NEWS
26 Jul 2022 - How quickly will central bankers change their tune?
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How quickly will central bankers change their tune? Eley Griffiths Group July 2022 The downward trajectory of global equity markets continued in June as central banks displayed a willingness to hike rates aggressively in the near term to fight inflation. This hard stance increased concerns of a swift contraction in global economic activity. The US Fed delivered a 75bp rate hike in June, the largest rise since 1994, after May's CPI accelerated at the fastest rate since 1981 (8.6%). Chair Powell signalled another large hike in July to fight inflation "expeditiously." Likewise in Australia, the RBA surprised markets with the largest rate hike in 22 years (50bp) to bring the cash rate to 0.85%. Small resources retracted by 22% on weaker commodity prices and shrinking demand concerns. The price of copper, a 'bellwether' for the economy, dropped below $US8000 for the first time in almost 18 months and is now down 17% year to date. Developers and explorers were sold off more heavily than producers, albeit no one was immune. As a slew of earnings downgrades and profit warnings started to build momentum across the market, outperforming in the month were defensive portfolio holdings. Litigation financer Omni Bridgeway (+5%) highlighted the benefits of being uncorrelated to the broader economic environment at present, as well as announcing the launch of an 8th Fund. With signs of economic fragility proliferating, investors finished the month speculating how quickly central bankers will change their tune. Last week, the closely watched Atlanta Fed's GDPNow estimate of real GDP was slashed to -2.1% in the second quarter, highlighting the prospect that the US economy may already be in recession. As a result, bond markets are now trimming their expectations for future rate hikes and investors are betting the deteriorating consumer and business confidence will be enough for central bankers to call a pause or slow their hiking cycle. Funds operated by this manager: Eley Griffiths Emerging Companies Fund, Eley Griffiths Small Companies Fund |
25 Jul 2022 - Performance Report: Digital Asset Fund (Digital Opportunities Class)
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| Fund Overview | The Fund offers a choice of three investment classes, each of which adopts a different investment strategy: - The Digital Opportunities Class identifies and trades low risk arbitrage opportunities between different exchanges and a number of digital assets; - The Digital Index Class tracks the performance of a basket of digital assets; - The Bitcoin Index Class tracks the performance of Bitcoin. Digital Opportunities Class: This class appeals to investors seeking an active exposure to the digital asset markets with no directional bias. The Digital Opportunities Class employs a high frequency inspired Market Neutral strategy trading 24/7 which uses a systematic approach designed to offer uncorrelated returns to the underlying highly volatile cryptocurrency markets. The strategy systematically exploits low-risk arbitrage opportunities across the most liquid and active digital asset markets on the most respected exchanges. When appropriate the Fund may obtain leverage, including through borrowing cash, securities and other instruments, and entering into derivative transactions and repurchase agreements. DAFM has a currency hedging policy in place for the Units in the Fund. Units in the Fund will be hedged against exposure to assets denominated in US dollars through a trading account with spot, forwards and options as directed by DAFM. |
| Manager Comments | The Digital Asset Fund (Digital Opportunities Class) has a track record of 1 year and 2 months and therefore comparison over all market conditions and against its peers is limited. However, the fund has outperformed the S&P Cryptocurrency Broad Digital Market Index since inception in May 2021, providing investors with an annualised return of 48.02% compared with the index's return of -60.61% over the same period. Over the past 12 months, the fund hasn't had any negative monthly returns and therefore hasn't experienced a drawdown. Over the same period, the index's largest drawdown was -71.98%. Since inception in May 2021, the fund's largest drawdown was 0% vs the index's maximum drawdown over the same period of -71.98%. The Manager has delivered these returns with 48.96% less volatility than the index, contributing to a Sharpe ratio for performance over the past 12 months of 4.18 and for performance since inception of 1.75. The fund has provided positive monthly returns 100% of the time in rising markets and 100% of the time during periods of market decline, contributing to an up-capture ratio since inception of 9% and a down-capture ratio of -49%. |
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25 Jul 2022 - Performance Report: Collins St Value Fund
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| Fund Overview | The managers of the fund intend to maintain a concentrated portfolio of investments in ASX listed companies that they have investigated and consider to be undervalued. They will assess the attractiveness of potential investments using a number of common industry based measures, a proprietary in-house model and by speaking with management, industry experts and competitors. Once the managers form a view that an investment offers sufficient upside potential relative to the downside risk, the fund will seek to make an investment. If no appropriate investment can be identified the managers are prepared to hold cash and wait for the right opportunities to present themselves. |
