edition of Hedge Clippings, we referred to it as the most dangerous situation since WWII, which depending on one's point of view, becomes potentially more dangerous the more unsuccessful that Russia becomes. Unlikely to back down or withdraw, at what stage does Putin escalate by using ever more powerful weapons? If he does so, at what stage will NATO respond, rather than the current strategy of providing arms instead of armies? Meanwhile, after just one month, news of the war (to call it what it really is) has been pushed off the front pages. Page 1 of today's Sydney Morning Herald has nothing other than a pointer to an article on page 13. The conflict doesn't rate a mention on P1 of today's AFR, possibly understandable as it is a financial newspaper, albeit the war's impact on trade, inflation (oil, gas, cereals), etc prevailing. The UK's Telegraph is not much different, more interested in a 5p. reduction of fuel tax. Maybe all this is caused by the incessant 24 hour news cycle, and the inability for the headlines or the latest news bulletin to "carry" a story - or retain readers' and viewers' interest for any length of time. It used to be said that last week's news was tomorrow's fish and chip wrapper, so maybe nothing has changed, except they don't put the news on the Macca's or Hungry Jacks' carton. And it seems that after an initial "risk-off" shakeout, equity markets have moved back to a "risk-on" stance with the ASX200 up 400 points since the first Russian tank rumbled over the border on 24 February, and the S&P500 up a similar amount since mid March. Meanwhile, other risks, such as energy prices, supply chain shortages, a looming election campaign, higher interest rates, inflation, stagflation, and talks of a US recession (induced in part by the war) remain, or have increased. Luckily there was one "good news" story - or at least an uplifting one, in Ash Barty's retirement, literally at the top of her game, aged just 25. We would consider that she has the world at her feet, with suggestions she might even enter politics. Surely she's too sensible (and honest) for that - although teaching some of them to retire while they're ahead would be a welcome move. News & Insights New Funds on FundMonitors.com Manager Insights | ASCF Pet Humanisation Megatrend | Insync Fund Managers Interest rates, bonds and listed real estate | Quay Global Investors The central bank dilemma | Kardinia Capital |
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February 2022 Performance News Delft Partners Global High Conviction Strategy Bennelong Twenty20 Australian Equities Fund |
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25 Mar 2022 - Fund Review: Insync Global Capital Aware Fund February 2022
INSYNC GLOBAL CAPITAL AWARE FUND
Attached is our most recently updated Fund Review on the Insync Global Capital Aware Fund.
We would like to highlight the following:
- The Global Capital Aware Fund invests in a concentrated portfolio of 15-30 stocks, targeting exceptional, large cap global companies with a strong focus on dividend growth and downside protection.
- Portfolio selection is driven by a core strategy of investing in companies with sustainable growth in dividends, high returns on capital, positive free cash flows and strong balance sheets.
- Emphasis on limiting downside risk is through extensive company research, the ability to hold cash and long protective index put options.
For further details on the Fund, please do not hesitate to contact us.
AFM Fund Review - February 2022 (pdf format)
25 Mar 2022 - How private debt can help guard against rising inflation
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How private debt can help guard against rising inflation Revolution Asset Management March 2022 With rising global inflationary pressures mounting, a range of factors are converging to create a new inflationary era. From the demand distortions and supply dislocations associated with the COVID-19 pandemic, geopolitical risks, as well as monetary and fiscal tightening, these factors are expected to increase volatility across financial markets in 2022. The reality of higher inflation and interest rate hikes has prompted asset owners to review their current defensive fixed income allocations and assess the level of risk protection required in order to earn the investment returns needed to meet their targets. Income generated by traditional fixed income sources such as fixed rate bonds are now harder to find. Strategies across private markets, in particular private debt, may be well equipped to deal with the ongoing market volatility and changes to interest rates. In periods of higher inflation, private debt can offer investors a level of protection - being a floating rate asset class means the underlying yield increases as inflation and interest rates increase. Additionally, the long term, patient capital nature of private debt, and the ability to absorb and pass on rising costs mean these strategies can actually benefit from inflation. But senior secured private debt can offer more than that. It's a defensive allocation that can help to preserve capital and provide genuine diversification and yield, whether through the right sub-sectors of private debt or the underlying assets well-positioned to flourish during an inflationary environment. The Australian investable private debt universe is large, and we believe the most attractive sub-sectors include leveraged buyout and private company debt - in businesses with brand and customer strength operating in non-cyclical industries; private and public Asset Backed Securities such as floating rate quality mortgages; and loans to stabilised commercial real estate assets with annual contracted rent. Risk mitigation in senior secured private debt also relies heavily on strong credit discipline. A proactive approach to risk management can help build greater resilience in changing market conditions such as inflationary environments. Revolution Asset Management believes the outlook for private debt remains positive. With a robust deal pipeline, deployment into 2022 is set to be strong. In private company and leverage buy-out loans, the M&A boom of 2021 drove three times the level of activity vs the prior year and 40% higher vs the five year average, and