Hedge Clippings | Friday, 25 September 2020

Touch wood - that should make all the difference - it seems that there's some light at the end of the COVID tunnel, such that hopefully the worst of the lock down restrictions might be behind us. Hopefully - there's that word again, and we were always taught that "hope is not a reliable strategy" - the easing is not too much too soon, and we don't slip back into rising case numbers.

No such luck in the UK, Europe (France in particular), the USA and many other countries as well, including Israel and Canada. Trump continues to maintain what a great job he's done in restricting US deaths to 200,000 (and counting), while in the UK Boris, who is eating humble pie (not) and facing threats of 50,000 cases a day within a month, is instituting a 10PM curfew, presumably because the virus, like the werewolves, only comes out at night.

What is of concern, based on the chart below from Longview Economics, is that the highest number of new infections in the UK in recent weeks has been amongst the 2 - 34 year old age group.

But Wuhan, China, where it all began, has reopened for international flights. Meanwhile, this week at the UN Chinese President Xi refused to accept any responsibility for the economic and medical carnage COVID-19 has wrought on the world.

Thank our lucky stars we're in Australia, with hope (again) we're heading in the right direction. While on the subject of direction, and Australia, there's good and bad news today on the economic front depending on one's point of view: The Federal budget surplus forecast just a few months ago to come in at $5 billion has now settled to a deficit of $85.3 billion or 4.3% of GDP for 2019-2020. So what's "good" about that?

Well for a start there was virtually no debt to speak of to start with, leaving the government with plenty of fiscal room to move. And while there's still a huge task ahead, one would assume that the budget due to be handed down by Treasurer Josh Frydenberg on Tuesday week will contain a mix of ongoing support where needed, while weaning others off the welfare nozzle where it's not.

Turning to markets, and equity markets in particular, and not surprisingly volatility remains elevated. Not at the record levels of over 80% in early March, although it spikes from day to day, but roughly double its average of less than 15% during 2017 - 2019. Maybe markets are turning their collective minds to the outcome of the US election on November 4?

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The US senate result could reverberate for decades if under Democrat control the filibuster goes by Magellan Asset Management

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

Is There a Bubble in Technology Stocks? by Aitken Investment Management

Hedge Clippings | Friday, 11 September 2020

One can't let the dateline on today's edition of Hedge Clippings pass without remembering that 19 years ago today (now forever simply known as 9/11) a series of four coordinated terrorist attacks shook the world, the most visible of which, captured on the TV news, saw United Airlines Flight 175 follow American Airlines Flight 11, and crash into New York's World Trade Centre. A third aircraft hit the Pentagon, and the fourth, heading towards Washington, crashed into a field after the passengers attempted to overcome the hijackers. Across all four attacks, a total of 2,977 people were killed, and over 25,000 were injured. Approximately 18,000 people are estimated to have since developed illnesses as a result of the toxic dust released from the collapse of the WTC Towers.

The reaction was shock, horror and swift retaliation. The attacks triggered both the war in Afghanistan (starting on October 7, 2001) and later, in March 2003, the invasion of Iraq, both of which have since had a major impact on the world - as intended by the backer and architect-in-chief of 9/11, Osama bin Laden.

It is estimated that from March 2003 to October 2018 between 268,000 and 295,000 people were killed in the Iraq war. Figures for Afghanistan are more difficult to define, but according to this article more than 100,000 Afghans have been killed or wounded since 2009, which is when the UN Assistance Mission in Afghanistan began documenting casualties.

So let's assume 500,000 deaths over 19 years. COVID-19 has killed almost double that (905,000 across the globe, including 194,000 in the US and counting) in less than a year. We are not sure where this leads, or what point we're making, but both are sobering statistics on the anniversary of 9/11 - a date which means little to many millennials, who might not recognise its significance.

