NEWS
14 Apr 2023 - Hedge Clippings | 14 April 2023
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Hedge Clippings | 14 April 2023 Jim Chalmers headed off to Washington this week for meetings with the G20, the World Bank, and the International Monetary Fund (IMF) among others, and ahead of his first full federal budget in May. The Treasurer's visit coincided with the IMF's release of their latest economic outlook, which to say the least, was not rosy, predicting an uncertain global outlook driven by financial sector turmoil, high inflation, the ongoing effect of Russia's invasion of Ukraine, and three years of COVID. |
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News & Insights Market Commentary - February | Glenmore Asset Management March 2023 Performance News Skerryvore Global Emerging Markets All-Cap Equity Fund Bennelong Emerging Companies Fund Delft Partners Global High Conviction Strategy Bennelong Twenty20 Australian Equities Fund |
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6 Apr 2023 - Hedge Clippings | 06 April 2023
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Hedge Clippings | 06 April 2023 Last week's Hedge Clippings correctly predicted that the RBA would hit the pause button on their combined rate rises of 3.5% since last May. However, the key word is "pause". As always, after all the preliminaries in the RBA's post meeting statement, check out the last paragraph, and particularly the final sentence: "The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that." That target of course is the oft' quoted range of 2-3%, but the Governor's statement also noted that inflation, while moderating, is not expected to reach "around" 3% until mid 2025. As we also discussed last week, while the latest monthly inflation figures are improving, (no doubt helping the "cause for a pause") the tight labour market, as evidenced by unemployment at 3.5% and at around 50 year lows, coupled with calls for wage increases in some sectors of 6-7%, are a "cause for concern". The RBA release noted that at the aggregate level wages growth is still consistent with their inflation target, (i.e.2-3%) but our best guess is that this is where the wheels may fall off the RBA's calculations. The RBA's statement referred to it in classic central bank-speak by saying the board will "pay close attention to both the evolution of labour costs and the price setting behavior of firms". By which they also presumably mean the public sector in the Labor controlled mainland. Calls for Philip Lowe's head on a platter have (sensibly) diminished over the past couple of months, but going forward this will no doubt depend on him being able to navigate the narrow path between taming inflation with higher rates, and so slowing the economy, and at the same time achieving a soft landing. That's a tough juggling act. For the moment - at least for another month - the RBA is buying some time as they wait for clarity on both inflation, and the effect of their efforts to control it over the past 12 months. Thereafter, expect rates to rise by another 0.15 to 0.25%, while any reduction - barring a recession - seems a long way off. Meanwhile, staying on the RBA, their latest Financial Stability Review, released this morning, looks at household budgets and associated financial stress, and confirms the bank's Baseline Economic Scenario; namely, that over the course of 2023 unemployment increases slightly to 3.75%, incomes will grow by 4.25%, expenditures will increase by 4.75%, and the cash rate will peak at 3.75%. In that scenario, the RBA predicts that around 15% of households will have "negative spare cash flow" (aka mortgage and living expenses greater than income), which from the perspective of the overall economy, they expect to be manageable. The Adverse Scenario - unemployment rising to 5.5%, under-employment 8%, and with wages growth and inflation dropping as a result, would see 17% of households with negative spare cashflow - as usual with the stress falling unevenly on lower income borrowers with low, or zero, savings buffer. The Bank expects the broader financial stability implications (i.e. damage to lenders' balance sheets) to be limited. However, as Philip Lowe pointed out in his address to the National Press Club earlier in the week, one of his major concerns is the level of inflation and stress in the rental market, where the data and statistics are more difficult to assess. This is dry subject matter for a Thursday, but we'd like to take this opportunity to wish everyone a safe and "Happy Easter" or whatever you may be celebrating. |
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News & Insights New Funds on FundMonitors.com 10k Words - SVB Special | Equitable Investors Cyber security - the new world order | Magellan Asset Management March 2023 Performance News |
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31 Mar 2023 - Hedge Clippings | 31 March 2023