with international borders reopening, this is expected to fuel activity in 2022. In private Asset Backed Securities, warehouse funding is reaching A$10 billion and continues to offer very attractive relative value compared to public Asset Backed Securities. In the current market, we are witnessing significant growth particularly in non-bank lending activity in Australia and New Zealand, which continues to provide attractive opportunities for our portfolio and helps quality non-bank lenders realise their growth plans. Allocating more to higher-yielding, floating rate assets such as private debt could be one strategy to minimise interest rate sensitivity of fixed income portfolios and guard against inflation risk, while at the same time increasing and diversifying sources of return. Author: Bob Sahota Funds operated by this manager: Revolution Private Debt Fund II, Revolution Wholesale Private Debt Fund II - Class B DISCLAIMER This information has been prepared by Revolution Asset Management Pty Ltd ACN 623 140 607 AFSL 507353 ('Revolution'). Performance numbers provided are as at the date of this article, and subject to change. Although every effort has been made to verify the accuracy of the information contained in this document, Revolution, its directors, officers, representatives, employees, associates and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by any person directly or indirectly through relying on this information. The information in this document is not financial product advice and has been prepared without taking into account the objectives, financial situation or needs of any particular person. All investments involve risk. Past performance is not a reliable indicator of future performance. |
24 Mar 2022 - Performance Report: Laureola Australia Feeder Fund
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| Fund Overview | Life Settlements are resold life insurance policies and can be thought of as a form of finance extended to an individual backed by the person's life insurance policy. This financing is repaid upon maturity by collecting the death benefit from the insurance company. Risk mitigation measures implemented by Laureola include science-driven due diligence of policies, active monitoring of insured through a vertically integrated operation, and investor aligned fund design. |
| Manager Comments | The Laureola Master Fund has a track record of 8 years and 10 months and has outperformed the Bloomberg AusBond Composite 0+ Yr Index since inception in May 2013, providing investors with an annualised return of 14.5% compared with the index's return of 3.37% over the same period. On a calendar year basis, the fund hasn't experienced any negative annual returns in the 8 years and 10 months since its inception. Over the past 12 months, the fund's largest drawdown was -2.39% vs the index's -5.1%, and since inception in May 2013 the fund's largest drawdown was -4.9% vs the index's maximum drawdown over the same period of -5.39%. The fund's maximum drawdown began in December 2018 and lasted 10 months, reaching its lowest point during December 2018. The fund had completely recovered its losses by October 2019. During this period, the index's maximum drawdown was -0.98%. The Manager has delivered these returns with 2.15% more volatility than the index, contributing to a Sharpe ratio which has only fallen below 1 once over the past five years and which currently sits at 2.29 since inception. The fund has provided positive monthly returns 97% of the time in rising markets and 94% of the time during periods of market decline, contributing to an up-capture ratio since inception of 160% and a down-capture ratio of -223%. |
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24 Mar 2022 - Performance Report: Delft Partners Global High Conviction Strategy
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| Fund Overview | The quantitative model is proprietary and designed in-house. The critical elements are Valuation, Momentum, and Quality (VMQ) and every stock in the global universe is scored and ranked. Verification of the quant model scores is then cross checked by fundamental analysis in which a company's Accounting policies, Governance, and Strategic positioning is evaluated. The manager believes strategy is suited to investors seeking returns from investing in global companies, diversification away from Australia and a risk aware approach to global investing. It should be noted that this is a strategy in an IMA format and is not offered as a fund. An IMA solution can be a more cost and tax effective solution, for clients who wish to own fewer stocks in a long only strategy. |
| Manager Comments | The Delft Partners Global High Conviction Strategy has a track record of 10 years and 7 months and has outperformed the Global Equity Index since inception in August 2011, providing investors with an annualised return of 15.08% compared with the index's return of 13.83% over the same period. On a calendar year basis, the strategy has experienced a negative annual return on 2 occasions in the 10 years and 7 months since its inception. Over the past 12 months, the strategy's largest drawdown was -5.12% vs the index's -7.46%, and since inception in August 2011 the strategy's largest drawdown was -13.33% vs the index's maximum drawdown over the same period of -13.19%. The strategy's maximum drawdown began in February 2020 and lasted 1 year, reaching its lowest point during July 2020. The strategy had completely recovered its losses by February 2021. The Manager has delivered these returns with 1.37% more volatility than the index, contributing to a Sharpe ratio which has fallen below 1 four times over the past five years and which currently sits at 1.11 since inception. The strategy has provided positive monthly returns 88% of the time in rising markets and 13% of the time during periods of market decline, contributing to an up-capture ratio since inception of 100% and a down-capture ratio of 93%. |
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24 Mar 2022 - Fund Review: Bennelong Twenty20 Australian Equities Fund February 2022
BENNELONG TWENTY20 AUSTRALIAN EQUITIES FUND
Attached is our most recently updated Fund Review on the Bennelong Twenty20 Australian Equities Fund.
