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We observe many investors with poor performance despite strong markets in the last few years.  Here are some ideas to help you address this in 2022.

1. Acknowledge the reality of your performance to date
Are you measuring your performance? If so, are you doing it holistically - taking account of all the wins and losses across your entire portfolio?  Then you're in a position to assess how well you're doing compared with how well you could be doing.  Once you do this, you'll often discover your performance is much worse than you thought (as many focus on and talk about the one or two good trades but overlook their losers).

Acknowledging the reality of this means accepting you're not using the best investment approach out there and there are better investment options than you struggling to be your own portfolio manager - or relying on those who don't deliver and untrustworthy people or institutions that often charge fees for delivering ordinary returns.  It means recognising that genuine expertise is worth finding and paying for and that it can add much more value and manage risk better than you have been doing.

2. Get rid of your under-performing broker or adviser
Many people we have spoken to over the years are seemingly trapped in a relationship with a broker that has not delivered for years.  Some of these brokers are snake oil salesmen, great talkers but hopeless investors with little or no alignment with their clients.  Australia is loaded with them.  The clients' capital is often being used as a large source of non-aligned revenue generation for the broker and their firm; the capital is used to fund the latest corporate deal the firm needs to fund for hefty corporate fees - and always seems to deliver little to no return to the client (with a million excuses why not or promises that things are just about to improve).  In effect the brokers' main clients are their investment banking arms as they are the main source of revenue generation for the firm, and the client is just a sucker that is sold sweet nothings.

There is a big advantage to being invested in a fund where the fund is the only source of revenue for the firm.  Firstly, the performance is clear, known, real and routinely calculated and produced by a third party, and secondly, the firm should only be remunerated by you the client and not have its main source of business being something that is using your money for some other benefit.  Ideally there is a clear alignment with the firm's principals invested in the fund themselves and paid mainly on performance, and not for asset gathering through having large amounts of assets or large base management fees.  That way, you actually have a much better chance of performing and can easily track your performance.

Some advisers are competent but many are not, and many trap their clients into convenient but perennially under-performing investment approaches.  Few are out there looking how to do a better job for their clients by having them invested with the best boutique investment managers globally.  Some invest their wholesale clients in the same assets as their retail clients for their own ease of business, when they should be invested differently to take advantage of all the benefits that wholesale investors have.

3. Think outside the square
Many want you to think that the only thing you can do is buy stocks and property and hope for the best.  This is far from the truth.  There is a world of alternative investment approaches which are better aligned with absolute return investors (which is most of us) and will better manage the risk over a full investment cycle than a long only investor can possibly do.  A simple example are investment managers which buy insurance to protect a portfolio against downside risks - reducing the chances of a disastrous portfolio outcome which sets you back for years.  Are you using managers that do this?  Or are you stuck in the traditional framework that's only suited to a bull market environment and will likely suffer greatly when markets fall?

4. Acknowledge the investment cycle
It has been a Goldilocks period for investment markets and a prolonged bull market.  Some completely naïve investors and investment approaches such as passive investing have done reasonably well from loading up on risk and not having seen that risk come to fruition (yet).  But this is changing and the investment environment is becoming significantly more hostile and much less likely to reward long only buy, hold and hope strategies.  Why?  Central banks are now moving to a significantly less "accommodative" stance as they threaten to reign in inflationary pressures in response to the massive societal inequities and inflationary pressures created by their policies and money printing favouring the wealthy ahead of workers.  Valuations of most assets are also very high and impute low forward returns with very high probabilities.  Recognise that the last few years have in effect been highly abnormal and simply unsustainable (What can't be sustained won't be.).

This means single digit returns from here are much more likely than double digit returns (at best).  And that risk management is now much more important to reduce the increased risk of large losses if valuations revert to longer term averages or inflationary pressures persist forcing a tightening in central bank policies.  Hence, it makes more sense to move to investment approaches with good prospective returns, better inflation protection, and much better protection from large losses than simply being long only and loaded with equity and property risk.  In fact, locking in high returns by reducing equity and property investments in favour of alternative strategies means that the abnormal gains of the last few years become permanent capital gains, protecting your wealth against the risk of large losses from market falls.

In summary
2022 is the year for radical change in the way you are investing.  There is huge potential to improve your results and better protect your wealth for a changing investment environment including:   

Step 1: Measure your performance across your entire portfolio in 2021 and be honest with yourself. If you are in a position where some of your investments have delivered little then avoid hope as a strategy or being frozen or convinced into doing nothing.  Cutting your losers is a good strategy. 

Step 2: Assess the value that has been added by your current broker or adviser relationships and stop using under-performers as these relationships are meant to add value to your bottom line, otherwise you are paying them for nothing or for treating you as a fool. Many of us are mistakenly loyal to long held relationships with sweet talkers that simply aren't in our interests. 

