NEWS
16 Mar 2021 - The Bond Market: The Tail Wagging the Dog?
|
The Bond Market: The Tail Wagging the Dog? Aitken Investment Management 11 March 2021 US political strategist James Carville once remarked, "I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. Now I would like to come back as the bond market. You can intimidate everybody!" This witticism was vividly bought to life in February. The ongoing progress made in administering vaccines more widely has raised the prospect of considerable levels of pent-up demand being unleashed as the global economy re-opens in the second half of 2021. Combined with ample amounts of monetary and fiscal stimulus - and assurances by governments and major central banks that policy will remain accommodative for several years - the outlook for an increasingly robust economic recovery over the next 18 months is taking shape. Alongside the prospect of this stronger economic recovery is the fear that permanently higher levels of inflation - benign for a long period of time - could be unleashed. In our recent investor webinar, we specifically addressed the issue of inflationary risks in some detail (which you can watch by clicking here). We anticipated the potential for an inflation-led market wobble during the first half of 2021 as reported year-on-year inflation cycles the disinflationary period of March to July 2020. The volatility experienced in February may be the first sign markets are beginning to price in the implications of potentially higher levels of inflation. Should inflation run hotter than the Federal Reserve is comfortable with - meaningfully above 3% year-over-year for a sustained period of time - the risk of interest rates needing to be increased to cool down the economy would be materially higher than markets assume today. To illustrate why higher bond yields could negatively impact valuation, imagine that you invest in an asset that will produce $1 in cash flow in year one, growing thereafter at 3% every year into perpetuity. How much should you pay for this asset? The answer depends to a significant degree on your discount rate, which is determined by the prevailing interest rate offered on long-dated government bonds. In the chart below - adapted from our aforementioned webinar - we illustrate that as the discount rate rises, the fair value (or justified price) of a stock declines. Higher interest rates, all else equal, leads to lower valuations. At present, our central case is that inflation will increase in 2021, but will then trend back down towards 2% over time. However, despite the fact that we believe there is a high likelihood of an inflation overshoot this year, it is an open question whether the current market positioning and structure is sufficiently robust to absorb rates moving sharply higher. On the evidence offered in February, there are potentially quite a few pockets of the market where higher discount rates will have a materially negative impact on valuations - in particular for highly leveraged investors. We remain cognizant of this risk and have taken appropriate steps to protect the capital in the Fund. In anticipation of a potential increase in discount rates, the Fund had already reduced its exposure to technology businesses with long duration cash flows, selling out of Apple, Netflix and Salesforce.com. Funds operated by this manager: |
16 Mar 2021 - Webinar | Airlie Funds Management
|
Finding hidden value in volatile markets Against a backdrop of heightened economic uncertainty and ever-falling interest rates, Australian investors have flocked to "quality": paying higher multiples across the board for the highest returning, fastest growing businesses. The challenge, in this environment, is to satisfy the desire to invest in quality businesses, without overpaying for them. |
15 Mar 2021 - Manager Insights | Premium China Funds Management
|
Damen Purcell, COO of Australian Fund Monitors, speaks with Jonathan Wu, Executive Director at Premium China Funds Management. Premium China was started their first fund in 2005 and have grown to offer 4 actively managed specialist Asian equity and fixed-income funds to both Australian and New Zealand investors. Their Premium Asia fund, which was started in 2009 has returned 12.97% per annum since inception outperforming the Asia Pacific Ex Japan benchmark by over 8% per annum.
|
12 Mar 2021 - Manager Insights | Prime Value
|
Damen Purcell, COO of Australian Fund Monitors, speaks with Richard Ivers from Prime Value Asset Management about the Prime Value Emerging Opportunities Fund. Since inception in October 2015, the Fund has returned 14.86% p.a. against the Index's annualised return over the same period of +9.64%. The Fund's Sortino ratio (since inception) of 1.27 vs the Index's 0.74, in conjunction with the Fund's down-capture ratio (since inception) of 45.74%, highlights its capacity to significantly outperform in falling markets.
|
12 Mar 2021 - Manager Insights | AIM Investment Management
|
Australian Fund Monitors' CEO, Chris Gosselin, speaks with Charlie Aitken from AIM Investment Management about the AIM Global High Conviction Fund's recent and long-term performance. The AIM Global High Conviction Fund is a long-only fund that invests in a high conviction portfolio of global stocks. The Fund has achieved a down-capture ratio since inception in July 2015 of 81.83%, highlighting its capacity to outperform when market's fall. The Fund has outperformed the Index in 7 out of 10 of the Index's worst months since the Fund's inception, further emphasising its strength in negative markets.