Meanwhile, Australia is stalled, and some turkey from the bush wants to distract the NSW government's focus on health, safety and the economy to force an immediate and one-off cabinet meeting to discuss land clearing vs. the protection of the endangered and dwindling koala population.

Did we say turkey? Maybe we mixed our fowls up. Goose.

Changing tack - to markets and fund performance, with the former experiencing some renewed volatility, and a long-awaited pullback following the FOMO rally which began in March. In August the ASX200 Accumulation Index rose 2.83%, still -7.43% below its level at the beginning of the year, and -5.08% below the same time last year.

Drilling down to individual fund performance in August, which whilst good overall was varied - ranging from -5% through to +18%, and with 45% outperforming the ASX200. Over 12 months the range has been extraordinary, from -88% to +79%, with 70% of funds outperforming the index, and 50% with positive returns

Meanwhile, the 300+ Active Equity funds in AFM's database rose by an average of 4.41% in August, are up +0.58% since January, and +5.19% over the past 12 months, for an annual outperformance of over 10.20%.  

As always sound information is therefore vital to informed fund selection and portfolio construction. Given the range of returns above careful analysis more important than ever, when the implications of the right or wrong choice leave the debate about fees a secondary consideration.

News & Insights

There's No Clear Solution to the Problem of Plastics by Nikko Asset Management

Hedge Clippings | Friday, 04 September 2020

We're not sure if it is the combined effects of lockdowns (or in Hedge Clippings' case, "significantly reduced social activity"), overexposure to COVID news (is there anything else happening?) or just the fact that it's already September (and therefore only two months before the Melbourne Cup), but the weeks seem to be just flying past.

Maybe it's a combination of all three, but there seems little difference between one week and the next, particularly for those unfortunate enough to be locked down in Victoria, who this week suffered the insult of having the AFL Grand Final moved to Queensland. What next? Did we mention the Melbourne Cup? Surely not...?

The past week hasn't been all boring however, although we have noted some predictable news items, and some equally predictable comments from various quarters, including three relating to, or by former prime ministers, namely Tony Abbott, Paul Keating and Kevin Rudd. More of that (or them) later.

Two pieces of unsurprising, and predicable economic news this week included the RBA holding interest rates at 0.25%, and the fact that Australia is, after 28 years, officially in a COVID induced recession. Not that anyone would have suspected otherwise, although perhaps some thought the numbers might have been worse. Undoubtedly they would have been without the extraordinary lengths that governments at both Federal and State level have gone to by pumping billions into personal and business support.

As we have noted before, Australia has been fortunate in having a large moat around our island's shores which has limited the health effects of the virus, while effectively going into the economic abyss with virtually no debt, providing the government with the ammunition it required.

From a market perspective it hasn't been all gloom and doom either - depending on which sector one looks at, and hence why the GDP fall was only 7%. With the ASX200 up 38% since its lows in March, and the tech heavy NASDAQ up 67%, there have been some well-documented winners - and losers. Earlier this week we spoke with two fund managers, Dean Fergie from Cyan Investment Management, and Rodney Brott from DS Capital, each of whom have successfully navigated the rebound since March to achieve record monthly returns and, in spite of the market's +38% rise, outperform the ASX200.

Delving deeper, and in spite of both being in lock-down in Melbourne, some common views and themes were apparent - the ability to switch sectors from those such as travel, tourism or commercial property, to areas that have benefited from COVID - tech and communications for example.

You can watch our recording of the Zoom call (recorded yesterday afternoon) with Dean and Rodney here. With today's market down sharply after last night's NASDAQ sell off wiping out the local market's gains in August, their views on investing in quality companies with good economic tailwinds are worth listening to.

To close, back to our reference to former prime ministers. Firstly, Keating and Rudd's call (in Keating's case, "salvo" is probably a better description) that the government shouldn't mess with the planned rise in the SGL, and lambasting the emergency early $20,000 early release opportunity. Normally we'd agree that super should be maintained, and the SGL should increase over time, but these are not normal times.

