Hedge Clippings | Friday, 13 November 2020

Hedge Clippings is at a loss for words (not a frequent occurrence, as some might understand) when it comes to the US election - or at least to Trump's reaction to his loss. Come to think of it, is seems the Donald himself is also at a loss for words as well, as his public statements have been few and far between. There's an underlying concern about the state of democracy in the US, and the turmoil his refusal to accept the result is creating.

Of course, The Donald has never been shy when it comes to controversy, whatever the expense. Sadly his legacy is one victim of his personality, however one might view his achievements over his single term. The other, more concerning issue is the potential damage done between now and the 20th January, and the opportunity it provides to other powers - China and Russia in particular - to take advantage of the vacuum.

Meanwhile back to business! In the managed fund sector, or the broader equity market, and for that matter in financial markets as a whole, we are constantly faced with "averages" which although technically accurate, can be highly misleading.

There's an old saying regarding averages: "When your head is in the freezer, and your toes are in the oven, your temperature is average." So it is with managed funds, particularly with actively managed funds. And even with ETFs and index tracking funds the reality of course is that the index itself is an average. In the case of the ASX 200 made up of 200 stocks, each of which perform significantly differently to produce the average or index return.

At www.fundmonitors.com we frequently quote a whole range of averages, but behind those there is a wide distribution of returns from individual funds. As can be seen from the chart below which just singles out Australian Long Short funds (including Equity Market Neutral, and 130/30 funds) the performance over 12 months to the end of October ranges from -50% through to +20%.

However even the headline returns of individual funds can be misleading - or at least need to be investigated as shown by the results for best and worst month highlighted by the green and red dots. While there are a number of other key performance indicators that need to be looked at such as volatility, Sharpe ratio and up-and-down capture, the best and worst month can give a good indication. Risk and return varies from investor to investor and whilst all investors seeking good return many of also wanting to do so without access volatility or risk.

What is also interesting from the chart below is that, in spite of the big variances between the best and worst months, the majority of Long Short funds, which are often considered to be more risky and more volatile than the market, have in fact outperformed the ASX 200 accumulation index (shown in orange) which has fallen just over 8% over the 12 months to the end of October.

The above chart is interesting: the bars clearly show the majority of funds out performed the ASX200 Accumulation Index, generally accepted as the relevant benchmark, although some may argue that as long/short or absolute return the appropriate benchmark is anything above 0%. However, equally telling are the red dots representing each funds worst month, and to a lesser degree the corresponding green dots.  Simply put it is much easier to perform well over the longer term (even though we have only focussed on 12 months in this instance) if you can avoid the market's worst months. Protection of the downside is a vital aspect of performance, and depending on the investor's risk appetite, an important KPI when evaluating any fund.

News & Insights

Video interview with Garry Rollo from Montgomery Investment Management

Amazon, Volatility, and the Virtue of Patience by Aitken Investment Management

Hedge Clippings | Friday, 06 November 2020

"It has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time...." So said Winston Churchill on Armistice Day in 1947.

But Churchill's quote also included:

"Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise."

Isn't that the truth!

And while we accept that the US system is democracy in action, one would have thought it is not what George Washington and his fellow founding fathers quite had in mind way back when they created the Constitution. They obviously hadn't allowed for Donald Trump, who, irrespective of one's liking or disliking of his policies, seems to be playing by his own rules.

It's been wall to wall, and minute by minute on the news channels, and if nothing else has pushed COVID, record low interest rates, and a record loss by the Wallabies to the inside pages. In the case of the Wallabies, thankfully so.

Amongst all the commentary and humour, we think this one sums it up best:

"A new analysis by some guy on Twitter has found that Donald Trump would have been re-elected with an overwhelming majority if none of the votes for Joe Biden had been counted."

You can read the full text here.

So there's nothing much that Hedge Clippings can really add to our comments of last week - namely that the polls might be incorrect, the result seemed to be up in the air, and that a tie or contested result wasn't out of the question. The sad reality is that whatever the result, the USA, as "leader" of the democratic world, will be at best divided, and at worst...

Back to interest rates, but more importantly to their "QE" program - namely buying $100 bn. of government bonds ($80bn Federal, $20bn State) over the next six months. While the new ultra-low rates won't make much difference to borrowers once the banks do/don't pass all the savings on, from the perspective of a depositor there doesn't seem to be much of a case for leaving any money in the bank. Unless of course you're worried about loss of capital.

While caution is required when reading glitzy ads (for example Mayfair 101 as reported by the AFR's Jonathan Shapiro) there are good opportunities to get both a reasonable return with acceptable risk. Check out www.fundmonitors.com.

We're living in strange times, and a strange economy. Major exports are under threat from China, who seem intent on punishing Australia for not kow-towing when told to, and having the temerity to have an independent opinion.

Domestic and regional tourism however seems to be going gangbusters, and with the opening up of state borders (more or less) likely to make up for much of the loss of overseas tourists.

Meanwhile Europe, and much of the rest of the world, continues to suffer with little end in sight to a long (indoor) winter.

As the old Chinese curse goes, "May you live in interesting times".

News & Insights

Video interview with Richard Ivers from Prime Value

ESG INSIGHTS Biden's most critical investment by Nikko Asset Management