| Manager Comments | The Collins St Value Fund has a track record of 6 years and 5 months and has outperformed the ASX 200 Total Return Index since inception in February 2016, providing investors with an annualised return of 16.09% compared with the index's return of 8.6% over the same period. On a calendar year basis, the fund hasn't experienced any negative annual returns in the 6 years and 5 months since its inception. Over the past 12 months, the fund's largest drawdown was -11.41% vs the index's -11.9%, and since inception in February 2016 the fund's largest drawdown was -27.46% vs the index's maximum drawdown over the same period of -26.75%. The fund's maximum drawdown began in February 2020 and lasted 7 months, reaching its lowest point during March 2020. The fund had completely recovered its losses by September 2020. The Manager has delivered these returns with 3.44% 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 0.88 since inception. The fund has provided positive monthly returns 84% of the time in rising markets and 63% of the time during periods of market decline, contributing to an up-capture ratio since inception of 79% and a down-capture ratio of 42%. |
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25 Jul 2022 - Performance Report: Airlie Australian Share Fund
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| Fund Overview | The Fund is long-only with a bottom-up focus. It has a concentrated portfolio of 15-35 stocks (target 25). The fund has a maximum cash holding of 10% with an aim to be fully invested. Airlie employs a prudent investment approach that identifies companies based on their financial strength, attractive durable business characteristics and the quality of their management teams. Airlie invests in these companies when their view of their fair value exceeds the prevailing market price. It is jointly managed by Matt Williams and Emma Fisher. Matt has over 25 years' investment experience and formerly held the role of Head of Equities and Portfolio Manager at Perpetual Investments. Emma has over 8 years' investment experience and has previously worked as an investment analyst within the Australian equities team at Fidelity International and, prior to that, at Nomura Securities. |
| Manager Comments | The Airlie Australian Share Fund has a track record of 4 years and 1 month and therefore comparison over all market conditions and against its peers is limited. However, the fund has outperformed the ASX 200 Total Return Index since inception in June 2018, providing investors with an annualised return of 7.82% compared with the index's return of 6.05% over the same period. On a calendar year basis, the fund hasn't experienced any negative annual returns in the 4 years and 1 month since its inception. Over the past 12 months, the fund's largest drawdown was -16.29% vs the index's -11.9%, and since inception in June 2018 the fund's largest drawdown was -23.8% vs the index's maximum drawdown over the same period of -26.75%. The fund's maximum drawdown began in February 2020 and lasted 9 months, reaching its lowest point during March 2020. The fund had completely recovered its losses by November 2020. The Manager has delivered these returns with 0.17% less volatility than the index, contributing to a Sharpe ratio which has fallen below 1 four times over the past four years and which currently sits at 0.51 since inception. The fund has provided positive monthly returns 97% of the time in rising markets and 12% of the time during periods of market decline, contributing to an up-capture ratio since inception of 106% and a down-capture ratio of 97%. |
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25 Jul 2022 - The Long and The Short: Finding solace in the short
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The Long and The Short: Finding solace in the short Kardinia Capital 08 July 2022
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As stocks have wobbled, investors have bemoaned having no place to hide - not even in gold. June alone saw the market fall a whopping 8.97%.
However, short positions across key sectors such as lossmaking, high multiple technology and consumer discretionary stocks seem to be strong contributors to relatively solid fund performance. Inflation sticksMeanwhile, the Australian CPI surged 5.1% for 12 months to 31 March this year, and the US CPI rose 8.6% for May year on year, potentially moving towards levels not seen since 1970-1980. And while last year central banks and economists were calling for the inflation spike to be transitory, the pathway of inflation over the last 18 months has been anything but. Inflation tends to be stickier than imagined.
Source: Bloomberg Of course, the message can change over time, but futures markets are currently forecasting a 170bps increase in US and Australian rates by December.
Source: Bloomberg
Source: Bloomberg It's often said the central banks will keep pushing until something breaks. The only way interest rates will not follow that trajectory is if US summer economic data is so weak that a pause in hikes is considered, which is becoming more likely by year's end. The risk for marketsIf the futures markets are correct, homeowners will see a significant increase in mortgage repayments by December. The RBA's 50bp rate rise in June woke many people up, and the domestic housing market is already coming under pressure. The biggest risk for markets is whether the US enters a recession. If it does, S&P500 could fall another 15% - which would have an impact on Australia. If not, the falls will be more modest. In the global economy, wage pressure continues to build as the consumer is squeezed by higher costs of everything, from rents to fuel. We believe high debt levels make the global and Australian economy particularly vulnerable. The current level of inflation likely also explains why consumer confidence is falling, and it's pushed the University of Michigan index just below record lows. Consumer confidence is a key driver of consumer consumption, which drives around 70% of the US GDP.