Messrs. Keating and Rudd as ex PM's and politicians of many years standing are both on highly generous pensions - and the beneficiaries of 15% taxpayer-funded non-contributory super. For those who suddenly had no income, credit card debts attracting 20% interest rates, rent or mortgages to pay, it wasn't so simple. Certainly, they'd be better off in their retirement in 30 years' time, but a bird in the hand.... The point is they have time to recover. Could the scheme have been more tightly controlled or available? Undoubtedly. However, at the time it was also undeniably welcome.

Finally, to that other ex-PM in the news, Tony Abbott, who appears to be a surprise appointment to the UK Board of Trade or whatever. No doubt HRH Prince Philip wrote a reference in return for Tony's equally surprising and generous Knighthood back in 2015. Surprise is probably not the word, with Scotland's First Minister Nicola Sturgeon singularly unimpressed, and calling him out on UK TV.

It didn't take British humourist and Sturgeon impersonator Janey Godley long to give her version of the First Minister's opinion of our onion eating ex PM which you can see here. Although most of Janey's rendition of Nicola's Scottish accent is unintelligible, the odd four letter word is unmistakable, so if that offends please accept our apology, or skip the link!

According to this morning's ABC news, Tony Abbott declined to comment, with a spokesperson advising that he wouldn't comment on "personal abuse". Maybe he's becoming sensitive in his retirement, or maybe he realised that sometimes it's best to keep one's mouth firmly closed.

News & Insights

VIDEO: Interview with Sean Sequeira, CIO at Australian Eagle Asset Management

VIDEO: Interview with Rodney Brott from DS Capital and Dean Fergie from Cyan Investment Management

Time to Move on? Go East? by Delft Partners

Hedge Clippings | Friday, 28 August 2020

The choice between Sovereignty and Sovereigns

Australians politicians are for once united in their view regarding the importance of Sovereignty, with both Scott Morrison and Anthony Albanese supporting controls on governments at all levels, along with universities, from being subject to foreign (read Chinese) influence.

Inevitably, however, there are those who disagree, presumably not as much about the issue of sovereignty itself, but that any such stance is likely to have a severe effect on their future flows (to use an old term for pounds sterling) of sovereigns themselves. Or more accurately dollars, or currency of whatever denomination.

In other words, follow the money, honey. Or as Paul Keating said, "in the race of life, always back self-interest. At least you know it's trying".

Not surprisingly, given how leveraged his state is to China, and how little it is exposed to COVID, the WA Premier came out on the side of preferring the money, and to hell with the threat to Sovereignty.  

Meanwhile, his Victorian counterpart, Daniel Andrews, has a massive conflict of interest: His state is reeling, both in health, socially, and financially from COVID, made worse by an own goal while mismanaging Melbourne's hotel quarantine arrangements. But his conflict is even greater, courtesy of his secretive "Belt and Road" deal with China, which even the ABC took issue with in October last year, describing it thus:

"it is also designed to grow China's clout abroad by making countries economically dependent on Beijing, and has been written into the Communist Party's constitution as a sign of its importance.

China's Government is thrilled it can bypass Canberra by doing deals directly with a state government - and hopes more deals with other states could pressure the Federal Government to change its policy in future.

It would be unthinkable for a Chinese province to break ranks with Beijing on a major foreign policy issue like Victoria is doing, which also helps to explain the frustration of the Morrison Government having its diplomacy undermined."

If that was the case last year, imagine what the Morrison government thinks now - or maybe they now have the opportunity to act on those frustrations.

Undoubtedly the Morrison government standing up to China will significantly affect export and trade income, and thus cost Australian jobs. Today's announcement that another beef exporter has become a victim is likely to become part of a long list of retaliatory measures orchestrated by Beijing, joining four others, along with restrictions on Australian barley and wine previously announced.

So, the choice is commerce and money, or, in the longer term, our democratic way of life. This may seem melodramatic, but the Chinese Communist Government is certainly more concerned about influencing our sovereignty than how much it is going to cost them in sovereigns.

