Hedge Clippings | Friday 17 January, 2020

Welcome back to a New Year, and depending on your level of pedantry, a new decade. We did notice a few grumbles in the media that technically we're not in the new decade yet, but as far as a simple-minded Hedge Clippings is concerned, we now write the date with a 20 in front (or behind) it, so a new decade it is.

We closed the last edition of Hedge Clippings with a summary of 2019, so it is only natural to open this year's effort with the picture ahead of us. Firstly, however, a thought for all those affected by Australia's bushfires which, for the time being at least, seem to have subsided. Although, there's a long way to go yet, not only for the remainder of this summer, but the years and decades beyond.

Much like 2019 we would expect 2020 to be dominated by geopolitics with a US election, the real Brexit, Putin and Xi all featuring heavily. Effectively, whilst we may think Australia is on the world stage, that means this year remains in the hands of four people of different persuasions, and different levels of political control domestically and globally.

Economically we wouldn't expect global interest rates to change much either way, although the US economy is showing signs of strength this may not translate into higher inflation - yet. Domestically, however, we're facing bushfire induced headwinds - both economically and politically.

From the perspective of investors and their advisors in managed funds, this year is once again going to be a challenge, met with varying levels of success by fund managers as always. 2019 was a stellar year, particularly for global equities (thanks to Donald and low interest rates) and in Australia the small to mid-cap sector. Short of a market shock, expect more of the same, and for the fund managers themselves, the same challenges.

In coming weeks once all funds have reported their December returns we will be providing data on the winners and losers from 2019. In the meantime, below is a roundup of reports received to date, and manager insights.

Hedge Clippings | Friday 20 December, 2019

This is the final edition of Hedge Clippings before we take a break to consider our New Year resolutions for 2020. Before doing that maybe there's time to take a look back on a year that was, by any accounts, eventful - dominated domestically by the Hayne Royal Commission and bankers behaving badly, along with the unexpected victory (except by ScoMo himself) by the Liberals in May's election.

Taking bankers behaving badly, one has to wonder what they were thinking. Did the various boards know what was going on at the branch, online and ATM level - and if so, one assumes they're open to prosecution. And if they did know, and assuming it wasn't deliberate, why didn't they address the issue(s)? Or were they just blissfully unaware and out of touch, in which case the reporting lines to and from management (assuming they knew) were so inadequate that they're simply guilty of incompetence?

As far as the big 4 banks are or were concerned, maybe it was a mixture of the two. Certainly in AMP's case (doesn't that seem a long time ago), it seems the board were well in the know about misleading ASIC, although we're not aware of any prosecutions to date.

Commissioner Hayne certainly consigned a large number of bankers' reputations to the scrap heap. The repercussions will be felt for years to come - probably until the next round of excess or poor behaviour comes to light.

Globally the news was dominated by continued low/slow economic growth, and ongoing rock bottom interest rates, which in turn buoyed equity markets - when politicians weren't getting in the way that is. The US/China tariff war threatened global growth and dominated economic issues, although it seems that political reality (or Donald's re-election) is necessitating a truce early in the New Year.

In the US, and on the global stage, Trump continued to dominate the headlines, and not always for the right reasons, albeit that someone standing up to China and its influence was, we think, long overdue. The Democrats are desperate to keep the pressure on via impeachment, in spite of the fact that (as we understand it) they won't succeed in the Republican-controlled Senate, where a two-thirds majority vote is required to remove him.

Expect the rhetoric to continue from both sides as the next US election draws closer.

And talking of elections, what about BoJo's stunning victory last week? Much of the credit for the Tories' win can be attributed to the blind determination of opposition leader Jeremy Corbyn to stick to an ideology that was clearly going to alienate the Labour party's traditional support base. Thrice married Corbyn looked like (and at 70 years old, probably is) a hangover from a 70's left-wing student movement. He had obviously learned nothing from his predecessor Michael Foot's loss to Maggie Thatcher in 1983, the year Corbyn himself was first elected to Westminster.

Much like our own election in May, where between them Shorten and Bowen shot themselves in both feet over changes to franking credits.

So, there it is for another year. We'll be back in January, raring to go and hopefully slimmer and sharper than before. Many thanks to all readers and recipients of Hedge Clippings over the past 12 months, and wishing you a Happy Holiday in whichever way you wish to celebrate it. May your New Year be full of promise and opportunity, but above all, health and happiness.

Hedge Clippings | Friday 13 December, 2019

As Hedge Clippings figuratively gets put to bed (if not to sleep) by around 2 PM on Friday afternoons it is too early to announce the winner of the UK election just yet, however we'll stick by our call from a few weeks ago - actually referencing our friends at Longview Economics in the UK - that Boris would win comfortably by 80-90 seats.