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Hedge Clippings | 31 March 2023 Good news on the inflation front! This week we saw Australia's CPI decline for the second month in a row to an annualised rate of 6.8%, down from 7.4% in January, and from 8.4% in December last year. One would imagine it's too early to expect the RBA to cut rates at their meeting next Tuesday, but it does bring about the possibility of a "pause", and no doubt a collective sigh of relief from homeowners, and probably RBA Governor Philip Lowe as well. However, as the saying goes, "one swallow doth not a spring make", and while it looks as if overall inflation may have peaked, there's a risk that wages-linked inflation has yet to impact the full CPI numbers. Casting our minds back a year or two, inflation seemed dead in the water - in fact, the RBA was concerned about disinflation, which of course was one of the reasons Lowe and the RBA were caught unprepared, in line with virtually every other banker and economist in the world (outside Argentina, where inflation hit 102.5% in February). Two events coincided - the sudden invasion of Ukraine forcing up energy prices, and the widespread easing of COVID restrictions, at the same time as China closed or locked down, creating a supply chain driven jump in the price of imported goods. That was followed by more general price increases of goods and services, some of which might have been opportunistic, after a long period of stability and margin compression. What is yet to come is inflationary pressure as a result of wages, with the RBA's estimate of wages growth of 4.2% year on year likely to be exceeded given the ACTU are pushing for increases in line with inflation, and East to West labor governments are more likely to agree or give in to them. If that's the reality, then the RBA's core inflation target of 2.9% by mid 2025 - or hope that the inflation genie is back in the bottle at 2-3% - is looking optimistic at best. Our (uneducated) guess is that 2-3% inflation may be a long way off, if ever. Maybe the low inflation, QE induced post GFC era was a one-off - and apart from the low inflation, in some ways, we hope that's the case. For a more educated analysis this piece of research from the nab - although over a month out of date, argues the case in more detail than we can. So all eyes will be on the RBA's announcement at 2.30 next Tuesday afternoon. We expect a welcome pause, but any reduction to be way off in the distance. Meanwhile, it was good to see Teal MP for Wentworth, Allegra Spender hosting a round table of experts - including Ken Henry - to shake up Australia's taxation system. As the discussion was only being held today in Canberra it's too early to comment on the outcome, but hopefully it puts some pressure on both major parties to take the subject of real tax reform (and not just tinkering with super balances affecting 0.5% of the population) out of the too hard basket, and into the action tray, as detailed in Hedge Clippings on March 10th. Australia and Australians are being held back by an overly complicated, inefficient tax system that governments of both persuasions have contributed to, and don't have the political will to fix. Maybe the independents will force them to get on with some real reform. |
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News & Insights Market Update February | Australian Secure Capital Fund Investment Perspectives: Is the Aussie residential market bottoming? | Quay Global Investors February 2023 Performance News Insync Global Quality Equity Fund Bennelong Long Short Equity Fund Equitable Investors Dragonfly Fund |
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24 Mar 2023 - Hedge Clippings | 24 March 2023
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Hedge Clippings | 24 March 2023
What defines the best managed fund? This week we thought we'd give politics and politicians a rest, as well as tax and the superannuation system. We're not even going to elaborate on the frailty or otherwise of the US or global banking system, except to say "who ever thought the Swiss would run into trouble?" Instead, we're looking at the performance of equity markets, and managed funds - and specifically the best performing ones, over varying time frames. We also refer to an excellent article (see link) by Romano Sala Tenna, Portfolio Manager at Katana Asset Management in Graham Hand's excellent "First Links" newsletter. The essence of the article is that time, and patience, are the keys to successful long term investing in the equity market. While there may be some volatility along the way, Romano clearly shows that the market's direction (given time) is always upwards. Which of course begs the question why so many investors try to "punt" the market, with highly variable results. Maybe it is simply the love of the punt, or possibly one, the other, or both of the two most common flaws of investing; greed and fear. As Romano points out, the sharpest fall (3 months) in the history of the ASX was in early 2020, thanks to COVID. Those who sold in February or March 2020 missed out on one of the strongest rallies which followed. He also points out that the market has averaged a return of 10.8% over the last 147 years. That may be longer than most fund managers propose, but you probably get the point. Romano's message is to invest for the long term and stay patient. As the chart below shows, on a rolling basis if you had invested in the market for any 8 year period since 1875, you won't have experienced a negative return. Some might wonder why, given Fund Monitors' focus is on managed funds, we're looking at investing directly in the market. Quite simply, choosing a managed fund is not so easy investing in the index. Managed funds come in all shapes and sizes, and performance varies between them. Performance also varies over time, and we would agree that when analysing the performance of funds one has to look at performance over the longer term. However, some of the best performing Australian Long Only funds over one year don't always back it up, year after year. The top 10 performing funds over the longer term however (7 years) don't always appear in the top 10 over 5, 3, and 1 year. Careful analysis shows consistency (at least in the top 10 list) is difficult to achieve. For the record, Romano's Katana Australian Equity Fund makes the Top 10 list in all four time frames - 1, 3, 5, and 7 years. Rob Gregory's Glenmore Asset Management doesn't have a 7 year track record but makes the top 10 over 5, 3, and 1 year. DMX Capital Partners and Anacacia's Wattle Fund appear in the top 10 tables 3 times, each over 7, 5, and 3 years. Analysis of managed funds isn't as simple as just selecting the top performing funds. Join our webinar "Making the Most of Fund Monitor's Data" next week, either on Tuesday 28th at 11:30 in the morning, or alternatively on Thursday 30th at 4:00 in the afternoon (both AEST) and we'll give you a site tour and tips on how to use the website to compare and track over 700 funds. |
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News & Insights Experiences Rule! | Insync Fund Managers Trip Insights: Americas | 4D Infrastructure February 2023 Performance News Digital Asset Fund (Digital Opportunities Class) Insync Global Capital Aware Fund Bennelong Emerging Companies Fund Emit Capital Climate Finance Equity Fund |
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17 Mar 2023 - Hedge Clippings | 17 March 2023
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Hedge Clippings | 17 March 2023 With friends like Keating, Albo doesn't need enemies! This week saw former PM Paul Keating, the Labor Party's elder statesman, and in his day chief head-kicker of the Liberal Party, give an almighty serve to PM Anthony Albanese, his deputy and Minister for Defence, Richard Marles, and Foreign Minister Penny Wong. This was vintage Keating, except it seems he's become a grumpy old man. Once upon a time he mixed sarcasm and humour to make his point. This time it was pure bile, and all the more extraordinary as it was aimed at his own troops. With friends like that, who needs enemies? In our view it was also hypocritical of Keating to say of Penny Wong: "Running around the Pacific Islands with a lei around your neck handing out money, which is what Penny does, is not foreign policy. It's a consular task." For the record, below is a photo of the then PM wearing what looks like a cross between - we're not even sure how to describe it - and wearing a lei around his neck, back in the day when he thought he was the Messiah. An opinion of himself he obviously still holds. Both the photo above and Wednesday's verbal spew were of course theatrics, but what's apparent is that Xi Jinping's hand is seriously manipulating somewhere up the back of the Keating puppet. He seems to think China is blameless, faultless, and just a benign and growing power in the Pacific, and around the globe. Forget human rights abuses, forget the facts, forget playing the ball - play the man, or in this case the woman. And when Keating was asked a question he didn't want to answer - by a young (female) journalist - he used the old get-out-of-jail put down response: "the question is so dumb, it's hardly worth an answer." And to another journalist's question on human rights and the treatment of Uyghur minorities in Xinjiang, he said it was open to debate, and deflected the question by referring to India's treatment of Muslims. Here's what Amnesty International say about China's approach to Ethnic Autonomous Regions: "The (Chinese) government took extreme measures to prevent free communications, independent investigations, and accurate reporting from the Xinjiang Uyghur Autonomous Region (Xinjiang) and Tibet Autonomous Region (Tibet). The government continued to implement far-reaching policies that severely restricted the freedoms of Muslims in Xinjiang. These policies violated