Step 3: Investigate alternative investment offers as there are many out there that are available to wholesale investors which better align with common investor objectives than traditional investment approaches.  

Step 4: Consider the investment cycle and ask yourself is this an environment where you think you can realistically continue using the same approach to achieve your desired returns.  If not then consider alternative approaches better suited to today's investment prospects and risks.  

There are many simple things you can do to protect your hard-earned capital and still make money, even in a more adverse investment environment.  Acknowledging the realities above is a crucial step in getting there.

Author Dr Jerome Lander, Founder and CIO

Just as the global economy started hitting its reopening stride, Omicron has seen uncertainty return.

First identified in Botswana, Omicron spread to South Africa where the alarm was raised on the 24th November. Since then, the variant has been confirmed in almost 40 other countries.

With around 60% of the global population fully vaccinated - the question is, how big a threat is this?

There are many unknowns when it comes to this new variant. These, along with the key facts we do know, plus the important signposts investor should track are discussed with Antipodes' healthcare portfolio manager, Dr Nick Cameron, in the latest episode of the Good Value podcast. 

Here are some of the key takeaways.

Transmissibility and severity

The Omicron variant has around 30 mutations in the spike protein - many more mutations or changes in the virus than we have seen in previous variants (of which many are new/novel). The spike protein is the key protein responsible for - and necessary for - the virus to enter or infect cells and cause symptoms.

Omicron has quickly become the dominant strain in the Gauteng province in South Africa. The infection growth rate profile appears higher than prior waves but importantly hospital admissions data looks more consistent.

Given borders between South Africa and many other countries were open to travellers for some time prior to the knowledge of the variant, it's no surprise Omicron has spread around the world.

Omicron appears highly transmissible but even if it's more transmissible, this doesn't necessarily mean its virulence (capacity to cause more severe disease) is also increased. Early signs suggest disease severity may not be any worse than Delta. For example, most hospitalised patients in South Africa had mild symptoms and few required high-level care.

While there are a number of mutations in the critical areas of the spike protein, there are many parts of the Omicron spike that remain unchanged. The immune system, including both T cells and neutralising antibodies in vaccinated people and in those that have recovered from prior infection (and have "natural immunity") should "remember" the unchanged parts of the virus, and provide some protection against severe disease and death.

Based on this, countries with high vaccination rates and high rates of community infection in prior waves will likely be the best protected.

Vaccine effectiveness

Given Omicron has so many mutations it is no surprise to see a marked reduction in the efficacy of current vaccines.

The most recent lab data shows the current two-dose regime of existing vaccines aren't as efficacious against the Omicron variant, but it's still too early to say how this lab data translates into real world protection against severe illness and deaths.

Boosting with current vaccines appears to lift protection, but this is likely to be short-lived. It increasingly appears an Omicron specific booster will be required, particularly for the more vulnerable populations like the elderly and those with higher-risk profiles for severe disease.

mRNA vaccine makers Pfizer and Moderna have already started developing new boosters which are specific to the Omicron variant - Pfizer's candidate could be available in March 2022.

More will be known on vaccine effectiveness in the coming weeks as more lab data results become available.

The key metric for investors

For investors, monitoring hospitalisations over the coming weeks will be key in assessing the extent of the risk posed by Omicron and the risk of further lockdowns.

So far, early indications suggest hospitalisation rates for Omicron appear low and vaccinations rates also appear to be lifting following the Omicron news. If vaccinated people, and particularly those that have also recovered from prior infection, are shown to only develop mild flu or cold like symptoms, this would be a positive sign in the fight against COVID-19. And positive in terms of the reopening continuing.

But it will take some time to collect enough data to confidently determine whether the Omicron variant is a threat to overloading health systems.

Two attractively priced healthcare opportunities amid the Omicron threat

Sanofi (EPA: SAN)

Sanofi is more than just a drug developer. A material portion of its earnings (~35%) comes from its vaccines and consumer health businesses both of which are more defensive, long-duration businesses compared to traditional drug development.

Sanofi is a leading manufacturer of vaccines, globally - it's one of only three scale flu vaccine manufacturers, and has a broad portfolio including polio and meningitis as examples, and a full pipeline of vaccines under development including two COVID-19 candidates.

Vaccines are attractive businesses. They require large scale manufacturing, are highly regulated and have high barriers to entry.

Sanofi's consumer health business is also one of the largest globally. Sanofi has a collection of well-known, over-the-counter medications and supplements and these businesses are very stable, generate high free cash flow and operate in markets which have more room to consolidate. When separately listed they can demand multiples of around 25x.