It's undoubtedly a tough call: Take a stand and the pain now, or leave it to another day, and another generation, when it will all be too late to reverse.

Depending on how much it hits one's hip pocket will probably determine your view. Those in WA such as Kerry Stokes and Andrew Forrest have probably already made their minds up.

From Hedge Clippings' perspective there could be a hidden benefit in China's stance on wine: will that leave more for Australian consumers, and/or drop the price? If so, maybe we'll vote with our hip pocket!
 

And now for something completely different: Meaning of American Pie by Don McLean

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New Funds on Fundmonitors.com

Retail REITs Still Look Cheap by Vincent Li and Brad Potter, Nikko Asset Management

Hedge Clippings | Friday, 21 August 2020

Last week's Hedge Clippings pondered the difference between "complete" and "finished" - two words which unfortunately aren't going to be used in reference to the current focus on COVID. Having said that, we, like most others, have seemingly become obsessed with, or by, COVID, hanging on every update, briefing, newspaper, or bulletin on TV or radio. So much so that we'd like to propose a COVID-free front page or news bulletin day (or maybe a week?) where updates are relegated to a small "need to know" section somewhere towards the back, or end, as the case may be.

We certainly don't want to suggest the situation is not serious, or to trivialise the dangers or predicament of those directly affected whether by illness or lockdown, or the efforts of politicians and those on the front line. However, we're rapidly approaching the stage of being "completely over" the media's seeming obsession with it, including whizbang interactive charts showing trends of cases per day, curves, and sadly deaths. The reality is that life continues beyond COVID, and until there's a vaccine we need to get on with it as best we can, thankful that we're in Australia - even if in Victoria - and not Europe, the US or worse.

Equity and other markets have certainly got on with life, with punters (sorry, "day trading investors") reportedly flocking to open online broking accounts with the likes of Comsec and others, presumably because they can't get to the pokies or the race track. How much of the government assistance handed out since March or April, or how much of the $30 billion (expected to reach $40 to $50 billion according to one estimate by Rice Warner) withdrawn from Super by 480,000 Australians, over 80% of whom are under 35, will end up being put to "good" use? We can understand early withdrawal if the proceeds are used to say, pay down credit card debt which is accruing interest at around 20% pa, or for essentials, but it tells the story that most workers don't appreciate (or bother) with super until it is too late to accumulate enough to cover retirement.

While the media, and most of the rest of us, have been distracted by our daily dose of COVID, that certainly can't be said for ASIC, in spite of reportedly finding that ex-AMP chair Catherine Brenner had done nothing wrong in spite of her successor Mike Wilkins offering an unreserved apology at the company's AGM in May 2018 for AMP's behaviour, which he described as "absolutely unacceptable". Not so lucky this week was Westpac, who declared they would not be defending ASIC's charges relating to fees for no service at Westpac's BT Funds Management and Asgard. Meanwhile, ASIC has commenced proceedings against RI Advice for failing to have adequate cybersecurity systems following illegal access to a server containing sensitive client information.

Elsewhere in the naughty corner this week was the colourful founder of Mayfair 101, James Mawhinney, who according to the AFR was defending his accounting treatment of various expenses which involved writing up the value of investments based on expenses such as office rent, flowers for staff, and wine. Many moons ago in a previous edition of Hedge Clippings we mentioned the antics of Mayfair 101, the IPO Wealth Fund and Mawhinney in not particularly glowing terms. There's an old adage - "when something sounds too good to be true, it probably is", although we're disappointed we weren't the recipients of Mawhinney's generosity in the wine department.