multiple human rights, including the rights to liberty and security of person; privacy; freedom of movement, opinion, and expression, thought, conscience, religion, and belief; participation in cultural life; and to equality and non-discrimination." Keating's approach is, and always has been, to tip a bucket on anyone with the temerity to challenge his bigoted view of whatever subject he chooses to be an expert on. And there aren't many he doesn't! He obviously loves China, and equally hates America. As for the cost of the submarines under the AUKUS deal, it is budgeted at A$368 bn. in total through to the mid 2050's. China's announced defense budget this year alone is US$224.8bn. (A$321bn.) up 7.2% in 2022, although the Center for Strategic and International Sudies (CSIS) reports the actual figure maybe 1.1 to 2 times higher than the official budget. According to this search of Google, China has 79 submarines, 12 of which are nuclear powered and armed. China's defense spending in 2021 was higher than the next 13 Indo-Pacific countries combined. No doubt Keating will pooh pooh those figures as well. One can argue the cost and the strategic and military wisdom of the AUKUS deal, but while Keating's kow-towing to China might win Xi's praise, it won't win his respect. And while there's some months to go yet, it's our guess he's off Albo's Christmas card list this year! Moving right along... Good to see Ken Henry re-enter the fray, arguing for a complete re-think of Australia's over complex and outdated tax structure. However, as we argued in last week's Hedge Clippings, finding politicians of any persuasion to grapple with the issue won't be easy. But maybe if there's bi-partisan support for AUKUS submarines, there's a chance? Contagion in the banking system has been front and centre of the financial pages since SVB ran out of cash last week, thanks to rumours that spread virally via social media and Silicon Valley's IT savvy elite, with the problem spreading to First Republic Bank. At this stage, it seems that the contagion, while real, will be contained by all banks standing shoulder to shoulder, but it's a clear reminder that when faced with the potential for loss of capital, bank depositors large and small will act first, and ask questions later. And finally, Happy St Patrick's Day to the (reported) 70 million people of Irish heritage who live outside Ireland, and to the 7 million who still inhabit the Emerald Isle. Ireland plays England in the six nations rugby in Dublin tomorrow, and based on form should win hands down, as long as the Irish team didn't overdo their St Patrick's day celebrations beforehand. |
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News & Insights New Funds on FundMonitors.com Manager Insights | PURE Resources Fund The Long and The Short: Could the year ahead defy the Fed? | Kardinia Capital Stock Story: Walmart | Magellan Asset Management February 2023 Performance News Bennelong Kardinia Absolute Return Fund Skerryvore Global Emerging Markets All-Cap Equity Fund Bennelong Australian Equities Fund L1 Capital Long Short Fund (Monthly Class) |
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10 Mar 2023 - Hedge Clippings | 10 March 2023
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Hedge Clippings | 10 March 2023
Let's have a real conversation about tax! Following the flurry of indignation, debate, and media comment raised by the government's changes to super balances over $3 million, everything seems to have gone quiet. Maybe this is just the temporary or short-lived nature of the news cycle, or possibly that it's hard to maintain the rage or focus on something that affects less than 1% of the population, and a seemingly privileged one at that. However, that doesn't change a couple of key issues we have with Dr. Jim's "discussion" with Australians about the purpose of their super. Firstly, the increased 30% tax rate is triggered by the value of the asset, not the amount of income earned. Secondly, if triggered, tax is payable on both realised and unrealised gains. However, those are just the details. What also seems illogical is that Treasury forecasts estimate the new tax will raise just $2 billion out of almost $250 billion a year in concessions, or less than 1% of the total. Watch out, because what the government would really like to do is to come after some of the remaining 99% if they can. Of course to do that - as Bill Shorten discovered in 2019 - they'll upset far more voters than the 0.5% impacted by their current plans, most of whom are unlikely to be Labor voters in the first place. Of course, what is needed is a total review or conversation, not only around super but the overall taxation system in Australia. We had one of those in the form of the Henry Tax Review (aka Australia's Future Tax System Review) announced by then PM "Kevin '07", in 2008. Having taken 2 years to prepare, this was handed to the hapless Rudd two days before Christmas in 