Source: Bloomberg Heading for recession?Every recession in the past 40 years has been preceded by an inverted yield curve, and the yield curve inverted in early April. Looking historically, the time interval between inversion and recession averages about 10 to 12 months. The US Fed needs to slow demand and can only do so by delivering "shock therapy" - by impacting consumers' wealth (via stocks and house prices). The Fed will take every rate rise the market gives it, but at the end of the day raising rates is a blunt instrument. It's rare for central banks to engineer soft landings, particularly when inflation is above 5%. So, we believe the US is headed for a recession. This view runs somewhat counter to consensus. Until recently, most US economists had been suggesting there were no signs of a slowdown in US economic data, but the stock market indicates otherwise. There's also, of course, an unwind of the central bank's balance sheet, which started this month in the US. The expansion of central bank balance sheets has inflated share prices in multiples since the GFC. It stands to reason that the opposite is also true. Federal Reserve Chair Jerome Powell's mandate is to tame inflation. We're very early along the tightening journey - we've only had three interest rates rises so far, and the pain may be ahead of us more so than behind us. Although, it's way too early in the rate hiking cycle to think about fighting central banks.
Source: Bloomberg Our outlookWe're long some defensive businesses, including Bapcor, Tabcorp and The Lottery Corporation. Auto parts are generally essential for car maintenance, while lottery tickets have proven to be very defensive during recessions. The market wants current earnings, not future long-dated earnings, and certainly not loss makers. Loss makers have no valuation support and 17% of ASX300 are loss makers (even if some are temporary like FLT, WEB). Some don't even have any significant revenue. This basket is where we are hunting for short ideas. We're short high multiple stocks - those with long earnings duration and loss makers. Of course, a constant risk for us is "bear market rallies" - these can be violent, so we're cautious of being too aggressive in our short book. We haven't seen the capitulation yet. It is worth noting Cathie Wood's beaten-down ARK Invest is still seeing inflows, even though ARK is off c.60%. This shows investors are still looking to buy the dips. The MSCI AC World 12m forward PE has derated from a peak 20x to 14x. However, global equity markets do not yet look especially cheap against history. For example, a drop to the 10x multiple seen during the 2011-12 Eurozone crisis would imply another ~30% derating. We'll be watching the economic data closely, with a particular focus on inflation, bond yields and whether central banks are forced to pause their tightening due to economic damage. |
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Funds operated by this manager: Bennelong Kardinia Absolute Return Fund |
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The content contained in this article represents the opinions of the author/s. The author/s may hold either long or short positions in securities of various companies discussed in the article. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the author/s to express their personal views on investing and for the entertainment of the reader. |
22 Jul 2022 - Hedge Clippings |22 July 2022
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Hedge Clippings | Friday, 22 July 2022
You probably don't need Hedge Clippings to bring to your attention what a miserable first half of 2022 it has been: Putin's invasion of Ukraine; incessant rain in Queensland and NSW leading to multiple "1 in 100 year" floods; a continuation - and now apparently an uptick of COVID cases; and in Europe and North America, a heat wave and catastrophic fires. All that before we even consider the economy and markets, where the emergence of long dormant inflation has led to increased interest rates, and the resulting equity price bubble well and truly bursting. A cursory glance at FundMonitors' Peer Group tables shows a sea of negative numbers, as do the major indices such as the ASX, Dow Jones, S&P500 and Nasdaq. These in turn have resulted in widespread negative returns from managed funds - particularly from some of those that had previously benefitted from said price bubble, and had crowed about their "skill" in riding it. Remember that old saying about roosters to feather dusters? Other fund managers, possibly older and wiser, were content to take what returns they could, when they could, understanding that nothing lasts forever. Looking at the Top Ten performing funds over the 12 months to June, avoiding long only equities, and particularly the small cap sector, was the place to be, with managed futures/currency funds taking out four of the top ten places, long/short of one iteration or another a further four, one private equity, and digital, or cryptocurrency, taking the last spot (+22.28%) in spite of Bitcoin's implosion. Naturally, Equity Alternative Funds performed well compared with the Long Only sector in a reversal of the broad sector performance over the past couple of years. Singling out Australian Equity Long funds, there were still some impressive performances, albeit fewer of them, and with more subdued results ranging from +21.22% down to 4.94% - still impressive given the underlying markets: To view performance and fact sheets of all 700 funds, click here. News & Insights Consider the evidence for long term returns | Glenmore Asset Management The Long and The Short: Finding solace in the short | Kardinia Capital 10k Words | Equitable Investors |