Based on the estimates of last night's exit polls - although notoriously unreliable as we know - the Sydney Morning Herald is reporting the Conservatives will increase their majority by 50 seats, whilst Labour, under 70's left-wing hangover, Jeremy Corbyn, are predicted to lose 71. The other winner, who could also affect the direction of UK politics going forward, is the Scottish Nationalist Party, expected to end up with 55 seats, a gain of 20.

Although they've yet to rival Australia's recent turnover of Prime Ministers, the British must be heartily sick of elections (3 in less than 3 years), Brexit, and politicians. Based on our own anecdotal evidence while visiting London recently, most of those we spoke with just wanted the endless arguments to end and to get on with it. However, elections in the UK are a lot simpler than ours.

Firstly, voting is voluntary and, for some historical reason we're not aware of, UK elections take place on a Thursday, so if you're busy, the weather's bad (as normal) or you're simply not interested, you don't have to bother. Secondly, you have a single choice to make on a single ballot paper and you can't vote for the upper house even if you wanted to, and you don't have State elections where you have to go through it all over again.

All jest aside, this is one of the more important elections simply because so much rests on it. There is clearly a fork in the road as Britain exits the EU after what many considered was a poor decision to join the then Common Market way back on January 1, 1973 under then PM Edward Heath. It is not often remembered there was an earlier referendum in June 1975 under Harold Wilson, when the "remain" vote was 67% - albeit on a national turnout of only 64%, but significantly higher than the leave vote of 52% under the most recent one.

One assumes that the UK won't be holding another referendum any time soon, given the chaos and division over the past 2 and a half years since David Cameron's ill-judged decision to hold the 2016 referendum which, as a "remainer", also lost him his job as PM.

The last word goes to Dianne Abbott, opposition frontbencher and Corbyn ally who said "It could be much worse.". One supposes that much worse must mean losing ALL their seats?

Hedge Clippings | Friday 06 December, 2019

Hedge Clippings' tends to alternate our weekly commentary between either what's happened in the past (e.g. poor behaviour from the banking sector) or trying to take a forward view on what might be on the horizon, or sometimes a combination of the two.

This week there's the less than surprising antics of Donald in Europe, in Watford of all places, as anyone who has ever been there would attest to, plus the less than surprising news that Australia's economy is holding its head above water, but only just.

As far as the economy goes it seems the average consumer is, either by design or necessity as a result of pressures on the household budget, keeping their hands firmly in their pocket rather than spending the savings from interest rate cuts, or the tax cut delivered a couple of months ago.

New car sales, usually a reliable barometer of consumer spending and confidence have been steadily falling for the past 12 months, and are down almost 10%, and while the Toyota Hi-Lux ute remains the top-selling vehicle, its sales have fallen by 21% over the same period, presumably indicating the pressure the building industry and the bush is under.

And talking of pressure, Australia has taken out a less than commendable silver medal by having the second-highest level of taxes on income and profits (58.8%), second only to Denmark at 63.3% and waa-aay ahead of the OECD average of 34%, or the UK at 35%. Thank goodness Scomo is taking to the public service, although to what extent that will really change things remains to be seen.

It could be worse - had Wee Willie Shorten been elected last time around we'd be heading for the top spot for sure. All jesting (and bias) aside, unless we're competitive, we can't compete (yes, I know that sounds obvious), and we need to be able to do so.

So, looking ahead and we have the UK's election next Thursday, as well as the Democrats' attempt to unseat (or should that be unsettle?) Donald Trump via an impeachment process - a process which we have to admit we don't fully understand. Something to do with politicians not being (or seen to be) dishonest.

Now there's a novel idea!

Hedge Clippings | Friday 29 November, 2019

When it comes to Big Banks, Hedge Clippings is frequently shocked, often surprised, but rarely astounded.

Westpac's alleged breaking of AML/KYC regulations a staggering 23 million times for a total value of $11 billion changes all that. Furthermore, the fact that the board was aware of the issue for some time, having reported itself to AUSTRAC, leaves one wondering how much communication or control the board has, or had, over the business or management.

Setting up a financial crimes committee seems somewhat like closing the stable door long after the horse has bolted, and one can only wonder about the atmosphere at WBC head office right now.

Compounding the issue with child sex exploitation adds to their issues, as it would seem does the recent capital raising with ASIC rightfully asking if the market was properly informed - which of course it wasn't.

Brian Hartzer's timing of his acceptance of the top job at Westpac couldn't have been worse, and Gail Kelly's retirement couldn't have been better. But it's worth remembering Westpac's AML woes go back a long way.

So, we now have three of Australia's top financial institutions - CBA, AMP and Westpac - with their corporate reputations' In tatters. No doubt ANZ and NAB will be nervously auditing their own processes as a matter of some urgency.