Finally, its drug business is one of the least exposed to patent cliffs over the next decade, has limited US drug pricing relative to peers, and a solid balance sheet with ample firepower to transform its pipeline.

The company's earnings are growing faster than peers, around the mid-teens level, and Sanofi is valued at just 11x earnings.

Walgreens (NASDAQ: WBA)

Walgreens has around 9,000 pharmacies in the US. In fact, ~80% of the American population lives within 5 miles of a Walgreens so the scale of their physical presence is a key competitive advantage.

But what really excites us is that Walgreens is leveraging its extensive retail footprint to provide healthcare services. Walgreens is transforming its physical locations into health hubs which will provide a range of healthcare services such as primary care, chronic disease management, vaccinations and specialty pharmacy services. All while the traditional prescription and retail offering continues.

Not only is Walgreens becoming a one-stop shop for healthcare needs, the margin profile of health services is much higher than the pharmacy business alone. Over time this could become a material driver of earnings growth and margin upside if the company is able to execute on its plans.

Once the healthcare services offerings are fully ramped up, the company's long-term earnings growth profile could reach 12-13% p.a. including buybacks, and it's valued at just 10x earnings.

The market is not pricing any value for the potential in health services and we see this a great pragmatic value opportunity.

Alison Savas, Client Portfolio Manager

FundMonitors closed for the end-of-year break before we could release this edition of the regular missive from Equitable Investors. Read and enjoy - the next issue will follow soon!

Our final 10k Words for CY2021 kicks off with The Economist's first cut on what events captured audience attention in the media during the year. We then range across Morgan Stanley's chart on China property sector's importance to commodities, the surge in VC investment in cryptocurrency startups illustrated by The Economist and Bloomberg's ranking of countries through time based on their COVID-19 vaccine penetration. We get into equities with Bespoke showing ETFs don't necessarily fulfill the diversification function that is expected of them and finally Equitable Investors' analysis of what has worked and what hasn't worked in CY2021 for ASX-listed micro-to-mid caps.

Impact of 2021 global events as measured by media activity (an initial draft analysis)

Source: The Economist

China property sector's contribution to commodity demand

Source: Morgan Stanley

VC funds piling into cyrptocurrency startups

                                                Source: The Economist

COVID-19 vaccine doses per 100 people

Source: Bloomberg

Sector ETFs not so diversified

Source: Bespoke

Quarterly average returns & CY2020 YTD return for ASX micro-to-mid caps by size (market cap)

Source: Equitable Investors, Sentieo

Quarterly average returns & CY2020 YTD return for ASX micro-to-mid caps by sector

Source: Equitable Investors, Sentieo

Quarterly average returns & CY2020 YTD return for ASX micro-to-mid caps by valuation band

Source: Equitable Investors, Sentieo

Disclaimer

Nothing in this blog constitutes investment advice - or advice in any other field. Neither the information, commentary or any opinion contained in this blog constitutes a solicitation or offer by Equitable Investors Pty Ltd (Equitable Investors) or its affiliates to buy or sell any securities or other financial instruments. Nor shall any such security be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.

The content of this blog should not be relied upon in making investment decisions.Any decisions based on information contained on this blog are the sole responsibility of the visitor. In exchange for using this blog, the visitor agree to indemnify Equitable Investors and hold Equitable Investors, its officers, directors, employees, affiliates, agents, licensors and suppliers harmless against any and all claims, losses, liability, costs and expenses (including but not limited to legal fees) arising from your use of this blog, from your violation of these Terms or from any decisions that the visitor makes based on such information.

This blog is for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. The information on this blog does not constitute a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Although this material is based upon information that Equitable Investors considers reliable and endeavours to keep current, Equitable Investors does not assure that this material is accurate, current or complete, and it should not be relied upon as such. Any opinions expressed on this blog may change as subsequent conditions vary.

Equitable Investors does not warrant, either expressly or implied, the accuracy or completeness of the information, text, graphics, links or other items contained on this blog and does not warrant that the functions contained in this blog will be uninterrupted or error-free, that defects will be corrected, or that the blog will be free of viruses or other harmful components.Equitable Investors expressly disclaims all liability for errors and omissions in the materials on this blog and for the use or interpretation by others of information contained on the blog

Since Holon's beginnings in 2018, the digital asset conversation has evolved rapidly. Back then, Bitcoin was a dirty word, and the scandals of Initial Coin Offerings only demonstrated the 'wild west' attitude of an immature crypto-world. Skepticism by the traditionalists was strong.

Now, with an estimated 100 million+ users (including leading payment companies and global corporates), and a market value of USD$1Trillion and growing, Bitcoin is no longer a dirty word, it's just a word.

