On Fridays when pondering content for Hedge Clippings we occasionally resort to a Google search for famous people's birthdays. Occasionally we'll find one of note - normally an (old) musician from the 60's or 70's such as Bob Dylan or Leonard Cohen, who are both legends, and personal favourites.

For instance, on Tuesday of this week ex-Beatle Ringo Starr turned 80! Who would have believed it - and based on this birthday clip, who would have recognised him, even without the COVID19 mask? That's either testimony to his genetics, lifestyle, or the wonders of modern cosmetics.  Not only does Ringo look pretty much like a 50 year old, but he doesn't even sound like an 80 year old. We're not sure if the Google ad which preceded the clip (for a hearing aid) was targeted specifically at yours truly, or just a punt on the demographics of people who can remember who Ringo was.

Elsewhere on the famous birthday list, exactly one month ago (June 10) was Prince Philip, who turned 99. Congratulations (belatedly)! No doubt he'll have received a special card from his number 1 Australian fan, Tony Abbott. Apparently there are 10 other people more famous than him (according to the list) most of whom seem to be either a YouTube, Reality or Instagram star under the age of 25. Hedge Clippings must be either out of date or out of touch (or both).

Which leads us to the dangerous, and sometimes confusing subject of lists, and in our little corner of the universe, specifically lists of top-performing managed funds. Having just closed out the financial year and a tumultuous four months of market mayhem, we learned long ago the dangers of top performing lists of funds, however popular they may be amongst those that appear in them. Sometimes the following year's performance is either embarrassing or disappointing, depending on whether you're the manager, advisor or investor concerned.

For instance, the list of top performing funds for the 12 months to December 2019 will look significantly different to the June 2020 version. And anyway, what constitutes "performance" in a sector where most offer documents suggest an investment time frame of 5 to 7 years? Headline performance by itself only tells part of the story, with risk factors such as drawdowns, down capture ratios and volatility being more relevant to most risk-averse investors in a post COVID world.

Hedge Clippings frequently compares and quotes averages, and while statistically absolute return and actively managed funds outperform markets and indices, averages can be dangerous: Over the past 12 months to June the average net return of all funds on www.fundmonitors.com is -0.35%, compared with -10.42% for the ASX200 Total Return Index. That's a clear 10% outperformance, with 83% of funds outperforming the index, and 60% with positive 12-month returns.  

Impressive numbers, unless you're invested in the other 40% - but even then, that's only over 12 months, not the recommended 5-7 years. Picking winning funds, like winning stocks is challenging, but more often than not it's a case of avoiding the losers, or at least creating a blended portfolio of funds with a low correlation to each other to minimise risk.

June 30th saw the end of the 2020 financial year, and for the last six months of it, extraordinary market volatility: Firstly, one of the 10 sharpest quarterly declines in history, followed by one of the 10 sharpest rallies. We'd suggest that's a "V" shaped recovery if ever we saw one. But that's the market. From where we sit, the economy is going to be a very different beast.

Tech rules! Actually money does, but where there's tech, it seems there's wealth. Tesla is now the most valuable automaker in the world, and today's paper says Afterpay is knocking on the door of the ASX Top 20.

Meanwhile medically, the pandemic - particularly in the USA, South America and other major population centres of the world - shows no real sign of abating, seemingly because people either can't, or won't, socially distance. And why would they when (unlike in Australia) their political masters seem to be actively encouraging themselves not to do so?

We even heard (surely this is folklore?) that in Alabama people are holding COVID parties with an entry fee, which is collected as a "pot" which is then "won" by the first person to test positive.

Insanity prevails!

Elsewhere the Chinese government has made its long-awaited move on Hong Kong, possibly hoping to do so under the cover of COVID. In turn, Australia (and other democracies) seem to have finally woken up to the concerns of the average Australian. Having been seduced by seemingly easy Chinese wealth for the past 15 or 20 years, we're seeing the inevitable drawback of that complacency.

Having seen Chinese agents of influence at work here and abroad, Australia is being firmly told not to even consider meddling in Chinese affairs by offering assistance or asylum to anyone wanting to leave, or flee, Hong Kong. The Chinese "absorption" of Hong Kong is complete. Next will be the democratic Republic of China, namely Taiwan.

How will Australia and the democratic world respond when (not if) that's next on the list?

Australia is eventually going to have to face the alternative of trade and wealth, or freedom. Maybe we've always been secretly aware of the threat, but lacked the vision, ability, resolution or inclination to take appropriate action. Just like the boiling frog.

