Hedge Clippings | Friday, 16 October 2020

For those readers of Hedge Clippings who recall the pre-Covid days when we could be a little more light-hearted in our weekly comments, join the club! Life seemed less tedious then, when even the Donald's latest missive or tweet, while still raising eyebrows, sometimes made for interesting reactions. Now we're subjected to daily statistics - be they counting cases and testing, or the trillions being spent to overcome the effects.

Not to be outdone, a couple of weeks ago Hedge Clippings included the comment that Active Equity Managers (be they long-only, long-short, or other alternative strategies) would be under pressure to justify their fee structure compared with the apparent attraction of low cost ETF's or Index funds. At that time it was too early in the month to provide the necessary statistics for the 12 months to September.

The fee debate is one that is regularly raised, not only relating to managed funds, but also when considering superannuation funds. While it is justifiable to consider fees, whether in total, or as a percentage of cost, the real test investors and advisors should also be considering is "value for money". Of course, in the case of managed funds this comes down to relative performance and risk - or at least avoidance or reduction of risk - which one would assume are what the investor is looking for, and the manager is hoping to provide.

There are some who object to high fees in principle (in spite of those same people owning or coveting expensive cars, or happily paying for quality elsewhere) but this ignores the value for money argument. Would you rather invest in an ETF which replicates the ASX or ASX200 with fees close to 0.5 or 0.10%, or an Active Equity Manager charging say 1 or 1.5% plus a performance fee of say 15%?

The answer of course is "it all depends on the performance - or the risk/reward ratio" - assuming that when comparing performances one looks at net performance after fees. That allows the investor or their advisor to make an informed decision about value for money - in conjunction of course with the myriad of other evaluation factors to take into consideration.

So is it worth paying the various fees charged by "Active Managers"? In some cases the answer is a resounding YES, in others, sadly NOT as the charts below clearly show:

Firstly, let's take the last 12 months (to the end of September) when the ASX200 Accumulation Index (ASX200 AI) returned -10.21% vs. Active Funds -0.94%. Over that period 76% of Active Equity Funds outperformed, with the "outperformers" returning on average 4.16% - or over 14% against the ASX - and by implication, an Index ETF.

But within that group there was widespread divergence or distribution of returns - negative -10.03% through to +39.13%. One would assume that a manager returning -10.03% charging 1.3% management and 15% performance (obviously not paid as it was negative) would not qualify as good value for money, whilst the one returning +39.13% was well worth their higher management fee of 1.6% and 20% of performance.

Over 3 and 5 years the numbers for the ASX200 AI have been better (but not stellar thanks to the past 12 months) but Active Managers on average have still outperformed, but not to the same extent, perhaps strengthening the argument that they don't provide value for money. Once again however, this is dependent on selecting the right fund, as the charts below show.

And for those who prefer the numbers rather than the picture, below is the data for 12, 36 and 60 months to September 2020, or for details of all funds visit www.fundmonitors.com.

The graphs and table above only considered funds on the www.fundmonitors.com database that invest in Australian equities.

Hedge Clippings | Friday, 09 October 2020

As much as Hedge Clippings would like to avoid the "C" word, there's no escaping it. Covid is so much a part of all our lives, such that the news is dominated by infection, testing, and mortality statistics both at home and abroad. And looking back at recent editions of Hedge Clippings, we have been as guilty of being Covid focussed as anyone else.

Realistically, as much as we'd love to move on, Covid isn't just about the present as this week's delayed budget shows. Even allowing for some political spin, the Goverment's Budget 2020-21 summary included the following headline:

"The once-in-a-century COVID-19 pandemic has fundamentally reshaped Australia's economic and fiscal outlook."

Without the spin, the word "outlook" would, or should, have been replaced by "future". From a forecast surplus of $6.1 billion (0.3% of GDP) in 2020-21, the figure is now a deficit of $213.7 billion, or 11.0% of GDP. Somewhat optimistically this is expected to improve to 3% in 2023-24, and then decline further to 1.6% by the end of the medium term. Hedge Clippings is not exactly sure of the definition of "medium term", except it's likely to be well beyond 2024. Although we guess, like age, it's relative. A bit like a medium bodied wine, but maybe we're getting ahead of ourselves, even though it is Friday afternoon.

To be fair, there's a valid get-out included: "Until a vaccine is developed and widely deployed, significant uncertainty remains".

Equally, we did opine last week that the government shouldn't hold back, urging the Treasurer to spend more, not less, but just not to waste it. What he did waste was the opportunity to ensure more of the nation's superannuation was funnelled into infrastructure spending, and as a result employment and the future. Maybe next year...

And given the global effects of Covid, the financial and health risks here are minuscule compared with those elsewhere. With the US election less than 4 weeks away on the first Tuesday in November (coincidentally also Melbourne Cup day), the polls are increasingly looking like a Biden victory, which if correct is going to significantly impact the future.

As of 6 October, according to the Guardian's poll tracker, Biden is leading 50.4% to Trump's 41.3%. Polls, however, can be misleading (just ask Bill Shorten) and the US system is not simply a case of who gains the most votes on the day (just ask Hillary Clinton). The outcome will undoubtedly affect markets, but the view that Biden is far-left seems to be incorrect based on The Economist's latest edition, which describes a Biden win as "only a little lurch leftwards" based on his spending proposals of around 3% of GDP (presumably excluding any Covid stimulus), compared with Bernie Sanders' 23%.

However, that's still considerable, with a forecast total new spending of US$7.27 trillion between 2021 and 2030, about half of which might be covered by tax rises, and the balance by public debt which is forecast to double - from the current 100% of GDP to a mouthwatering (for some) 200% by 2050.

Over $3.5 trillion in increased taxes will certainly scare a few (and possibly Trump amongst them if he ever gets to pay tax), but in reality only a few. Again from the Economist, the greatest change in after-tax income (-18%) as a result of Biden's tax plan will only affect the top 0.1% of income earners, followed by a fall of less than 10% for those in the top 99 - 99.9%. Even those in the 95-99% of income earners will only be worse off by around 2%, so they still should be able to scrape by.

The Economist describes Biden as "The Pragmatist". Assuming he wins - not a sure-fire outcome, and even if he does, there's no guarantee the current President will vacate the White House - it will certainly make for a change to the evening news.

Finally, before signing off we remember that today would have been John Lennon's 80th birthday had he not been shot in New York aged just 40.

News & Insights

Sep '20 - Speculative Markets, Deteriorating Backdrop, Where to Hide? by Laureola Advisors

Deferred loan repayments are hitting the banks by Montgomery Investment Management

New Funds on Fundmonitors.com