2009, but not released until May the following year. For the record, Kevin Rudd was also careful to shackle Henry's review before it started. It was not allowed to consider increasing the rate of, or broadening the base of the GST, or consider imposing tax on super payments to retirees aged over 60! Henry's report made 138 recommendations grouped under 9 broad themes. Rudd implemented just 3 of the 138 changes suggested in the report, lost his job over one, the proposed resources Super Profit Tax, which became the Minerals Resource Rent Tax (MRRT), passed in 2012 under Julia Gillard, and promptly repealed by Tony Abbott in 2014. History shows it is wise to choose your targets carefully, and avoid upsetting the powerful, and in the case of the resources Super Profit Tax, well resourced (pun intended) self interested companies, 83% of which were reportedly offshore owned. History also shows the futility of trying to overhaul or change the existing system, however broken, inefficient, or inequitable it may be. Most of Henry's report and its recommendations remain in the too hard basket, gathering dust. Some, such as a reduction in company tax, have been partially implemented. This leads us to two questions: Firstly, will we ever get the reform Henry's review proposed, such as just two levels of personal income tax and a much higher tax free threshold ($25,000), across the board company tax of 25%, and a simplification of superannuation, deductions, and offsets? And secondly, will any politician ever dare to increase the GST from its current 10%, and broaden its base in return for a reduction in personal income tax? This 2020 report from PWC estimated that by increasing the GST rate to 12.5% and broadening the base to include water, childcare, health, education, and food, it would generate $40 billion a year - so a rate of 15%, (as it is in New Zealand) let alone 20% (the OECD average rate is 19.3%), it would presumably take that towards $100 billion. The answer to both questions is "unlikely" given the political pain involved. However, that's the conversation Dr. Chalmers needs to have with Australians. And then get on with it! |
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News & Insights New Funds on FundMonitors.com Market Commentary | Glenmore Asset Management Investment Perspectives: 10 charts for optimism in 2023 | Quay Global Investors Magellan Infrastructure Strategy Update | Magellan Asset Management February 2023 Performance News 4D Global Infrastructure Fund (Unhedged) Delft Partners Global High Conviction Strategy |
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3 Mar 2023 - Hedge Clippings | 03 March 2023
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Hedge Clippings | 03 March 2023 Last week's Hedge Clippings warned readers to beware of politicians with a hand in one's pocket. This week, let's double down on that, and just make it "beware politicians". Of course in this specific case, we're referring to the Treasurer, Dr. Chalmers, and PM Anthony Albanese, and their changes to the taxation of superannuation balances above $3 million, although it applies pretty universally to the lot of them (politicians that is, not super balances). However, specifically, everything Chalmers and Albo have said and done on this has either been smart, sneaky, or maybe a bit of both, depending where you're coming from. Where do we start? Let's go back a year to when both were in election (aka "don't scare the horses") mode when they were at pains to assure voters there would be no changes to superannuation. How to overcome that little obstacle? Delay the introduction of the changes until July 2025, beyond the current parliamentary term. Sneaky or smart? You be the judge. Then there's Jim Chalmers saying just a couple of weeks ago that "we need to have a conversation about super's sustainable future." Lo and behold, just a week or so later it's set in stone, and it wasn't so much a "conversation" as an edict. Much like the "conversations" yours truly was invited to have many years ago in the headmaster's study, when there was only going to be one, or normally six, painful outcomes. Either Chalmers had been doing more than writing his 6,000 word essay over his Christmas holiday, or he's suddenly had an epiphany of the taxation kind.  