Australia has often been tagged "The Lucky Country", and whilst there may be debate in some quarters about that description, when it comes to the current COVID situation it would be hard not to agree. Former treasurer Peter Costello noted on the ABC earlier this week that Australia has always suffered from the tyranny of distance, while his predecessor Paul Keating famously described Australia at being at the "ar*e" end of the world.

Both statements are true enough, but thanks to being surrounded by a great big moat (Costello's term again), and being where we are in the world, we are now benefitting from that tyranny. Historically a combination of the moat and distance is largely responsible for what, and figuratively where, we are today. Australia was remote from the rest of the world for millions of years, resulting in the diversity of flora and fauna we're now blessed with (koalas and kangaroos) or infamous for (venomous critters). Indigenous people survived without interference from the outside world for 60,000 years until the arrival of the First Fleet, paradoxically sent here because of the very same moat, and the same tyranny of distance.

Now, far from being disadvantaged, we're the beneficiaries of both moat and distance, even as we see panic buying return as cases "spike" to double digits on multiple days in Victoria. Across the other side of the world, there are riots in the USA and elsewhere as some people refuse to wear a mask, citing it as an "infringement" of their rights. Meanwhile, they crowd onto beaches in California and Florida, and of all places, Bournemouth in the south of England (which is less of a beach than a bunch of stones on the English Channel, one of the more polluted stretches of water Hedge Clippings has ever taken a dip in).

But we digress. Yes, we're lucky, and thankful that relatively speaking we have (to date) dodged the worst that medically COVID might have done to us. In the UK they're easing restrictions in spite of 307,980 cases and 43,230 deaths; In the US they're not quite as sure (depending on their political or religious leanings) whether to mask up and isolate, demonstrate, or enjoy some cash and card-free "shopping", as they top the world with 2,504,588 cases and 126,780 deaths (and counting). Readers wanting more up to date information can find it here. Economically and socially, while many Australians are sweating on what the government is going to do post the September end of Job Keeper or Seeker, or being able to go interstate, cases and deaths are still rising globally.

As many are realising, our borders will remain closed (much like Queensland and WA) until the rest of the world is clear of COVID, or the risk can be mitigated thanks to a vaccine, unlikely to be until mid next year according to the experts. Until that time, sections of the economy will have to remain on government support or a lifeline of one sort or another. However, asking what that will look like at the end of June, halfway through phase-1 in the fast-changing world of COVID, is premature. Presumably, where support is required (travel and tourism in particular), support will be provided, even if it means running the mint's printing presses 24x7 while the government heavies the banks to maintain support at both the consumer and business level.

The past history of banks doing just that hasn't always been exemplary. However, this time around they risk their own stability if they decide to pull the rug out from beneath the customer. You can bet your last dollar that ScoMo and Josh will be reminding them that during the GFC the government handed the banks a lifeline, even though they were on the opposition benches at the time.  

Closer to home, and back in the office, this week we caught up with Kristiaan Rehder of the Bennelong Kardinia Absolute Return Fund who shared his views here on the market's past few months and what may lie ahead. His fund has done well to avoid the volatility of the market, as on average has the overall managed fund sector, which to the end of May was down -6.30%, less than half the fall of -12.70% suffered by the ASX200 Total Return Index. Taking that over 12 months, all equity funds still managed a return of +1.37% against the ASX200 TR's fall of -6.70% Full details can be found here.

Yesterday's job numbers, while statistically appalling, shouldn't have been too surprising. Even the headline unemployment rate of 7.1% masks the real situation which is revealed when examining the details around reduced hours, and the participation rate.

And while everyone's focussed on the unemployment rate, or the participation rate, last week's horror "R" word (recession) is now accepted as the inevitable consequence of COVID rather than the "recession we had to have", while the "D" word (deficit) is pushed even further back into short memories. But the "D" word is going to last much, much longer than the "R" word.

Put simply, the headline rate doubles (or possibly triples) when taking into account the large proportion of those who have lost their jobs, are underemployed, and who are not actively out there looking for work when there's none, or very little to be found.

Employers who have let their employees go, or reduced their hours, will hardly be taking on new staff before re-hiring, or increasing the hours of the ones they already know - and who in turn already "know" the job. Whether on Job Seeker or Job Keeper, these will be "first in, best dressed" when the wheels of the economy finally, but only gradually, start turning again.

Gradually - or possibly erratically - is the key, and as such is a key problem for the government as it faces the halfway mark in the emergency life support it introduced at the start of the lock down. At that stage many - both employers and employees - felt somewhat cushioned from the full economic effects of COVID thanks to the range of measures introduced: One-off payments to both businesses and individuals; Job Seeker (double rate) or Job Keeper; mandated commercial rent relief; and early access to superannuation.