News & Insights

Webinar Invitation: Understanding Life Settlements with Tony Bremness from Laureola Advisors

VIDEO: Interview with Craig Racine from Gyrostat Capital Management

VIDEO: Interview with Monik Kotecha from Insync Fund Managers

Hedge Clippings | Friday, 14 August 2020

There's not much new that Hedge Clippings can add to the focus - some may say overload - that COVID has created over the past six months. It has come to dominate all our lives as we hang on for good news instead of bad, and most pertinently, when the search for a safe and effective vaccine will be completed, so the current restrictions will be finished, over, finito!

In reality, we doubt the battle will ever be complete, or finished.

Which got us to thinking about the ever changing nature of both the funds management sector, and particularly fund performances. Over the past 15 years or so that AFM has been researching and monitoring actively managed funds, we have seen an extraordinary change. For instance, pre-GFC hedge funds were considered secretive (which some were) and risky, and some downright dodgy (thankfully no longer in business), and overall purely the domain of wholesale investors and institutions and therefore out of reach of the retail sector (which most were).

During the GFC (for those who can remember back that far), hedge funds were blamed for causing volatility, as was short selling, with Gerry Harvey infamously declaring that "all hedge fund managers should be put up against a wall and shot", and ASIC, along with other regulators around the world, banned the practice, which incidentally didn't put a halt to the volatility.

Common sense eventually prevailed, and with some regulatory control, hedge funds were allowed to operate, and as a result, flourished not only for the big end of town, but for the benefit of retail investors as well. Over the following 10 years some thrived, some survived, and inevitably some failed, as have their long-only peers. That's how the market, and capitalism, works.

Over that time we have seen some spectacular successes - both from a business building perspective (for instance Magellan, with close to $100 billion in FUM after just 13 years in operation) and risk mitigation and performance, such as those we regularly feature. The point is that, like COVID, the funds' management story is not complete, nor finished, and never will be. New managers will come, and old ones go. Meanwhile, the performance of individual funds, and sectors or strategies, will also continue to fluctuate - such as the value vs. growth scenario that has been unfolding over the past few years as disruption and technology takes the lead.

Even Hedge Clippings' week is not complete, or even finished, until yours truly has hit the "send" button. Which is a neat segway into the difference between the meaning of the words complete and finished, which most readers would assume mean much the same as each other.

However, would you believe that on the website quora.com there's a whole section devoted to the topic of the difference between the two, presumably frequented by English language scholars and the occasional pedant (who? Moi?) who devote their time to examining the nuances between the two in minute detail.

The final word is left to an Indian gentleman by the name of Gopalkrishna Vishwanath, a retired structural engineer and scholar, who posted thus:

"No English dictionary has been able to adequately explain the difference between complete and finished.

However, in a recent linguistic conference held in London, England, and attended by some of the best linguists in the world, Samsunder Balgogin, a Guanese, was the clear winner.

His final challenge was this: "Some say there is no difference between complete and finished. Please explain the difference between complete and finished in a way that is easy to understand."

His astute answer: "When you marry the right woman, you are complete. But, when you marry the wrong woman, you are finished. If the right one catches you with the wrong one, you are completely finished."

His answer was received with a standing ovation."

And while talking of completely finished, here's a flashback to the times when Hedge Clippings included a segment to finish the week on a much needed lighter note entitled, "And now for something completely different". Some of you might find this video of an Italian auction tickles your sense of humour - or horror as the case may be.

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Australian House Prices: How Worries Should We Be? by Nikko Asset Management

VIDEO: Interview with Dean Fergie from Cyan Investment Management

VIDEO: Introduction to the L1 Capital U.K. Residential Property Fund IV

Hedge Clippings | Friday, 07 August 2020

Although Hedge Clippings tries to steer a steady course between seeing the opportunities that abound when looking into the future, and concerns about the risks that are all too apparent, the current relentless stream of seemingly negative news particularly re COVID, does provide some challenges.

Possibly it is the reversal into lockdown in Victoria and the seemingly impossible task of eliminating COVID there that fans the negativity. Meanwhile, on the positive side, the relative absence of infection in SA and WA to the West, and Queensland to the North (with NSW hovering dangerously in the middle - literally) gives one confidence, albeit with some trepidation.