|
12 Mar 2021 - The Case for Asian Equities
|
The Case for Asian Equities Australian Fund Monitors 09 March 2021 Asia represents nearly one-third of global GDP, but Australian investors continue to allocate a relatively small amount towards Asian equities. We believe there is a case to be made for investing in Asian equities, noting there has been a belief that Asian markets are potentially more volatile and are therefore riskier. However, for the two years to 31 January 2021, Asian markets performed more strongly than the Australian and global markets. AFM's Asia Pacific ex-Japan benchmark returned 16 per cent for the two years compared to 13.5 per cent for the Global Equity benchmark and 9.9 per cent for the ASX 200 Total Return benchmark. The standard deviation for the Asian benchmark was also lower than both the global benchmark and the Australian benchmark with volatility of 11 per cent, 12.1 per cent and 20.2 per cent respectively. The maximum drawdown for the ASX 200 Total Return benchmark was -26.8 per cent compared to -7.89 per cent for the Asia Pacific ex-Japan benchmark. The maximum drawdown for the global market was also comparably large at -13.2 per cent. Looking at actively managed Asian equity funds, seven of the 24 Asian equity funds on AFM beat the index. On average long-only funds performed marginally better than long/short and market neutral funds over the last two years. However, the absolute return strategies performed better in the last 12 months. Funds with a high exposure to India had struggled to add value, versus the overall Asia Pacific ex-Japan index, while the two funds on the AFM database that focus on China returned 24.5 per cent and 2.67 per cent for the two years. Asian equity funds have an average correlation of 0.51 to the ASX 200 Total Return benchmark and 0.5 to the Global Equity benchmark, highlighting their potential to provide good diversification.
|
11 Mar 2021 - Manager Insights | Premium China Funds Management
|
Damen Purcell, COO of Australian Fund Monitors, speaks with Jonathan Wu, Executive Director at Premium China Funds Management. Premium China was started their first fund in 2005 and have grown to offer 4 actively managed specialist Asian equity and fixed-income funds to both Australian and New Zealand investors. Their Premium Asia fund, which was started in 2009 has returned 12.97% per annum since inception outperforming the Asia Pacific Ex Japan benchmark by over 8% per annum.
|
11 Mar 2021 - How will the recovery influence returns?
|
How will the recovery influence risk and returns? Mark Burgess, Chairman of the Advisory Board at Jamieson Coote Bonds As the macro risks associated with COVID-19 have loomed over global markets and economies for almost a year now, changing expectations of the shape and strength of the recovery will be important in influencing returns and volatility for 2021. We recently sat down with Mark Burgess, Chairman of the Advisory Board at Jamieson Coote Bonds to discuss this and other important issues on investors' minds. Navigating the economic recovery This recovery is unique as we've seen one of the most dramatic interventions in markets in history, to the credit of central banks and governments who took immediate action last year and we are now beginning the see the consequences of that. Will it take traction in the economy? How will the virus develop? These are critical issues which are raising serious question marks about the style and nature of the recovery. Financial markets are looking through this - at some of the beneficial aspects of low rates and at the rising liquidity aspect of central bank intervention. The economic environment is rather unclear, relative to financial markets, which are taking a forward looking view. Inflation risks on the rise I'm always reminded of what I believe is the right approach to risk and look to a range of scenarios, such as economic growth. Inflation should be one of those scenarios. How does inflation play out? Is it a rising risk? We're likely to get an uptick in inflation as the year-on-year comparisons turn positive. There are a couple of factors that have helped keep inflation low in the past, such as globalisation, that appear to be changing and therefore the ability to keep inflation at low levels is changing at the margin. On the flip side, we have very slack labour markets, we have an output gap that's quite wide, and at these low interest rates, capacity can be added quite quickly across the world. With this in mind, my expectation is that perhaps inflation will uptick but we're unlikely to get the kind of embedded or serious inflation that we saw say in the 1970s. Competition caused by excess investment as a result of low interest rates could cause deflation in parts of an investor's portfolio, and the inflation-deflation combination should be assessed across the assets that go into a well-diversified portfolio. Watch the video to hear more. Constructing fixed income allocations - the risk of chasing yield Yields are going to be low generally and the most important risk is not to chase yield for yield sake. If you're chasing yield with risk attached to it, those risks will be lurking in the background more over the next two to three years than they have in the past. As bond yields are marginally moving back up, they're getting ready to be a defensive asset again. Markets are experiencing this combination where yield is becoming available in some places and in other places there's certainly a lot of competition for yield. Investors should be cautious as risk attached to yield is one of the most important things to watch out for. We've long advocated this; one example is separating corporate credit from high grade sovereign bonds. High grade government bonds provide safety, while corporate credit will have other risk and return characteristics. Most importantly, as we come out of the COVID-19 environment, we'll find out which corporates are safe and which are in good shape as we see that part of the cycle play out. "The most important risk is not to chase yield for yield sake." The important role of high grade government bonds in diversifying some of the unknown risks that remain High grade government bonds were defensive during the downturn, playing the important diversifying role that they have always played in portfolios. As government bonds edge slightly higher again, they will provide that defensive characteristic and diversification within a portfolio. We believe they will always be a good asset to hold. Australian investors haven't held a large position in government bonds historically, and a key lesson from the events of last year proved the diversification characteristics of the asset, at a time where diversification was difficult to find. There are a couple of other places to find diversification, but high grade government bonds are certainly one component of that. Watch the video to hear more.