Added to that, the banks chipped in with mortgage relief to help, although on the other side of that coin shareholders suffered via a reduction or cancellation of their dividends.

But now the horizon is clearer. As the lockdown is gradually (albeit not uniformly) eased, we can see the September end of support in sight. And while some aspects of life and business are opening up again, it's certainly not back to normal. Public transport is almost a joy to travel on; city streets are clear of dawdlers and, sadly for the retail stores, window shoppers. Restaurants are open (some at least) but underutilized as they adhere to the new rules.

And some sectors - particularly those leveraged to overseas visitors and students, such as travel, tourism and education - have a much longer term of economic pain and hibernation ahead.

Therein lies the problem for Scomo and his team: On one hand how to wean both business and employees off the welfare they're now relying on, if not used to (and don't forget there are some benefitting and enjoying it), while also maintaining or extending the support for those sectors that will still need it. At the same time, the government will be trying to use the situation as an opportunity for reform, which of course will be resisted every step of the way by those adversely affected.

Take for example today's announcement regarding the proposed changes to higher education and the cost of a degree. Some, deemed more suitable or relevant for the economy and the workforce of the future, will be reduced in cost: Agriculture and maths, down 62%; teaching, nursing, languages, down 46%; science, health, architecture, IT and engineering, down 20%.

Offsetting those reductions, law and commerce will rise by 28%, while the cost of a humanities degree will cost the same as law - but double their current rate. Of course, depending on one's media preference, the headlines and talkback chatter was all about the increases, in spite of the fact that none of the changes will affect students currently studying, or the fact that HECS exists to cover the cost if required.

Reform is not easy to sell to those on the wrong side of the change, but is necessary to adjust to a changing world.

While on the subject of change, this week we spoke with Alex Pollak, CIO of the aptly named Loftus Peak Global Disruption Fund. Alex's insight into the changing fortunes and direction of companies that specifically benefit from disruption - even if neither he, nor the companies themselves, had anticipated COVID's acceleration of disruptive trends. As he explains in this video, what COVID has done is to accelerate the social, business and economic trends that were already in place, benefitting the disrupters at the expense of traditional business models.

No one likes to be seen to be actually benefitting from the effects of COVID's disruptive damage, but his Global Disruption Fund has an impressive run rate, returning 12.67% over the six months to May 31, and 32.46% over the past year. To view the fund's full AFM Profile, click here.

Last week we concluded our weekly commentary with the line that (as at the end of May) "by itself, a fall on the ASX of only 12% YTD, given the "R" word... is extraordinary." As at the time of putting Hedge Clippings together only a week later and the ASX is in almost exactly the same position, but having both risen and then fallen 400 points over the week.

As anticipated by a few old hands, the steam seems to have well and truly gone out of the post-COVID rally, with volatility and risk well and truly back on the table. Whether that's a reflection of too fast, too hard, the realisation of the economic damage facing the global economy, or a reaction to recent civil unrest, is hard to tell. Maybe a combination of all three, plus others. However, it is a reminder that diversification, particularly into assets and funds with a low correlation to the market and each other, is a cornerstone of risk mitigation.

The other re-appearance over the past week has been some good old political opportunism with oppositions of all persuasions grasping for (or should that be gasping?) airtime in the COVID saturated media. As we've mentioned before, given there was no playbook for the crisis that's unfolded over the past four months, we think that both the Federal and State governments have steered through the potential social, health and economic carnage pretty well. By global standards, both Australia and New Zealand have shown the world (with the exception of Taiwan) how to handle, or not handle as the case may be, a crisis.

Now as we exit lockdown, those same governments have possibly come to the difficult part of the exercise, with a combination of community impatience and frustration building up. Taking away the handouts that so many people have received (including some who saw it as a free bonus given they didn't need it in the first place) is the difficult part of any welfare process.

Hereafter, and for years or decades to come, Australians will be footing the bill for the essential life support the economy has been put on. That will take some real management, and we hope the government (or governments) will take the opportunity to reform certain key areas. One amongst them that Hedge Clippings has long banged on about is the current superannuation regime.

Where do we start given limited time and space available?

Well for a start, make it simpler! What should be straightforward has been overcomplicated by rules and regulations to the extent most of the population can't fathom out the detail and just leave it for others.

Secondly, what's the point of forcing the workforce to save for 40 years or more by (they or their employers) contributing almost 10% (yes, we do think it should be higher!) of their salary, only to allow them to take a lump sum at retirement or aged 65, and be able to potentially blow the lot rather than earning a pension, even though they have another 20 years or so to go before "moving on"?