- The Bennelong Twenty20 Australian Equities Fund invests in ASX listed stocks, combining an indexed position in the Top 20 stocks with an actively managed portfolio of stocks outside the Top 20. Construction of the ex-top 20 portfolio is fundamental, bottom-up, core investment style, biased to quality stocks, with a structured risk management approach.
- Mark East, the Fund's Chief Investment Officer, and Keith Kwang, Director of Quantitative Research have over 50 years combined market experience. Bennelong Funds Management (BFM) provides the investment manager, Bennelong Australian Equity Partners (BAEP) with infrastructure, operational, compliance and distribution services.
For further details on the Fund, please do not hesitate to contact us.
AFM Fund Review - February 2022 (pdf format)
24 Mar 2022 - Interest rates, bonds and listed real estate
23 Mar 2022 - Fund Review: Bennelong Kardinia Absolute Return Fund February 2022
BENNELONG KARDINIA ABSOLUTE RETURN FUND
Attached is our most recently updated Fund Review. You are also able to view the Fund's Profile.
- The Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies.
- The Fund has significantly outperformed the ASX200 Accumulation Index since its inception in May 2006 and also has significantly lower risk KPIs. The Fund has an annualised return of 8.03% p.a. with a volatility of 7.71%, compared to the ASX200 Accumulation's return of 6.31% p.a. with a volatility of 14.13%.
- The Fund also has a strong focus on capital protection in negative markets. Portfolio Managers Kristiaan Rehder and Stuart Larke have significant market experience, while Bennelong Funds Management provide infrastructure, operational, compliance and distribution capabilities.
For further details on the Fund, please do not hesitate to contact us.
AFM Fund Review - February 2022 (pdf format)
23 Mar 2022 - Pet Humanisation Megatrend
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Pet Humanisation Megatrend Insync Fund Managers March 2022 Since 1988, The APPA National Pet Owners Survey has delivered comprehensive consumer research studies about pet ownership, pet care practices and preferences in product and services consumption of America's pet owners. Below are some of the highlights that are particularly noteworthy - Pet ownership is up
Spending increased
Millennials are the largest 'pet parents'
Spending is up post pandemic, as 'pet parents' are more than ever before willing to sacrifice more of their paycheques to provide premium care and services for their pets. The $100 Bn pet industry is poised to nearly triple to $275 billion by 2030 (Morgan Stanley). An annual compound rate in excess of 14% p.a. growth. The American Pet Products Association is a not-for-profit industry association founded in 1958 and is headquartered in Stamford, Connecticut. The APPA represents more than 1000 pet product manufacturers, importers of pet products and suppliers of products for non-pet livestock as well. Funds operated by this manager: Insync Global Capital Aware Fund, Insync Global Quality Equity Fund |
23 Mar 2022 - How Alphabet is using AI to power its future business success
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How Alphabet is using AI to power its future business success Montaka Global Investments March 2022 Most investors suspect that AI sits at the core of Alphabet's key businesses (Search, YouTube, Cloud, etc). But many are still underestimating how AI is creating unimaginable opportunities in completely new industries for the technology giant. Like Microsoft and its cloud computing division Azure, Alphabet's AI capabilities appear to be following a similar path of explosive growth after years of incubation. Below we look at 4 ways that Alphabet is using AI to significantly enhance its businesses, respond to competitive threats, and also generate solutions to some of the world's most pressing problems (such as renewable energy) that we couldn't imagine solving just a few years ago. We expect these 4 examples - and AI more broadly - to make Alphabet even more mission-critical to customers, open immensely larger markets for the company, and drive increased profitability for many years to come - all of which will continue to underpin Alphabet's role as a core holding in Montaka's investment portfolios. 1. Google Search - Like a duck ...Alphabet is obviously best known for the ubiquitous Google Search engine that has maintained its competitive advantage for over two-decades and holds over 90% global market share. This is a frightening feat in an industry that innovates as quickly as technology. Unsurprisingly, the incredible moat that surrounds Search has its foundation drenched in Alphabet's most cutting-edge AI research and development. In many ways Google Search is like a duck, the query box has not changed for over twenty years, but while it might look calm on the surface, it is paddling like crazy underneath!