Hedge Clippings | Friday 22 November, 2019

Hedge Clippings remains in distant parts, and thus well out of the daily face-to-face contacts we're used to, and with limited access to the usual internet and email overload we're normally dependant on. The challenge, therefore, is to pick up what one can - partly to keep in touch with events in Australia, and possibly bring some relevance from an offshore perspective.

Over the past months it would be impossible not to have noticed an increase in anti-Chinese rhetoric in Australia, possibly partly in response to Donald Trump's trade war, but also locally as well.  This has seemingly ramped up this week with former ASIO director Duncan Lewis saying that the Chinese government is trying to "take over" Australia's political system through foreign influence operations, with any person in office a potential target.

The same goes for business and commerce in general.

We might think the Chinese government is focusing on Australia, but this situation seems to be replicated around the globe. Currently we're in Barbados, famous for Sir Garfield Sobers' exploits in the cricket pitch, and of course rum, which by the way is excellent! The point is that even on this tiny speck of an island (21 miles by 14), and throughout the region, today we had exactly the same conversation with a leading local business identity.

Moving on, it seems that Australia's economic growth forecast has been downgraded, which shouldn't come as too much of a surprise. Household debt is at record levels fuelled by ultra low-interest rates which are likely to go lower. In response the government has announced a major $3.8 billion infrastructure investment program, but is it enough?

Hedge Clippings has long called for an investment of superannuation fund assets into infrastructure.  Both have a long term horizon, and one would have thought the political or legislative issues to be easily managed.

The infrastructure sector is of increasing size and interest in AFM's database. Steady returns, steady income streams, and both local and offshore exposure - both to emerging and developed economies. Watch this space!

Hedge Clippings | Friday 15 November, 2019

As indicated last week, this edition of Hedge Clippings comes to you from London. From the outset we'll seek forgiveness for typos, or ramblings over and above the norm, which we will put down to the effects of jet lag. It is irrelevant which end of the plane you are in, 24 hours cooped up with 450 others in a noisy tube and an 11 hour time difference at the other end is no fun.

Hedge Clippings has yet to establish the best routine to handle long distance flights. One school of thought is the David Boon approach: Stay awake, if barely conscious, while consuming as much alcohol as possible. That certainly makes the flight more bearable, simply because by the time one is flying over Darwin the senses become, shall we say, "dulled".

Alternatively, take the airline's good advice; drink plenty of water, avoid alcohol, and put up with the discomfort, bored out of your tree. And try to resist the atrocious food, which in any other environment you wouldn't feed your dog. We're now of the opinion that the onboard food is as bad for jet lag as the booze. Hedge Clippings' solution: Stay hungry, both during the flight and post arrival, and if you can find such a thing in London, hit the (good) caffeine.

But we digress. There's an election in the UK in less than a month, and the outcome will determine Britain's future for some time to come - if not forever. We had thought the result could go either way given the variables at stake, but based on a very small survey, the feedback is for a Boris victory.

Firstly, a couple in their 60's who voted to remain in the referendum, along with their children. Wind forward three years and they're sick of the whole thing and just want to get on with it, as do, less enthusiastically, their children.

Next, a more analytical view following a meeting with Chris Watling of Longview Economics, who in their usual fashion have numerically quantified their forecast result - namely that Jeremy Corbyn's Labour is committing political Hari Kari, and that Boris Johnson, having hit the ground stumbling, is likely to end up with a likely majority of 60 to 90 seats - if not more.

Longview's senior market strategist, Harry Colvin, goes on to conclude that "that outcome should crystallise certainty in markets around (i) the shape of Brexit, and (ii) business friendly government policies.  

There are reasons given for their view, with extensive and detailed analysis as usual, including no compulsory voting, and the UK's "first past the post" system. Not to mention that it seems Jeremy Corbyn's extreme socialist views are a step (or ten) too far to the left, akin to him committing political Hari Kari.

If you're into the minutiae of UK politics, Longview's definitely worth a week-end read.

Hedge Clippings | Friday 01 November, 2019

An article today on Financial Standard quoting Rainmaker data reports only 10% of Australian Large Cap equity funds outperformed the market in the 12 months to 30 June.

Aside from the fact that the information is a little out of date (see chart below for AFM distribution of returns data to the end of September - all funds all strategies), large-cap equities is a hard space to significantly outperform, particularly in the current environment. Large cap stocks dominate the market and drive its overall return. There are numerically more opportunities OUTSIDE the ASX Top 20 or Top 50 or even the Top 200 even though their volatility might be higher. And outside the Top 200 companies are flying well beneath broker's research and with significantly higher growth opportunities.