And finally, and probably most importantly, given the economic need to kick start the economy with long term infrastructure projects, why not force - or incentivise - all superannuation funds to invest a percentage of their assets in approved infrastructure "bonds". As of the most recent APRA data, there's now $2.7 trillion in superannuation, almost 35% of which is in a combination of fixed income or cash. That's almost a trillion dollars earning not very much (over 13% is in cash, so not very much is actually almost nothing) and which is there for the long-term (up to 45 years).

Meanwhile, infrastructure, and the country, has the need for funding, has a similar investment term, and can provide steady returns (certainly more than cash in the bank).

And finally, that $2.7 trillion is forecast to grow to over $7 trillion before yours truly (if he's lucky) is currently scheduled by the actuaries to shuffle off to another place. So that is around $2 trillion in cash and fixed income which could, with the benefit of some governmental initiative and taxation reform, be helping to build the nation, and helping to stabilise the returns of all superannuation fund members.

OK, off the soapbox! Australian Fund Monitors is delighted to announce the addition of Damen Purcell to the position of COO. Damen has over 20 years of experience in the financial services sector and will bring added depth to the management, marketing and operations of AFM. Yours truly might even be able to hand over the reins of Hedge Clippings in the not too distant future, and return to his prior habit of enjoying lunch each Friday. (Question mark deliberately excluded!)

Now there's an idea worth chasing!

Recession confirmed. Surprise, Surprise!

Hedge Clippings understands that for politicians the "R" word is a double-edged sword. Oppositions love to taunt governments, and governments love to remind the opposition of their own "R" record when in power, while pointing to their own prowess in avoiding them.

Of course, the fact that Australia hasn't experienced a recession in close to 30 years makes the Treasurer's acceptance/admission that we're now in one - while we're still in the June quarter, let alone before we have the numbers that won't be released until September - all the more a confirmation that we're living in extraordinary times.

However, this week's premature acceptance, or capitulation, or however one wants to describe it, was probably a first. Hardly the "recession we had to have" under former Treasurer Keating (self-described as the "world's best" at the time), more one that no government could have avoided under the circumstances, in spite of the efforts they're making, and the billions they're spending, to mitigate its effects.

What is surprising is how long it has taken to accept the inevitability of the "R" fact (or perhaps how long it has taken a journalist to ask the question), given that you don't need to be a student of the science of economics, or the dark art of political speak, to have known the answer.

The real question, which no one knows, is how long the recession is going to last, how deep it will be, how large the deficit will become, and how long - or should that be, how many generations - before the "S" word (surplus) is considered remotely possible. There are millions of Australians who only know of recessions via the classroom or through the media. Going forward, there are millions more who sadly won't live to see another surplus.

None of this should be taken as criticism of the measures that the Federal government, and the State governments of all persuasions, have taken to protect Australians against both the physical and economic effects of the global COVID-19 pandemic. Inevitably there are sections of the community and workforce which have been affected - or benefitted - more or less than others.

That happens. However, taken as a whole, it is difficult not to be thankful (if we weren't already) that we live in Australia, rather than in the US, Europe, or in fact anywhere else in the world. That would include NZ, but understand there may be more than one opinion on that depending on which side of the Tasman one is on.

More importantly, as we're only three months into this disaster (probably more correctly described as a debacle in the US or UK), how we come out of it and how the government manages to wean the country off COVID Welfare, bring us out of the recession, and put us back onto the path to growth, will be key to our collective future prosperity. And don't fall into the trap of thinking that a quarterly bounce in GDP in Q2 or Q4 means we're out of the woods. Getting back to where we were is not going to be an easy task.

Which brings us to the markets and the performance of managed funds. To the end of May, the ASX200 Accumulation Index rose 4.36%, still down -12.7% from December 31, and -6.7% over 12 months. Early days yet, but based on 20% of performances received to date, Australia/NZ managed funds rose by 9.55% in May for an outperformance over the month of +5.19%, and are down just -2% YTD. Over 12 months they are up +4.33%, outperforming the Index by over 10% both YTD and over 12 months.

By itself, a fall on the ASX of only 12% YTD, given the "R" word that is now part of the vocabulary of 30 and 40-year-olds for the first time in their lives, is extraordinary.

Pity the poor private investor

Coronavirus driven capital raising on the ASX has been a boon for listed companies (wanting to shore up their balance sheet), a treat for investment banks and brokers (lucrative fees), and a boon for institutional shareholders (new shares at a substantial discount to market) who've made a quick and easy return of 10% or more.

