On Fridays when pondering content for Hedge Clippings we occasionally resort to a Google search for famous people's birthdays. Occasionally we'll find one of note - normally an (old) musician from the 60's or 70's such as Bob Dylan or Leonard Cohen, who are both legends, and personal favourites.

For instance, on Tuesday of this week ex-Beatle Ringo Starr turned 80! Who would have believed it - and based on this birthday clip, who would have recognised him, even without the COVID19 mask? That's either testimony to his genetics, lifestyle, or the wonders of modern cosmetics.  Not only does Ringo look pretty much like a 50 year old, but he doesn't even sound like an 80 year old. We're not sure if the Google ad which preceded the clip (for a hearing aid) was targeted specifically at yours truly, or just a punt on the demographics of people who can remember who Ringo was.

Elsewhere on the famous birthday list, exactly one month ago (June 10) was Prince Philip, who turned 99. Congratulations (belatedly)! No doubt he'll have received a special card from his number 1 Australian fan, Tony Abbott. Apparently there are 10 other people more famous than him (according to the list) most of whom seem to be either a YouTube, Reality or Instagram star under the age of 25. Hedge Clippings must be either out of date or out of touch (or both).

Which leads us to the dangerous, and sometimes confusing subject of lists, and in our little corner of the universe, specifically lists of top-performing managed funds. Having just closed out the financial year and a tumultuous four months of market mayhem, we learned long ago the dangers of top performing lists of funds, however popular they may be amongst those that appear in them. Sometimes the following year's performance is either embarrassing or disappointing, depending on whether you're the manager, advisor or investor concerned.

For instance, the list of top performing funds for the 12 months to December 2019 will look significantly different to the June 2020 version. And anyway, what constitutes "performance" in a sector where most offer documents suggest an investment time frame of 5 to 7 years? Headline performance by itself only tells part of the story, with risk factors such as drawdowns, down capture ratios and volatility being more relevant to most risk-averse investors in a post COVID world.

Hedge Clippings frequently compares and quotes averages, and while statistically absolute return and actively managed funds outperform markets and indices, averages can be dangerous: Over the past 12 months to June the average net return of all funds on www.fundmonitors.com is -0.35%, compared with -10.42% for the ASX200 Total Return Index. That's a clear 10% outperformance, with 83% of funds outperforming the index, and 60% with positive 12-month returns.  

Impressive numbers, unless you're invested in the other 40% - but even then, that's only over 12 months, not the recommended 5-7 years. Picking winning funds, like winning stocks is challenging, but more often than not it's a case of avoiding the losers, or at least creating a blended portfolio of funds with a low correlation to each other to minimise risk.

June 30th saw the end of the 2020 financial year, and for the last six months of it, extraordinary market volatility: Firstly, one of the 10 sharpest quarterly declines in history, followed by one of the 10 sharpest rallies. We'd suggest that's a "V" shaped recovery if ever we saw one. But that's the market. From where we sit, the economy is going to be a very different beast.

Tech rules! Actually money does, but where there's tech, it seems there's wealth. Tesla is now the most valuable automaker in the world, and today's paper says Afterpay is knocking on the door of the ASX Top 20.

Meanwhile medically, the pandemic - particularly in the USA, South America and other major population centres of the world - shows no real sign of abating, seemingly because people either can't, or won't, socially distance. And why would they when (unlike in Australia) their political masters seem to be actively encouraging themselves not to do so?

We even heard (surely this is folklore?) that in Alabama people are holding COVID parties with an entry fee, which is collected as a "pot" which is then "won" by the first person to test positive.

Insanity prevails!

Elsewhere the Chinese government has made its long-awaited move on Hong Kong, possibly hoping to do so under the cover of COVID. In turn, Australia (and other democracies) seem to have finally woken up to the concerns of the average Australian. Having been seduced by seemingly easy Chinese wealth for the past 15 or 20 years, we're seeing the inevitable drawback of that complacency.

