Hedge Clippings | Friday, 18 September 2020

COVID rolls on, and on and on. While in Australia we're trying to eradicate it, elsewhere in the world it seems to be well on the way to its much anticipated second wave. It has almost become the new normal item of news and conversation, and seems likely to remain so for some time to come.

In spite of the dire predictions, Australia's reporting season seemed to pass with more "ticks" than "crosses" as Matt Williams from Airlie Funds Management explains in this video.

This week AFM's Damen Purcell also recorded an interview with Nicolas Bryon who manages APSEC's Atlantic Pacific Australian Equity Fund. Both Airlie and APSEC invest in Australian equities but each takes a significantly different approach: Airlie being "long only" with a maximum cash position of 10%, while APSEC uses shorting and derivatives and therefore fits into the Long/Short basket.

You can view the videos below, but the point of this article is not to compare the two directly, but to emphasise the benefits of diversification when selecting funds, just as one would when investing directly in individual stocks. Of course, it can be argued that one of the benefits of investing in a single managed fund is that there is automatically an element of diversification to a greater or lesser degree depending on the number of individual stocks in the portfolio. However, investing in a single fund doesn't provide diversification across strategy, asset class or geography, and also leaves the investor exposed to individual fund or manager risk.

Hedge Clippings has previously detailed the variance in both strategy and manager performance from year to year - hence the warning on every offer document that past performance can't be guaranteed, and that the proposed time frame for investment is generally 5-7 years. As we've stated before, chasing top-performing funds is tempting, but can be risky. For instance, of the top twenty performing funds in 2010 (with performance ranging from ~+25% to over +100%), thirteen had negative returns the following year, and ten lost 20% or more. Only five, or 25%, managed a positive return in both years. While those two years might be a stand out example, the reality is that it is a familiar story, just as is individual stock sector selection.

Diversification therefore should be uppermost in investors' and advisors' minds when reviewing funds and making investment decisions. Not only diversification across managers or funds, but also across strategy, style and geographic mandate, particularly considering the impracticality of trading funds the way one would trade a market or stock.

In this regard, the correlation between strategies and funds, along with their respective up capture and down capture ratios, become important tools. Interestingly correlation, given its importance particularly when markets dislocate as they did earlier this year, is not always used by many investors or analysts.

Investing across funds or strategies with low correlations to each other may not result in having many (or any) of the top performers included in a portfolio, but is likely to produce a more attractive overall result over time with lower risk than chasing individual high flying funds. It also allows the investor to target an acceptable risk level, rather than just focusing on returns.

Changing tack: Today marks the 50th anniversary of the death of Johnny Allen "Jimi" Hendrix who, in spite of the fact that his musical career only spanned four years, had a lasting impact on the musical world. Not necessarily to everyone's taste, he was Pop Musician of the Year in 1967, and in 1968 Rolling Stone magazine declared him Performer of the Year. Hedge Clippings was present along with an estimated 600,000 others (in body, if not in mind) when Hendrix topped the bill at the third and last Isle of Wight Festival in 1970, just a few weeks before his untimely death. Personally, we thought the previous year's IOW Festival featuring Bob Dylan was better, although the memory of that event is pretty hazy as well.

Finally, global warming and climate change or just coincidence? This season has seen 7 hurricanes in the North Atlantic so far, making it the second most active season on record, and with forecasters estimating there could be a total of 40 such storms before the season ends, it is likely to top the list. Probably until next year.

For those that understand the significance, the latest one is named Sally! There have been 16 tropical storms named Sally over the years, including one in 1971 that made landfall in Australia.

News & Insights

New Funds on Fundmonitors.com

Video interview with Nicolas Bryon from APSEC Funds Management

Video interview with Matt Williams from Airlie Funds Management

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