Leaving the politics and weasel words aside, let's take a look at the policy itself: It's hard to argue that those with more income shouldn't, or are unable, to pay a greater proportion of it in tax. But Chalmers' plan doesn't hit those with high income from their super accounts, it is triggered based on the value of a member's balance, but taxed on the earnings - plus those earnings include un-realised gains. As far as the overall benefit to the budget's bottom line, Treasury's modeling indicates that there is over $250 billion a year in taxation concessions from a variety of sources, including negative gearing, franking credits, and CGT, of which super accounts for around $45 billion. Of that $45 billion, $23.3 billion is made up of concessional tax rates on contributions, and $21.5 billion from concessions on earnings. Increasing the tax on earnings from 15% to 30% on balances over $3 million will raise $2 billion a year. The government doesn't seem to have thought this through - although they've certainly thought about the politics. There's outcry and opposition enough, even though less than 1% of the population are impacted in an effort to claw back $2 billion from the overall concession pool of $250 billion. Think of the response if negative gearing ($24.4bn), CGT on a main residence ($48bn), CGT on assets held for more than 12 months ($23.7bn), or franking credits ($17.2bn) had been in their sights. Of course, Bill Shorten discovered the response to any changes to franking credits in 2019 by ignoring the fact that there are 3.1 million direct recipients from that source. It's pretty easy to sell the policy to the 99.5% of the population theoretically not impacted by it, as long as that's an accurate estimate, as clever Jim has deferred indexation of the $3 million until it is someone else's problem. (Meanwhile, the FSC has estimated that up to six times as many workers will be affected over time.) And while the critics have Chalmers and Albanese in their sights, let's not forget that successive governments have tinkered with the taxation of super ever since it was introduced by Paul Keating way back when. |
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News & Insights 10k Words | Equitable Investors The global inflation bogeyman slips away... | Insync Fund Managers Airlie Quarterly Update | Airlie Funds Management January 2023 Performance News |
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24 Feb 2023 - Hedge Clippings |24 February 2023
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Hedge Clippings | 24 February 2023 Beware of the Politician with his hand in your pocket... The government set the proverbial cat among the pigeons this week with the "floating" of ideas to change the superannuation system - with a particular emphasis on the top end of town, and it seems those fortunate - or smart enough - to have a super balance of $3 million or more. Depending on where you sit - or maybe that should be where your super balance sits - this is either irrelevant or a clear breach of then shadow treasurer Jim Chalmers' statement on the ABC in March last year that "Australians shouldn't expect major changes to superannuation if the government changes hands." Chalmers is on electorally safe ground for two reasons: Firstly, it's a fair bet that Labor will stay in office for at least one term after the present one, and secondly, he quotes the statistic that the average balance in super is about $150,000. Of course, this is misleading, presumably deliberately, so as not to alienate the "average" voter. The average balance includes those who have only recently joined the workforce - and by recently that would include those on "average" wages who've been working for the past 20 years. According to AMP, you'll need to be closer to 50 than 40 to have a super balance of $150,000 while the average super balance of a 65-70 year old male is $414,380, and $370,042 for a female. Unfortunately, AFSA calculates that a comfortable retirement lifestyle requires a balance of $640,000, so the average is not going to be enough for the average retiree. Super is great, but for the majority is not enough. Chalmers, Albanese, and Assistant Treasurer Stephen Jones have all hit the airwaves to re-iterate that any changes are fairly and squarely aimed at the top end of town, and unlikely to resonate elsewhere - although they should. For far too long superannuation has been tweaked by both sides of politics to the extent that it is incomprehensible to the average (there's that word again) worker. Successive governments have used a combination of carrot (tax incentives for voluntary contributions) and stick (legislation to compel employers to pay or deduct from wages) to reduce the reliance on welfare in retirement. Both have been successful but only up to a point. The stick has helped, but not enough to provide a comfortable retirement to the average retiree. Meanwhile, the carrot has, for those in the treasurer's sights, been overly successful, such that he wants his share of their success! You can't offer a carrot, then take a stick to those who make the most of it. You know what they say about the dangers of having a politician's hand in your pocket... While it seems the devil will be in the detail, hints are that the aim is to limit the amount one can have in super to $3 million. This seems patently unworkable to a simple mind such as ours. More logical would be to set a reasonable tax rate for income over a certain level (excluding capital withdrawal) from super in retirement. That won't be popular either, because once a tax has been introduced it will only be a matter of time before it is increased. Chalmers is trying to avoid the stuff-up Bill Shorten made suggesting changes to franking credits before his 2019 election loss. His other target might be negative gearing on property, but too many pollies have second properties (Albo included) so that's not likely as too many votes would evaporate. Taxing the super of the rich (and the not so rich) is a much safer option. |