Having seen Chinese agents of influence at work here and abroad, Australia is being firmly told not to even consider meddling in Chinese affairs by offering assistance or asylum to anyone wanting to leave, or flee, Hong Kong. The Chinese "absorption" of Hong Kong is complete. Next will be the democratic Republic of China, namely Taiwan.

How will Australia and the democratic world respond when (not if) that's next on the list?

Australia is eventually going to have to face the alternative of trade and wealth, or freedom. Maybe we've always been secretly aware of the threat, but lacked the vision, ability, resolution or inclination to take appropriate action. Just like the boiling frog.

Australia has often been tagged "The Lucky Country", and whilst there may be debate in some quarters about that description, when it comes to the current COVID situation it would be hard not to agree. Former treasurer Peter Costello noted on the ABC earlier this week that Australia has always suffered from the tyranny of distance, while his predecessor Paul Keating famously described Australia at being at the "ar*e" end of the world.

Both statements are true enough, but thanks to being surrounded by a great big moat (Costello's term again), and being where we are in the world, we are now benefitting from that tyranny. Historically a combination of the moat and distance is largely responsible for what, and figuratively where, we are today. Australia was remote from the rest of the world for millions of years, resulting in the diversity of flora and fauna we're now blessed with (koalas and kangaroos) or infamous for (venomous critters). Indigenous people survived without interference from the outside world for 60,000 years until the arrival of the First Fleet, paradoxically sent here because of the very same moat, and the same tyranny of distance.

Now, far from being disadvantaged, we're the beneficiaries of both moat and distance, even as we see panic buying return as cases "spike" to double digits on multiple days in Victoria. Across the other side of the world, there are riots in the USA and elsewhere as some people refuse to wear a mask, citing it as an "infringement" of their rights. Meanwhile, they crowd onto beaches in California and Florida, and of all places, Bournemouth in the south of England (which is less of a beach than a bunch of stones on the English Channel, one of the more polluted stretches of water Hedge Clippings has ever taken a dip in).

But we digress. Yes, we're lucky, and thankful that relatively speaking we have (to date) dodged the worst that medically COVID might have done to us. In the UK they're easing restrictions in spite of 307,980 cases and 43,230 deaths; In the US they're not quite as sure (depending on their political or religious leanings) whether to mask up and isolate, demonstrate, or enjoy some cash and card-free "shopping", as they top the world with 2,504,588 cases and 126,780 deaths (and counting). Readers wanting more up to date information can find it here. Economically and socially, while many Australians are sweating on what the government is going to do post the September end of Job Keeper or Seeker, or being able to go interstate, cases and deaths are still rising globally.

As many are realising, our borders will remain closed (much like Queensland and WA) until the rest of the world is clear of COVID, or the risk can be mitigated thanks to a vaccine, unlikely to be until mid next year according to the experts. Until that time, sections of the economy will have to remain on government support or a lifeline of one sort or another. However, asking what that will look like at the end of June, halfway through phase-1 in the fast-changing world of COVID, is premature. Presumably, where support is required (travel and tourism in particular), support will be provided, even if it means running the mint's printing presses 24x7 while the government heavies the banks to maintain support at both the consumer and business level.

The past history of banks doing just that hasn't always been exemplary. However, this time around they risk their own stability if they decide to pull the rug out from beneath the customer. You can bet your last dollar that ScoMo and Josh will be reminding them that during the GFC the government handed the banks a lifeline, even though they were on the opposition benches at the time.  

Closer to home, and back in the office, this week we caught up with Kristiaan Rehder of the Bennelong Kardinia Absolute Return Fund who shared his views here on the market's past few months and what may lie ahead. His fund has done well to avoid the volatility of the market, as on average has the overall managed fund sector, which to the end of May was down -6.30%, less than half the fall of -12.70% suffered by the ASX200 Total Return Index. Taking that over 12 months, all equity funds still managed a return of +1.37% against the ASX200 TR's fall of -6.70% Full details can be found here.