Institutions are quickly seeing Bitcoin (and other digital assets) as a valuable hedge against the volatility of the modern world. Investors (especially younger investors) are seeing that they have access to a store of value (wealth creation) opportunities as an alternative to the current financial system that has, and is, failing them.

And to meet this demand, new banks are being established (for example Avanti Bank in Wyoming, USA) to specifically custody Bitcoin for customers - with this trend accelerating. It seems that cryptocurrencies and digital assets, more broadly, are becoming mainstreamed. How things have changed in just a few short years!

But where is Australia in all this?

Holon has worked with Australian governments to discuss the accelerating digital economy across the political divide, particularly as we believe that data generation and storage requirements, driving Web 3.0, are being vastly underestimated by the market. While there has always been interest and an acknowledgement of where things were heading, we saw little real action.

Indeed, the major banks, and particularly the Reserve Bank of Australia, have been active 'resistors' - either attempting to delegitimize digital assets or dismissing them altogether, and even going to the extent of de-banking digital businesses. With all of this, there was a sense that Australia needed to be dragged kicking and screaming into the digital age.

2021 was different.

In October, we were pleasantly surprised that the advice contained in Holon's submissions to the Australian Securities and Investments Commission's (ASIC) crypto-related financial products consultation paper and the Senate Select Committee on Australia as a Technology and Financial Centre was reflected in the Senate Select Committee's recommendations to the Australian Government enabling the Web 3.0 economy and ASIC's guidance to the financial services industry.

Digital assets, and their custody and handling as financial products, were now being taken seriously. There was also acknowledgment that greater legal, business and investment certainty was needed to drive dollars into the Australian economy, rather than away from it.

The underlying message was that we desperately needed to avoid the 'digital-desertion' that we had been seeing (not unlike the 'brain-drain') - where young, talented digital companies are forced to move off-shore because of the uncertainty (and hostility) they faced at home. However, this may just have come to an end.

We have to thank the Chair of the Senate Select Committee, Senator Andrew Bragg, who led the charge to begin pushing for much needed regulation of digital assets in Australia and, as a consequence, helping to publicly legitimize them. From being 'well behind the eight-ball', Australia may have a chance to be a unique player on the global scene.

As a bigger surprise, and a significant affirmation to the work of the Senate Select Committee, the Federal Treasurer announced on 8 December that the Australian Government has agreed in principle with several core tenets of Senator Andrew Bragg's report. The Treasurer said that the impending reforms would be 'fast-tracked' as they are the 'most significant' in 25 years and will progress in two phases - with the most urgent and immediately implementable changes being consulted upon in the first half of 2022, and the remainder by the end of 2022.

The Treasurer stated that the Government will commence consultation on the feasibility of a retail Central Bank Digital Currency in Australia - a digital asset issued by a central bank and linked to a sovereign currency for better consumer protection and connection the global financial system - with advice to be provided by the end of 2022.

In relation to payments, cryptocurrencies and digital assets, the Treasurer stated that, by mid-2022, the Government will have:

• Set out a strategic longer-term plan for the payments system, developed with industry and reviewed annually.
• Settled the details of additional powers for the Treasurer to set payment system policy.
• Determined the changes necessary to modernize payments system legislation to accommodate new and emerging payment systems, including consideration of BNPL and digital wallets.
• Completed consultation on the establishment of a licensing framework for Digital Currency Exchanges to provide greater confidence in the trading of crypto assets.
• Finalized consultation on a custody or depository regime for businesses that hold crypto assets on behalf of consumers so that investors have greater confidence in the safe keeping of these assets.
• Received advice from the Council of Financial Regulators, working with other relevant agencies, on the underlying causes and policy responses to the complex issue of de-banking.

By end-2022, the Treasurer indicated that the Government will have:

• Settled the framework to replace the current one-size-fits-all payment licensing arrangements with a functionally based framework adopting graduated, risk-based regulatory requirements.
• Received a report from the Board of Taxation on an appropriate framework for the taxation of digital transactions and assets.
• Undertaken a mapping exercise of existing crypto currencies and tokens to better inform consumers and others of the risks and benefits that arise.
• Examined the potential of so-called Decentralized Autonomous Organizations (DAOs) that is a type of decentralized corporation used to co-ordinate financial contributors from around the world through automated (smart) contracts.

Overall, the Australian Government's commitment to these reforms, based on the recommendations of the Senate Select Committee, are welcomed as they are advantageous to the future of Holon's Web 3.0 cloud storage operations and digital asset management business.

However, there's still some way to go to enact any regulatory reforms, but this is the clearest signal from Government that Australia is now embracing digital assets and 'open for business' - and at Holon, we're proud that we were (and will continue to be) an active part of the policy making that is bringing it about!

Luke Behncke, Executive Chair