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News & Insights Market Update January | Australian Secure Capital Fund China re-opening post COVID | 4D Infrastructure January 2023 Performance News Bennelong Long Short Equity Fund Digital Asset Fund (Digital Opportunities Class) Insync Global Quality Equity Fund Glenmore Australian Equities Fund Delft Partners Global High Conviction Strategy |
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17 Feb 2023 - Hedge Clippings |17 February 2023
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Hedge Clippings | 17 February 2023 This week Hedge Clippings thought we'd give inflation, interest rates, and RBA Governor bashing a rest. After all, it's been front page news for a couple of weeks (or should that be months) and culminated in Philip Lowe appearing before a Senate Committee grilling today for the second time this week. For the record, he's sticking to the script that inflation is the number one problem, that unemployment could reach 8.5% if it wasn't fixed, and the only way to fix it is to keep on raising rates even at the risk of recession. He acknowledged, as we suggested last week, that increased interest rates hurt the vulnerable most, and the impact "is being felt very unevenly across the community". Being in the sights of politicians asking some plainly uneducated questions (surprise, surprise), he did have a dig back, saying that he could make decisions that politicians couldn't, or wouldn't, with this comment: "It's hard for the political class to take the short-term decisions to manage the cycle." Ouch! Moving right along... If ever there was a year to reinforce the twin benefits of diversification, and taking a long-term view when investing in managed funds, 2022 would be it. Surprisingly, given the well publicised, painful, and costly examples of ignoring each, (or both) they're two of the standout lessons from an analysis of 2022 fund performances. Against a backdrop where few anticipated the sudden outbreak of inflation, or the speed and extent of central banks' reaction, overall the market had a shocker. The 12 month returns of 16 Peer Groups to December 2022 shows that only Debt (+5.11%) and Hybrid Credit (+4.20%), and to a lesser degree Infrastructure (+0.94%) provided investors any comfort. Equity funds, particularly Small/Mid Cap, both in Australia and globally, bore the brunt at -19.34% and -23.31% respectively. On a relative basis, Australian Small/Mid Cap funds underperformed their overseas peers with the average fund (-19.34%) underperforming the broader ASX200 T/R index (-1.08%) by over 18%. By comparison, while Global Small/Mid Cap funds averaged a negative return of -23.31%, this was "only" 5% below the S&P500 total return of -18.11%. While one can therefore argue that small caps weren't the place to be in 2022, taking a longer view - as recommended in every offer document for a managed fund we've ever seen - provides a more balanced view. In the three prior years, 2019-2021, Australian Small/Mid Cap funds returned 27%, 18%, and 21% p.a. respectively, and over the prior 10 years this group had only one negative year (-6.5% in 2018) and no less than six years of +20% returns. Taking it back even further to 1995, this Peer Group has returned an average of over 15% p.a. with an up capture ratio of 137% (in other words, 37% above the market's return when it is positive) and a down capture ratio of 95% (showing when the market falls, they fall almost as much). For the record, not all small/mid cap managers suffered as badly, but consistency across the cycle is difficult. Over 3 and 5 years only two - Anacacia Wattle Fund (+16.79% and 16.73%) and Glenmore Australian Equities (+16.37% and 17.42%) beat the long-term (25 year) peer group average of 15% and outperformed the ASX200 in 2022. And while some investors in Small/Mid Cap funds may be nursing losses in FY2022 (average -17.58%) that had reversed by FY January 2023 to +12.18% since July last year. There lies Lesson #1: Investing in managed funds requires a long term view. Lesson #2: Diversification, and distribution of funds' and indices' returns. Diversification is a two edged sword: Over diversification can flatten performance. Concentration - such as investing in a single fund or product - can lead to significant under-performance. While still on the small mid cap peer group - although this runs true across the board - the spread of performance is significant, particularly in market sell-offs. 2022 saw small/mid cap managers' performance range from +3.53% through to -43%. The dilemma, for investors and advisors alike, is how much to diversify, and how to avoid long-term underperformers, or worse still, the likes of Mayfair 101. |