|
11 Mar 2021 - Why this fuel source could knock battery power off its perch
|
Why this fuel source could knock battery power off its perch Matthew Fist, Portfolio Manager, Firetrail Investments 19 February 2021 The hype around hydrogen is heating up. Hydrogen has been used as an alternative energy source since 1807. But higher costs, transportation and storage difficulties have restricted its use over the past 200 years... Until now! The urgent need to curb climate change, declines in renewable energy pricing, and changes in supply/demand are creating new opportunities for hydrogen as a viable alternative energy source. While the range is high, medium-term forecasts point to hydrogen demand growing around ten-fold. In this monthly insights piece, we discuss the implications for investors and why Fortescue's former CEO Andrew "Twiggy" Forrest (and also Firetrail) are getting excited about the opportunities that will arise for Australian investors over the next decade in alternative energy sources The hype around hydrogenLast month, Forrest used his second Boyer Lecture to make the case for green hydrogen as the solution to reaching net-zero emissions. He also highlighted Fortescue's plan for a hydrogen-powered 'green steel' plant in the Pilbara. Elsewhere, US President Joe Biden signed an executive order on his first day in office recommitting the US to the Paris Agreement, and all signs are that he will push ahead with the stated target of 100% clean energy in the US by 2035. Closer to home, Australia's Prime Minister Scott Morrison has shifted his stance, stating that the nation's goal is to "reach net-zero emissions as soon as possible, and preferably by 2050". Hydrogen is the most common element in existence, making up 75% of the universe by mass. It is almost 1 million-times more abundant than fossil fuels, is highly combustible, and only emits water when burned. Perhaps of most interest is the energy density of hydrogen. The combustion of one kilogram of hydrogen produces more than three times as much energy as one kilogram of diesel! In a hydrogen-based economy, so the story goes, "green hydrogen" produced using renewable electricity could be used in place of fossil fuels that currently provide around 80% of global energy and are responsible for the bulk of emissions. But there are drawbacks. Hydrogen is currently expensive to produce and difficult to store and transport.
Back to 1807The first internal combustion engine that used hydrogen as fuel was constructed as far back as 1807. Similarly, the potential for hydrogen to replace coal as a means of electricity generation emerged in the 1860s. This leads us to the most obvious question - is it really different this time? The case for the 2020s being the decade where hydrogen finally fulfils its long understood potential rests on two key premises: Curbing climate change. Meeting the climate targets of the Paris Agreement dictate decarbonisation across all areas of economies, not just electricity generation. This includes 'hard to decarbonise' sectors such as shipping and steel production that contribute a significant level (around 11% combined) of global emissions. Due to the chemical properties of hydrogen, it is uniquely suited to provide a solution to many of these sectors. In other words, to curb climate change, hydrogen can be used to decarbonise parts of the energy system that electricity cannot reach. Falling cost of electricity. Historically, potential use cases for hydrogen have been made impossible by the sheer amount of energy required to produce the gas from water via electrolysis. Recent enthusiasm has, in part, been driven by continuous declines in renewable pricing, with current projections indicating that renewable energy prices of around $10-20/MWh (where hydrogen becomes an attractive proposition) will be common over the next decade. Ultimately, for green hydrogen to fulfil its promise, both demand and supply sides of the equation must come together. Supply must be provided in suitable quantities at a cost that competes directly with incumbent technologies and other new green solutions. Similarly, on the demand side, technology must be developed and refined such that green hydrogen can replace current processes. SupplyThe economics of the conversion of energy into green hydrogen depends primarily on:
Solar is an abundant resource when compared to all other forms of both renewable energy and fossil fuels, as can be seen in Figure 3. In Australia, because of our massive share of solar energy and large landmass, just 0.13% of land area would be required to provide enough energy to cover all our energy requirements. Many studies have been undertaken on the likely trajectory of solar and hydrogen production, with most predicting price parity with fossil fuel derived hydrogen gas between 2030 and 2050, broadly equivalent to the current cost of gas in many developed markets and a price that could see uptake across a range of industries. Importantly, Australia is forecast to be one of the lowest-cost producers of hydrogen. DemandWhile the supply side of the hydrogen equation and cost trajectory is relatively well understood, the same cannot be said for demand. Various studies on pathways to decarbonisation suggest hydrogen's long-term share of energy supply could be as high as 30%. Most estimates, such as those forecast by BP and Bloomberg, fall in the order of 15-30% by 2050. At an industry level, there is significant debate about the suitability of hydrogen from both an economic and technological perspective. Consider, for example, passenger vehicles. Hyundai and Toyota are both due to start around 20-unit hydrogen fuel-cell fleets in Australia by the end of March. At the same time, Volkswagen concluded last year that "everything speaks in favour of the battery and practically nothing speaks in favour of hydrogen". Elon Musk calls the fuel cell-powered cars "fool cells". Two areas of consensus on the demand side for hydrogen centre around long-duration backup power for renewable-based grids and the production of steel.