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June 2022 Performance News Delft Partners Global High Conviction Strategy Digital Asset Fund (Digital Opportunities Class) Bennelong Kardinia Absolute Return Fund |
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22 Jul 2022 - Performance Report: Bennelong Emerging Companies Fund
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| Manager Comments | The Bennelong Emerging Companies Fund has a track record of 4 years and 8 months and therefore comparison over all market conditions and against its peers is limited. However, the fund has outperformed the ASX 200 Total Return Index since inception in November 2017, providing investors with an annualised return of 15.97% compared with the index's return of 6.27% over the same period. On a calendar year basis, the fund has only experienced a negative annual return once in the 4 years and 8 months since its inception. Over the past 12 months, the fund's largest drawdown was -31.44% vs the index's -11.9%, and since inception in November 2017 the fund's largest drawdown was -41.74% vs the index's maximum drawdown over the same period of -26.75%. The fund's maximum drawdown began in December 2019 and lasted 10 months, reaching its lowest point during March 2020. The fund had completely recovered its losses by October 2020. The Manager has delivered these returns with 15.01% more volatility than the index, contributing to a Sharpe ratio which has fallen below 1 four times over the past four years and which currently sits at 0.62 since inception. The fund has provided positive monthly returns 81% of the time in rising markets and 32% of the time during periods of market decline, contributing to an up-capture ratio since inception of 270% and a down-capture ratio of 125%. |
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22 Jul 2022 - Performance Report: Bennelong Kardinia Absolute Return Fund
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| Fund Overview | There is a slight bias to large cap stocks on the long side of the portfolio, although in a rising market the portfolio will tend to hold smaller caps, including resource stocks, more frequently. On the short side, the portfolio is particularly concentrated, with stock selection limited by both liquidity and the difficulty of borrowing stock in smaller cap companies. Short positions are only taken when there is a high conviction view on the specific stock. The Fund uses derivatives in a limited way, mainly selling short dated covered call options to generate additional income. These typically have less than 30 days to expiry, and are usually 5% to 10% out of the money. ASX SPI futures and index put options can be used to hedge the portfolio's overall net position. The Fund's discretionary investment strategy commences with a macro view of the economy and direction to establish the portfolio's desired market exposure. Following this detailed sector and company research is gathered from knowledge of the individual stocks in the Fund's universe, with widespread use of broker research. Company visits, presentations and discussions with management at CEO and CFO level are used wherever possible to assess management quality across a range of criteria. |
| Manager Comments | The Bennelong Kardinia Absolute Return Fund has a track record of 16 years and 2 months and has outperformed the ASX 200 Total Return Index since inception in May 2006, providing investors with an annualised return of 7.61% compared with the index's return of 5.78% over the same period. On a calendar year basis, the fund has experienced a negative annual return on 2 occasions in the 16 years and 2 months since its inception. Over the past 12 months, the fund's largest drawdown was -10.51% vs the index's -11.9%, and since inception in May 2006 the fund's largest drawdown was -11.71% vs the index's maximum drawdown over the same period of -47.19%. The fund's maximum drawdown began in June 2018 and lasted 2 years and 6 months, reaching its lowest point during December 2018. The fund had completely recovered its losses by December 2020. During this period, the index's maximum drawdown was -26.75%. The Manager has delivered these returns with 6.58% less volatility than the index, contributing to a Sharpe ratio which has fallen below 1 five times over the past five years and which currently sits at 0.63 since inception. The fund has provided positive monthly returns 87% of the time in rising markets and 32% of the time during periods of market decline, contributing to an up-capture ratio since inception of 16% and a down-capture ratio of 55%. |
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22 Jul 2022 - How much would higher immigration rates help equity markets?