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News & Insights 10k Words | Equitable Investors Magellan Global Strategy Update | Magellan Asset Management January 2023 Performance News Argonaut Natural Resources Fund Bennelong Concentrated Australian Equities Fund Quay Global Real Estate Fund (Unhedged) Skerryvore Global Emerging Markets All-Cap Equity Fund |
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10 Feb 2023 - Hedge Clippings |10 February 2023
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Hedge Clippings | 10 February 2023 As expected, on Tuesday the RBA did what everyone expected, and what they had to, raising rates by 0.25% in the sharpest and fastest series of increases in recent (and probably longer) memory. Even though expected by 100% of market economists, investors didn't take too kindly to it, with the ASX falling almost half a percent on the day, and after a brief rally on Wednesday, continuing to fall since. It wasn't what the RBA did that upset the market, but what RBA Governor Philip Lowe said - particularly, as we always point out - in the last paragraph (and in this case the last sentence) or so of their statement: "The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve this." That's RBA speak for "expect more rates rises to come," so unless things on the inflation front change direction quickly, 3.85% seems a forgone conclusion, possibly by May or June, and with every chance of that tripping the 4% mark in the second half of the year. Amid all the forecasts of widespread mortgage stress and damage to household budgets, the hard and nasty truth is that's what the RBA is aiming at - or at least to force consumers to rein in spending - to try to quell inflation. Unfortunately, it's not a level playing field in mortgage land, and to quote Bill Gates, "Life's not fair. Get used to it". Of course, Bill can afford to say that, but the RBA has a problem with the un-level field when using mortgage rates - as only one third of households have a mortgage - to tame inflation. The other two thirds are less, or not impacted, so they're probably still spending, even if their morning flat white is now costing them over $4 a pop. But there's more to the un-level field: Amongst the one third of households with mortgages, there are those who are more stressed than others - either by virtue of being on lower incomes, having only recently taken out a mortgage thanks to the RBA's "no rate rise until 2024" prediction, those about to come off a low fixed rate onto a higher variable one, or those with smaller savings to dip into to buffer to rise. Assuming (this is a guess) 20% of all mortgages are in the above categories, that's less than 7% of the overall population. At 50%, it rises to just over 15% of the total. This may sound as if we're being callous or uncaring. Far from it. The point is that the RBA needs to change the spending habits of the majority, not just the minority, a point they acknowledge (along with the lagging effect of higher rates) in the penultimate paragraph of their February Statement on Monetary Policy. So while they may be mindful of the uneven pain they're causing on the un-level playing field of life, "The Board's priority is to return inflation to target." And that's not going to happen at least until Santa's been around again (if we have a recession) or possibly after he's been back twice (if there's a soft landing). So, as Bill said, "get used to it". Over to markets and fund performance: As everyone knows, last year's outbreak of inflation was a shock to everyone, including the RBA, as was Ukraine, (except to Putin). The market tanked for the first nine months of the year and has since recovered strongly, such that the 12 month performance of the ASX200 Total Return to the end of January was +12.21%, significantly better than the S&P500 equivalent of -8.22% for an out-performance of over 20%. AFM's Peer Group Comparison tables show a similar, although more variable pattern, such that over both three and six months to the end of January, ALL Peer Groups, with one exception (Alternatives, which includes Crypto funds) were in positive territory. The top performing Peer Group over 12 months was the Equity Long Large Cap group, which returned just over 8% on average, with 25% of those out-performing the ASX200 TR and the top performer, the Lazard Select Australian Fund returning 32%. |
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News & Insights Market Commentary | Glenmore Asset Management Cycle is not a dirty word | Airlie Funds Management January 2023 Performance News 4D Global Infrastructure Fund (Unhedged) Bennelong Australian Equities Fund L1 Capital Long Short Fund (Monthly Class) |
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