For example, at the end of 2019 Google Search incorporated BERT, a neural network-based AI technique for natural language processing, which was hailed by Alphabet as the "the biggest advancement made to Search in the last five years". Just two years later (2021), Alphabet introduced MUM, a next-generation AI and a step-change enhancement to existing capabilities noting; "MUM is a big advancement in Search, 1,000 times more powerful than our current systems. It has the ability to learn and transfer knowledge across 75 languages". Incredibly, the speed at which these mind-blowing AI breakthroughs are being melded into Google Search is accelerating. And just this year (Feb 2022), Sundar Pichai (CEO) revealed on Alphabet's Q4 2021 earnings call, that Search was now running a new AI architecture called Pathways. He highlighted that "AI models are typically trained to do only one thing, but with Pathways, a single model can be trained to do thousands, even millions of things". This is expected to represent a major enhancement to Search quality and add further monetization options to the business. 2. YouTube - AI helps Alphabet clean up contentAI is also driving enormous efficiencies at YouTube. Alphabet's YouTube is the largest online video platform in the world, with over two billion monthly active users who watch more than one billion hours of content per day and upload 500 hours of new content per minute! Operating a network of this scale is a herculean engineering feat, but more impressive is how Alphabet is applying artificial intelligence to make the platform safer and more trusted for consumers and advertisers. At the scale YouTube operates, it is physically impossible for humans to moderate every piece of content that is uploaded. This is a huge problem given the size of YouTube's userbase and their voracious appetite for video content. Explicit and inappropriate content can have a significant impact on children, promote violence, spread disinformation, and alienate advertisers. It is no secret that many online platforms struggle with the problem of content moderation which will remain a perpetual challenge. However, Alphabet has made incredible progress using its cutting-edge artificial intelligence. Utilizing AI and promoting trusted sources across YouTube has resulted in a mind-blowing 85% reduction in content that violates YouTube's policies. Alphabet's AI decimated inappropriate content on YouTube
Source: Alphabet, Montaka Alphabet can now detect nearly 95% of all violative content on YouTube with automated AI flagging and address it before it becomes a problem. These results were driven by the application of scalable, automated AI technologies which will likely continue driving margins higher across YouTube as the need for expensive, manual human moderation of content fades. The high-grading of content on YouTube also makes advertisers more confident that their brands and products are promoted in an appropriate fashion, drawing more advertising dollars to the platform and incentivizing creators to produce more content (flywheel). 3. AI is accelerating Alphabet's ability to counter new competitionAI is also helping Alphabet to quickly adapt to competitive threats. Early in the pandemic Alphabet identified TikTok and its highly addictive, AI-enabled recommendation engine as a competitive threat. TikTok's engagement numbers were growing extraordinarily quickly as consumers demanded short-form, vertical videos during lock-down and were flocking to the platform. The speed with which Alphabet was able to create YouTube Shorts and address this video content gap in its ecosystem, highlights Alphabet's incredible leadership across AI and how it can be applied to support and enhance its core business. YouTube Shorts was created as a concept in the depths of the pandemic and has now grown to over 15 billion global daily video views inside of 18 months. This is a startling demonstration of exponential growth, YouTube's ecosystem, and the power of Alphabet's AI. Alphabet's AI enabled the creation of YouTube Shorts