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How much would higher immigration rates help equity markets? Montgomery Investment Management 05 July 2022 In this video insight, Roger discusses how the fate of equity markets now hinges materially, but not solely, on the employment picture and the how central banks navigate the very serious choice they have to make between inflation or recession. Transcript Roger Montgomery: Immigration. It's the most convenient solution to the wage pressure now being felt across the developed world, the pressure that could entrench inflation through a wage/price spiral. You may have noticed, hoped-for immigration is not ramping up. From the UK, to the US, New Zealand and here, the world is awash with jobs and nobody to fill them. Consequently, business are forced to pay more, workers and unions are demanding more, and already high supply-led inflation justifies the demands for growth in real wages. So, what happened? Well, you might remember during the worst part of the COVID pandemic, Australia was one of many countries that offered fiscal support to those out of work or underemployed. Here in Australia it was JobKeeper that kept the economy humming. Temporary visa holders however, including international students, and casual workers who hadn't been employed for 12 months were notably excluded from the program. More than a million people in Australia were on temporary visas and they were excluded from the government's support payments; that's about 500,000 international students, 140,000 working holidaymakers, 120,000 skilled temporary entrants, 200,000 bridging visa holders (who were largely partner visa applicants or asylum seekers), and more than 16,000 temporary protection visa holders (commonly referred to refugees). In the absence of support many simply went home and many of those may not want to return. Meanwhile, those that do want to return, or visit for the first time, face egregious airfares thank to limited airline capacity and international air travel operating at about 40 per cent of pre-pandemic levels. The longer the situation persists the sooner inflation ceases being solely a supply chain issue - out of the control of central banks - to a more endemic demand-led issue central banks will be forced to act on more harshly to control. The fate of equity markets now hinges materially, but not solely, on the employment picture and the how central banks navigate the very serious choice they have to make between inflation or recession. The US Federal Reserve is very focused on inflation which is currently at 8.6 per cent. Just recently, The Federal Reserve's Chairman Jerome Powell said it will not let the economy slip into a "higher inflation regime" even if that means raising interest rates to levels that put growth at risk. The U.S. central bank has moved to a do-whatever-it-takes approach with Powell saying "The clock is kind of running on how long will you remain in a low-inflation regime … The risk is that because of the multiplicity of shocks you start to transition into a higher inflation regime, and our job is to literally prevent that from happening and we will prevent that from happening". Thanks to that very tight labour market, demand remains strong and supply chains cannot cope. Consequently, what was previously thought of as being transitory inflation, is becoming entrenched. Higher wage demands come next and following that…a wage price spiral. A slowing economy is necessary to bring down demand, and a recession, in particular for the US and Europe, may be unavoidable as the US central bank leans towards killing inflation at all costs. Meanwhile the liquidity that was injected into the financial system and economy during the pandemic is being withdrawn. US QT 'officially' started in June, but the 'effective' global balance sheet has already shrunk by US$1 trillion since December 2021. In such an environment - money literally being sucked out of markets - it is difficult for asset prices to rise materially or sustainably. And none of that addresses heightened geopolitical risk or a potentially collapsing Chinese economy. Great returns come from buying at low prices and I have presented widely elsewhere on the blog about the arithmetic of investing in growth amid compressed PEs. It may just be that even lower prices are possible. Speaker: Roger Montgomery, Chairman and Chief Investment Officer Funds operated by this manager: Montgomery (Private) Fund, Montgomery Small Companies Fund, The Montgomery Fund |
21 Jul 2022 - Performance Report: Glenmore Australian Equities Fund
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| Fund Overview | The main driver of identifying potential investments will be bottom up company analysis, however macro-economic conditions will be considered as part of the investment thesis for each stock. |
| Manager Comments | The Glenmore Australian Equities Fund has a track record of 5 years and 1 month and has outperformed the ASX 200 Total Return Index since inception in June 2017, providing investors with an annualised return of 20.22% compared with the index's return of 6.75% over the same period. On a calendar year basis, the fund hasn't experienced any negative annual returns in the 5 years and 1 month since its inception. Over the past 12 months, the fund's largest drawdown was -16.18% vs the index's -11.9%, and since inception in June 2017 the fund's largest drawdown was -36.91% vs the index's maximum drawdown over the same period of -26.75%. The fund's maximum drawdown began in October 2019 and lasted 1 year and 1 month, reaching its lowest point during March 2020. The fund had completely recovered its losses by November 2020. The Manager has delivered these returns with 7.48% 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 0.91 since inception. The fund has provided positive monthly returns 90% of the time in rising markets and 38% of the time during periods of market decline, contributing to an up-capture ratio since inception of 232% and a down-capture ratio of 102%. |
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