And so it is with many of the fund managers we talk to or meet. Actually, we don't meet that many of them in the current environment, but Zoom has become such a way of life and business that it's now a new normal. Depending on their view, and no doubt their strategy and current performance, they're either a glass half full, or a glass half empty of confidence.

Occasionally there are those who, far from being merely half full of confidence, are overflowing with it. This may be due to their age, or relative youthfulness. It might be their fund's performance - it being difficult to remain confident while losing other people's money. It might be the sector they invest in - which in the case of tech and disruption probably equates to good performance.

But more likely, and more often than not, it's about their attitude and approach, which in turn no doubt dovetails with their fund's strategy and therefore performance. We're in a changing world where, for example, Tesla is worth more than Ford and a range of other manufacturers because it is looking to the future and, love him or loathe him, is run by one of the great enthusiasts of the corporate world. To be long Tesla requires conviction, and an eye for the future. Doubtful? You're probably short, and financially painfully so.

Next week we're interviewing a young and exuberant fund manager, Michael Frazis, who embodies the positivity and enthusiasm referred to above. Michael's fund is just 2 years old, and it endured a torrid first six months in 2018 before posting returns of 24% in 2019, and 25% YTD in 2020. There are others who embrace change and disruption as a strategy or theme. Invariably they're full, or overflowing, with positivity.

Finally for this week, a mention of a book - available as an audio download - we've recently read - or listened to - called Black Box Thinking by Matthew Syed. Highly recommended. And certainly likely to raise the positive views in any pessimist!

News & Insights

Will the US Dollar Become Another Casualty of COVID-19? by Arminius Capital

Hedge Clippings | Friday, 31 July 2020

The rapid rise in the number of cases of COVID in Victoria, and to a lesser degree (so far) in NSW, is a stark reminder - if needed - that there's a long and winding road ahead before we're out of the physical and medical dangers of the pandemic. Far from the numbers declining, or even being under control, they're increasing rapidly, while in the US and Europe they seem disastrous.

And just when it looked as if the government would be able to start selectively weaning sections of the community off their Job Seeker and Job Keeper payments at the end of September, there's every chance that, in some states at least, they're going to become more dependant. And with Victoria and NSW having the largest populations, the flow-on effects of border closures will prolong the impact and damage on the tourism sector in Queensland in particular.

In the short term, investors and fund managers will not only have to consider the geographic effect on companies, but will also have to navigate the upcoming reporting season. In the longer term, governments, and all who live under them, will have to consider and navigate the debt mountain that COVID has created.

These are sobering, and worrying times, but as always there will be winners and losers. From the investor's perspective, investment and fund selection decisions are going to be more critical than ever. High yielding investments - provided they're not also high risk - will appear on more approved product lists. One would suspect that dividends will be reduced further, with the trickle-down effects on investors' spending habits having further negative effects on the economy.

Just as well - there's not much most Victorians can do, or places they can go, to spend what income they have anyway. Maybe one of the few bright spots will be Dan Murphy's (and others') online ordering and delivery services...

Which reminds me, it's Friday, and nearly drink o'clock.

News & Insights

The Rise of Restoration: A Focus on Oil and Economic Reality by Nikko Asset Management