Yesterday's job numbers, while statistically appalling, shouldn't have been too surprising. Even the headline unemployment rate of 7.1% masks the real situation which is revealed when examining the details around reduced hours, and the participation rate.

And while everyone's focussed on the unemployment rate, or the participation rate, last week's horror "R" word (recession) is now accepted as the inevitable consequence of COVID rather than the "recession we had to have", while the "D" word (deficit) is pushed even further back into short memories. But the "D" word is going to last much, much longer than the "R" word.

Put simply, the headline rate doubles (or possibly triples) when taking into account the large proportion of those who have lost their jobs, are underemployed, and who are not actively out there looking for work when there's none, or very little to be found.

Employers who have let their employees go, or reduced their hours, will hardly be taking on new staff before re-hiring, or increasing the hours of the ones they already know - and who in turn already "know" the job. Whether on Job Seeker or Job Keeper, these will be "first in, best dressed" when the wheels of the economy finally, but only gradually, start turning again.

Gradually - or possibly erratically - is the key, and as such is a key problem for the government as it faces the halfway mark in the emergency life support it introduced at the start of the lock down. At that stage many - both employers and employees - felt somewhat cushioned from the full economic effects of COVID thanks to the range of measures introduced: One-off payments to both businesses and individuals; Job Seeker (double rate) or Job Keeper; mandated commercial rent relief; and early access to superannuation.

Added to that, the banks chipped in with mortgage relief to help, although on the other side of that coin shareholders suffered via a reduction or cancellation of their dividends.

But now the horizon is clearer. As the lockdown is gradually (albeit not uniformly) eased, we can see the September end of support in sight. And while some aspects of life and business are opening up again, it's certainly not back to normal. Public transport is almost a joy to travel on; city streets are clear of dawdlers and, sadly for the retail stores, window shoppers. Restaurants are open (some at least) but underutilized as they adhere to the new rules.

And some sectors - particularly those leveraged to overseas visitors and students, such as travel, tourism and education - have a much longer term of economic pain and hibernation ahead.

Therein lies the problem for Scomo and his team: On one hand how to wean both business and employees off the welfare they're now relying on, if not used to (and don't forget there are some benefitting and enjoying it), while also maintaining or extending the support for those sectors that will still need it. At the same time, the government will be trying to use the situation as an opportunity for reform, which of course will be resisted every step of the way by those adversely affected.

Take for example today's announcement regarding the proposed changes to higher education and the cost of a degree. Some, deemed more suitable or relevant for the economy and the workforce of the future, will be reduced in cost: Agriculture and maths, down 62%; teaching, nursing, languages, down 46%; science, health, architecture, IT and engineering, down 20%.

Offsetting those reductions, law and commerce will rise by 28%, while the cost of a humanities degree will cost the same as law - but double their current rate. Of course, depending on one's media preference, the headlines and talkback chatter was all about the increases, in spite of the fact that none of the changes will affect students currently studying, or the fact that HECS exists to cover the cost if required.

Reform is not easy to sell to those on the wrong side of the change, but is necessary to adjust to a changing world.

While on the subject of change, this week we spoke with Alex Pollak, CIO of the aptly named Loftus Peak Global Disruption Fund. Alex's insight into the changing fortunes and direction of companies that specifically benefit from disruption - even if neither he, nor the companies themselves, had anticipated COVID's acceleration of disruptive trends. As he explains in this video, what COVID has done is to accelerate the social, business and economic trends that were already in place, benefitting the disrupters at the expense of traditional business models.

No one likes to be seen to be actually benefitting from the effects of COVID's disruptive damage, but his Global Disruption Fund has an impressive run rate, returning 12.67% over the six months to May 31, and 32.46% over the past year. To view the fund's full AFM Profile, click here.