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12 Mar 2021 - Hedge Clippings | 12 March 2021
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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.
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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.
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12 Mar 2021 - Performance Report: Paragon Australian Long Short Fund
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Fund Overview | Paragon's unique investment style, comprising thematic led idea generation followed with an in depth research effort, results in a concentrated portfolio of high conviction stocks. Conviction in bottom up analysis drives the investment case and ultimate position sizing: * Both quantitative analysis - probability weighted high/low/base case valuations - and qualitative analysis - company meetings, assessing management, the business model, balance sheet strength and likely direction of returns - collectively form Paragon's overall view for each investment case. * Paragon will then allocate weighting to each investment opportunity based on a risk/reward profile, capped to defined investment parameters by market cap, which are continually monitored as part of Paragon's overall risk management framework. The objective of the Paragon Fund is to produce absolute returns in excess of 10% p.a. over a 3-5 year time horizon with a low correlation to the Australian equities market. |
Manager Comments | Positive contributors in February included Cettire (long), Betmakers (long), Chalice (long), Ionic and Appen (short), marginally offset by declines in OceanaGold and PointsBet. In their latest report, Paragon highlight double-digit-% price rises across food, base metals, timber and house prices, however, their view is that headline CPI numbers are misrepresentative of true inflation. They believe markets are embracing the breadth and strength across Resources and increasingly the prospect of a super-cycle ahead. |
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12 Mar 2021 - 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 Fund has achieved up-capture and down-capture ratios over the past 12 months of 191.57% and 57.8%. This indicates that, on average, the Fund has risen almost twice as much as the market during the market's positive months while falling approximately half as much as the market during the market's negative months. The Fund has outperformed the market in 6 out of 10 of the market's worst months since the Fund's inception, notably outperforming by +4.9% during March 2020 when the Index fell -20.7%. |
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12 Mar 2021 - Performance Report: AIM Global High Conviction Fund
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Fund Overview | AIM look for the following characteristics in the businesses they want to own: - Strong competitive advantages that enable consistently high returns on capital throughout an economic cycle, combined with the ability to reinvest surplus capital at high marginal returns. - A proven ability to generate and grow cash flows, rather than accounting based earnings. - A strong balance sheet and sensible capital structure to reduce the risk of failure when the economic cycle ends or an unexpected crisis occurs. - Honest and shareholder-aligned management teams that understand the principles behind value creation and have a proven track record of capital allocation. They look to buy businesses that meet these criteria at attractive valuations, and then intend to hold them for long periods of time. AIM intend to own between 15 and 25 businesses at any given point. They do not seek to generate returns by constantly having to trade in and out of businesses. Instead, they believe the Fund's long-term return will approximate the underlying economics of the businesses they own. They are bottom-up, fundamental investors. They are cognizant of macro-economic conditions and geo-political risks, however, they do not construct the Fund to take advantage of such events. AIM intend for the portfolio to be between 90% and 100% invested in equities. AIM do not engage in shorting, nor do they use leverage to enhance returns. The Fund's investable universe is global, and AIM look for businesses that have a market capitalisation of at least $7.5bn to guarantee sufficient liquidity to investors. |
Manager Comments | AIM believe the central driving force behind markets in February was the sharp increase in longer-dated government bond yields. In anticipation of a potential increase in discount rates, the Fund had already reduced its exposure to technology businesses with long duration cash flows from September 2020, selling out of Apple, Netflix and Salesforce.com. Top contributors in February included Estee Lauder, Alphabeet, Mastercard, Berkshite Hathaway and PayPal. Key detractors included ICON PLC, Heineken, Keyence, Amazon.com and UnitedHealth. |
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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.
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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.
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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.
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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. |
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