Source: Alphabet, Montaka While TikTok does not disclose global daily views, it is believed to have 4 to 5 billion in the U.S. alone and many more globally. It is a serious competitor that may have impacted the business more dramatically if not for Alphabet's extraordinary AI capabilities that enabled YouTube Shorts to be so successful.Source: Alphabet, Montaka. Interestingly, YouTube Shorts has largely been focused on engagement, user experience and product market fit, rather than monetization. Alphabet has significant runway ahead with respect to this incremental revenue stream with CEO Sundar Pichai noting "there's a lot more to do, [it's] super early...[we are] testing how shopping can be integrated with Shorts...the opportunity space here is pretty broad and it's exciting". 4. AI is helping Alphabet to solve the unsolvableAI is also helping Alphabet address some of the world's most intractable problems, including sources of renewable energy. The ocean potentially contains an unlimited source of carbon free and costless energy, if only we had the technology to unlock it. If we could find a solution to nuclear fusion, we could turn a single glass of seawater into a full year of power for an entire household. It would produce virtually no emissions and be available on-demand ... but it has long been science fiction. That is until DeepMind, Alphabet's cutting-edge AI division took on the problem. Nuclear fusion is the process that powers the sun and all the stars in the universe. It involves smashing hydrogen atoms together (fusion), rather than splitting uranium atoms (fission) and releases quadruple the amount of energy of a typical nuclear fission reaction. Nuclear fusion produces four times the yield of nuclear fission
Source: HyperPhysics A major challenge of nuclear fusion is the temperature required to perform it. Given the enormous gravitational pressure at the core of the sun, nuclear fusion can be achieved at around 10 million degrees Celsius. However, this level of pressure is not possible on earth. In fact, we need an environment that is 10 times hotter than the core of the sun for nuclear fusion. There is no material that can withstand such high temperatures, so fusion needs to be achieved in a plasma (super-heated gas) and held inside a continually changing magnetic field to control the reaction, something that is incredibly difficult to do. A further constraint around nuclear fusion research has been the ability to run experiments. To create a fusion reaction, scientists use a machine called a 'tokamak' to simulate sun-like conditions on earth. However, after three seconds of activity the tokomak needs 15 minutes to cool down. Software-based plasma simulators are even slower and require several hours of compute time to simulate just one second of real-time data. This is a highly inefficient way to carry out research, effectively rendering nuclear fusion a pipedream given our inability to address the problem. Enter Alphabet's DeepMind, in what has been hailed a major breakthrough and published in the prestigious scientific journal Nature, constructed an algorithm built on AI reinforcement learning to control the magnetic fields that govern plasma in a fusion reaction. DeepMind's algorithm predicted it would be able to control a real-life reaction for two seconds which was then applied to a real-life tokamak. The AI was spot-on. It controlled the plasma reaction exactly as predicted in the real-world. Over-time it is hoped Alphabet's AI will produce algorithms that enable plasma reactions to go on far longer than two seconds, and move humanity a step closer to solving the eternal problem of nuclear fusion. If successful, Alphabet's nuclear fusion AI would likely be sold as-a-service to customers looking to produce energy from this source. Potentially unleashing an explosive new revenue stream for Alphabet in the future. Inside a Tokamak Fusion Reactor (Illustrative)
Source: Financial Times A TECHNOLOGICAL INFLECTIONArtificial Intelligence is enhancing all areas of Alphabet's business, from those with valuable monetization models including Search, YouTube and Cloud, to emerging opportunities like autonomous driving (Waymo). Increasingly however, AI is creating opportunities in unexpected areas that Alphabet has not historically participated, raising the potential for it to disrupt entirely new industries and create brand new revenue streams in areas such as energy, biotechnology and beyond (i.e. real-options). Investors overlook and take for granted that silently sitting beneath the surface of Alphabet is perhaps the most cutting-edge AI apparatus the world has ever seen. It represents an insurmountable competitive advantage that will continue to strengthen for decades to come and propel the business forward in unimaginable ways. For readers interested in exploring AI from a broader and more general perspective, we cover many of our key insights in our AI Whitepaper which readers can access here. We believe that the months and years ahead will present opportunities to make attractive, multi-generational investments and we are prepared and well-positioned to take advantage of these. Note: Montaka owns shares in Alphabet (Google) Author: Amit Nath, Senior Research Analyst Funds operated by this manager: Montaka Global Fund, Montaka Global Long Only Fund DISCLAIMER |