The market opportunity for investorsWhile the range is wide, medium-term forecasts point to hydrogen demand growing around ten-fold. As Forrest put it in his Boyer Lecture, Australia's "characteristic good luck" extends to hydrogen. Given Australia's natural solar resource endowment and proximity to Asian markets, it is only a matter of time before small-cap investment opportunities arise. Australia's 'good luck' is not lost on large corporates - companies such as Woodside (ASX: WPL), Incitec Pivot (ASX: IPL) and APA Group (ASX: APA) are all actively investing and exploring potential opportunities.
ConclusionMore than 200 years since it was first used as a source of fuel, the hype around hydrogen is growing. Improving economics and an increasing focus on curbing climate change is creating new opportunities for hydrogen as a viable alternative energy source. On the demand side, medium-term forecasts point to hydrogen demand growing around ten-fold, paving the way for future investment opportunities for Australian companies, entrepreneurs like Andrew Forrest and investors like Firetrail. |
|
|
10 Mar 2021 - An Extraordinary Scam that You Need to be Aware Of
|
An Extraordinary Scam that is Netting Millions Romano Sala Tenna, Katana Asset Management 19 February 2021 In 30 years following markets, I've seen a lot of scams. But the current one is the most dangerous yet, and people we know and care about are going to lose money unless we warn them. Two weeks ago a Melbourne-based friend emailed me. His closest friend's 68-year-old mother, who happens to be disabled from a stroke, had recently inherited $300,000. Using www.compare-investments.com.au, they checked for a rate better than the 0.4% on offer at the bank. After completing an enquiry form, they were soon emailed a "prospectus" from a global bank. This offered 4.56% for one year, 5.49% for two years right up to 9.21% per annum for 10 years. My friend asked me what I thought. The 23-page prospectus looked professional and completely consistent with genuine documents from the global bank in question. But as I later discovered, key pieces of information were doctored, including the phone number, email address and of course the bond rates. As I read the prospectus, my first impression was that the rates looked really good! Good, but not ludicrously high enough to raise my suspicions. And with the apparent backing of a big bank brand, it seemed like an option worth considering. But timing is everything in the markets. And fortunately for my friend (and unfortunately for the scammers), literally 24 hours beforehand, I had received an email from the head of fixed interest at Bell Potter Securities, warning of high yield bond scams. An exchange of emails confirmed that this was indeed a scam. If this unfortunate lady had proceeded, her application form and 100-point identification check would have provided the scammers with all the information they needed to steal her identity. Worse still, if she had transferred money, it would have been directed to a false bank account and then very quickly skimmed off-shore; never to be returned. I'm not too proud to admit that, if not for that email the day beforehand, I would not have realised this was a scam. And if a professional money manager doesn't immediately recognise an investment scam, what hope is there for the average citizen? Most Scams Are Easy to Spot... Such scams usually have one or more of the following traits:
...but not this one Several factors, alongside the impressive but "realistic" returns - especially over one- and two-year terms - actually further suggested the authenticity of this scam, including:
As an aside, when I phoned that number it went through to an after-hours voice recording. But earlier in the week I actually got through to a lady with an Australian accent, who definitely did not work for a tier-1 global bank! We are in an especially dangerous time for scams, and it is not just because of the pervasive reach of technology. The even bigger issue currently is that because cash rates are so low, many mums and dads - who have often only ever used bank deposits - are now looking elsewhere. Scammers are becoming increasingly clever and more resourceful, and it has never been quicker or easier to enact a scam than it is today. This scam was certainly deceptive, but you can bet even more sophisticated scams are close behind. We need to ensure that those most vulnerable are not defrauded. Simple steps to protect savings - yours or others I think most scams can be avoided if the would-be victim follows three simple steps:
Further Steps if You Have Time There are some additional things to look for:
As a final point, take the time to report any scams to SCAMwatch. The short time it takes to fill out the form may very well save someone else's life savings. Please Warn Anyone You Care About I have been following financial markets for 30 years, and this scam passed my radar. If a seasoned market follower can be fooled, then anyone can. Our only defence is to warn those we care about. |
|
|