Hedge Clippings | Friday, 24 July 2020

Everyone loves a list - and Hedge Clippings is no exception, provided of course we're near the top, and it's a list one would want to be on. In other words, if the list is "This Year's Best..." then most people would like to be there. On the other hand, if it's the bottom of the list, or it's titled "This Centuries Worst..." then most would duck for cover. Some people seem to love being on the "Rich List". However, possibly because yours truly is never ever going to make the tail end of that one, it does not hold much more than a passing interest. It's probably of more interest to Lamborghini salesmen, or possibly potential kidnappers - there's another couple of reasons to justify not being on it. Even if one's not actually on a list, people love reading them - good or bad. Lately, we've become used to the daily COVID results, and Hedge Clippings avidly reads the email we receive each night from Longview Economics in London, updating us on which country is doing well, and vice versa. Closer to home, but still on the COVID theme, we eagerly await the daily stats from each state - such is the world we live in. Of course, at AFM we're a party to the LIST game, namely lists of the best performing funds in one category or another, and as recently as last week in Hedge Clippings we supplied the Top 20 All funds over 12 months to June 2020. We might be accused of keeping up with the Jones's - or in our case, Morningstar's or Mercer's - but in our opinion lists of best performing funds (and sometimes the worst ones) can be misleading, and dangerous. And by dangerous, we mean costly if one doesn't do a little - or a lot - of digging. So, let's dig back a little in time: If we look at the Top 10 funds over 1 year to June 2015, it was quite a year: Even the one at the bottom of the list returned 36%, whilst number 1 came in at 61%, for an average return of almost 48%. Pretty good, given the ASX200 returned just 5.68% and the S&P500 7.42%. Of those 10 funds, 7 had a five-year track record at that time, with an average return p.a. of 18%, and 9 had at least a three-year track record, averaging 31% per annum. Pretty impressive! Except that winding forward to 2017, only one of the 2015 Top 10 was still in the Top 10 list for the 12 months to June 2017. And only 6 of them made it in the 2017 Top 100, and 3 didn't make the Top 200! Roll forward to June 2020, and of the Top of the Class in 2015, none made the 2020 Top 10, none in the Top 20, although 4 did make it into the Top 100, 2 into the Top 200, and 3 into the Top 300. Let's try again, this time looking at the "Class of 2017". A tighter range, number 1 returned +36%, through to Number 10 at +27%.  Average return for the Top 10 was just over 30% - impressive enough, but in a market where the ASX200 put on a more respectable 14%, and the S&P500 almost 18%. All but one had a 5-year track record at that stage. Only one featured in the 2015 Top 10 list. Of 2017's Top 10 (and you can probably guess what's coming) none made it to the 2020 Top 10. 4 were in the Top 100 (one by the skin of their teeth at 99), 3 into the Top 200, and the remaining 3 in the Top 300. So, what does this say about the Top 10 - or 20 - for the 12 months to 2020? You could be excused for thinking that we're giving them all the "kiss of death" normally reserved for those award recipients at gala managed fund industry evenings (there goes our invitation to this year's do). However, digging down, and analysing rather than just scanning or compiling lists, a few things come to light: 4 out of the 2020 Top 10 (and 5 of the Top 20) have less than 3 years track record, and only 3 have 5 years or more. Only 9 of the Top 20 have a track record of 5 years or more. This seems to confirm our previous research that early stage and small managers provide good returns, in spite of the fact they're excluded form most APL's. Against that, 7 of the 2020 Top 20 have over 15 years track record, so Hedge Clippings is pleased to see that age doesn't automatically exclude quality. The average return of the 2020 Top 10 was +31% with a Sharpe of 1.65 against a market backdrop of -7.68% for the ASX200 and +7.51% for the S&P500. Every PDS and IM warns that past returns are no guarantee of future performance, BUT, we do like to think that if a manager can navigate the volatility of the past 12 months and perform well, it augurs well for agility and being able to perform in a variety of conditions. And as an avid (albeit old and conservative) believer in disruption and the future, Hedge Clippings also points to the fact that markets, or more accurately, economies, have changed, as have business models and valuations of stocks such as Afterpay and Tesla. For the record, an equally weighted portfolio of the Top 10 Funds in 2015, 2017 and 2020 would have returned the following in the 12 months to June 2020:

We fully accept that selecting funds AFTER the results are known only proves what we all now know - the known knowns. Hedge Clippings is a devoted disciple of selection based on low correlations by blending funds for diversification to produce results targeting RISK, rather than returns.

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