AFM's data above shows around 20% of all funds outperformed the ASX accumulation index's 19.29% return over the past 12 months. It's worth remembering that 19% is a pretty impressive return as well - nice to have, but investors can't expect that every year. However, as we're never tired of pointing out, that's an average, and averages mask the real outperformers - and the underperformers.

Moving on to underperformers of a different kind, Bill Shorten was well and truly outed this week - although for most people it didn't require an internal review by the Labor party to work out why he lost the unlosable election. No doubt complacency came into it, but the internal review seemed to spare former shadow Treasurer Bowen for his franking credit policy - and gaffe of telling voters if they didn't like it, vote elsewhere. Labor alienated key sections of the community, many of them committed Labor voters, but particularly retirees, and in Queensland, miners.

Hedge Clippings is heading to London next week, not necessarily to get a first-hand view of the Johnson/Corbyn election battle, although it will be useful to gauge the mood, albeit briefly. Of more interest will be the mood of the managed fund sector, and the potential impact of Brexit, or the possibility of a truly socialist government in the UK to boot. Given that voting is not compulsory, and with winter approaching, one would think the weather could have a significant impact on the outcome of a December 12 poll, as could the impact of dissatisfied voters moving to the minor parties.

Hedge Clippings | Friday 01 November, 2019

The front page article in today's Financial Review suggests there could, or should, be only one rule to determine the legal obligation when providing a financial service: ""Be Fair". If only it were so simple!

Acting fairly, efficiently and honestly - enshrined in Corporations Law - should be a pretty straightforward and simple task, but in reality it is anything but simple, or straightforward.

The difficulty of course is that fairness, like beauty, is in the eye of the beholder. What might seem fair (and/or reasonable) to most of us, might not seem so straightforward to others. This is not only applicable to financial services, but every other facet of life. As business and social values change and adjust over time or across borders, how do those determining what's fair decide if party A has broken the fairness rules, let alone the law?

Fairness used to be something taught in kindergarten, or a code of conduct to be displayed on the sporting field. With the rise of professional sport that seems to have gone out the window, and that might give a clue to the problems with fairness in financial services - PROFIT!

For some years now Hedge Clippings has been lamenting the fact that there has been a general decline in moral values, and this has infected business, and particularly the financial sector. And yet paradoxically there is greater awareness around other aspects of behaviour, and an increasing consciousness of our moral obligations to society.

So is it just the profit motive, or lure of the big bucks or bonus, or just a change in standards? After all, society changes over time, and what might have passed as reasonable a century ago is now most likely to cause an outcry - and vice versa.

The difficulty is in the definition. I may know what I believe is fair - or unfair as the case may be - and have a very black and white view on it. But I'm not sure in the politically correct world in which we now live I'm even able to describe it in that way for fear of it being labelled a racist term.

Changing tack slightly, and ignoring my natural bias, it would be completely UNFAIR if England didn't win the RWC tomorrow night given they played an entertaining style of rugby last week when South Africa were boring.

Hedge Clippings | Friday 25 October, 2019

Equity Returns - are investors expecting too much?

An article published in the business section of the ABC News website on Thursday provided an insight and research into investor's expectations of annual returns from the share market.  Australian investors at 10.7% came in around the global average of 10.9%, while American investors at 12.4% were more optimistic, and Europeans were more cautious at 9% (understandably, in Hedge Clippings' opinion).

The article quoted Sally, an investor who, having been invested in the local market via ETF's for the last 18 months, is happy with her return of 9% but would like a little more - in line with the survey results. With interest rates and returns on cash at close to zero, or term deposits at 2% if you're lucky, we understand the attraction of equities at around 10% plus the potential for some franking credits.

Our concern is that Sally (and others) haven't factored in equity risk, and the potential loss of her capital. Has she been lulled into a false sense of security by a market buoyed by low interest rates, and marketing of ETFs and passive investing at low fees?

Taking a look at the ASX200 Accumulation Index, she's on track over 5 years, and the same over the longer term, 25 years. However, her risk is hidden in the 1 to 5 year returns:

The sting, of course, is in the tail, or in this case the GFC, which some might consider a one-off event. However, the market fell around the same amount in 1987, and while the trigger might have been different, the pain was the same.

Those in favour of index investing and ETF's can and will say you can exit when you want to, but will Sally know when to do so, particularly when everyone else, including mutual funds, are doing the same?

So, how have actively managed equity funds performed over the same period? Taken as an average, as follows:

Whilst the may have underperformed over the shorter time frames, the key is the reduction in risk, as shown by the maximum drawdown of -23% in the GFC.

That's the average of all equity-based funds in AFM's database, but using the old "head in the freezer, toes in the oven = average" analogy, what about the top tier funds:

Of course, selecting the top funds - which can vary over time - is not easy. However, careful research, and appropriate diversification across manager, strategy, market sector and geographic region could provide Sally with attractive returns without the same level of risk.