Not so fortunate are the legion of individual shareholders - be they mums and dads, retirees, or SMSF members - who didn't get the offer of a quick return to make up, even in part, for the shellacking they've received as a result of the coronavirus in the first place. Not only this, but in many cases they've had, or will have, their dividends slashed or cut completely, seen interest on any cash in the bank go down to virtually nothing, and for those whose jobs have been impacted, seen their wages and salaries reduced - or disappear completely.

And finally, to add insult to injury (maybe that term's a little harsh) their equity has been diluted along the way, and therefore in due course so will their future dividends. And it's not as if there's no spare capital around, SMSF's are currently holding almost record levels of liquidity.

However, it's not fair! Although as Bill Gates once remarked when returning to give advice to students at his old university: "Life's not fair. Get used to it!".

The other side of the argument, of course, is that the institutions and managed funds who have been on the receiving end of the bonus quick returns are actually investing on behalf retail investors. As such, it could be argued it all works out in the wash, even if that's not really the point. However it does provide another reason to leave investing to the experts (the fund managers) provided, as we are always at pains to point out, you do your homework (research) and don't put all your eggs in one basket (diversify across managers, funds and strategies).

Talking of funds and performances, the statistics and returns continue to show that when times are tough for the market, actively managed funds, absolute return and alternative strategies provide downside protection - which is of course when it's required.

For the 12 months to the end of April, the ASX200 absolute return index was down -9.06% (and as of today's date is not much better). On a strategy or sector basis, managed futures rose +4.59%, equity long/short fell -2.13%, market neutral -2.90%, and equity long-only -4.78%. Across all strategies, the 12-month return was -3.12%, and -2.67% for all absolute return funds. With the usual caveat on averages, the range has been extreme: -75% through to +30%, with 75% outperforming the ASX200.

When looking back at the market's gyrations over the past 3 months there would appear to have been three clear stages: Falling for a month from the highs reached in the middle of February, bouncing back for a month from the lows of 23 March, and since then some semblance of stability as the market moves in a broadly sideways direction (albeit with considerable underlying volatility).

In hindsight, probably the most surprising factor was that it took until mid-February for investors and some fund managers to recognise the potential damage caused by the global pandemic. Not all investors or funds of course, as some were clearly ahead of the curve, but plenty were not.

As investors are now painfully aware, the ASX200 fell almost 21% in March, and that figure would have been closer to -27% had the last week of the month not included the start of the recovery.

April's market recovery of almost 9% still saw the ASX 200 down 16% since the start of the year, and over 9% lower than 12 month ago. By comparison, absolute return funds listed on www.fundmonitors.com have fallen just over 8% year-to-date on average, and slightly under 3% over 12 months.

As we always point out, the term "average" is dangerous: YTD individual performances range from -80% to +25%, while over 12 months the figures are not that much different: -78% through to +30%. Drilling down into the details always reveals reality. Many of the funds that would have appeared in "Top 10" tables to 31 December last year are at the other (wrong) end of the scale by the end of April this year.

Equally, what the volatility has shown clearly is that diversification across funds and strategies is vital when looking to avoid downside risk and loss of capital. And not just diversification of names or managers - selecting funds with low correlation is vital, particularly in negative or volatile markets. So too is including funds which offer real downside protection - either through manager skill, or diversification of strategy.

During the bull market of the past few years some defensive funds and strategies have struggled to attract the attention of investors and the obsession for high headline returns. Finally, funds such as Gyrostat (12 months: +15%), ARK Global (12 months: +25%), and Levitas (12 months: +16%), to name just a few, are being recognised as true diversifiers in a well-balanced, low correlation portfolio of actively managed funds.

So where to from here?

While some managers consider the worst is over, many others, possibly along with the mood of many investors, are more cautious, concerned about a second leg down in the market, an extended recession, and/or a second wave of infections. Hedge Clippings remains in this camp, but either way, up or down, diversification across funds with low correlations to each other would seem appropriate in these uncertain times.

It seems as if, in Australia and New Zealand particularly, there are increasing expectations around the lifting of social distancing and lockdown restrictions. Whether it be the re-opening of schools or the resumption of limited sporting competitions, or it's simply the number of people with whom we can meet and greet - albeit at arm's length or more.

However, we have been incredibly lucky in Australia to have avoided the worst of COVID-19 - at least from a medical perspective. Oversees the infection rates and death tolls have been truly devastating, initially in Italy and Spain, and subsequently in the UK and the USA. With this in mind we spoke with two of our "regulars" this week, namely Monik Kotecha from Insync Fund Managers and Chris Watling from Longview Economics, to get their take on how companies, markets and economies might emerge once the lockdown is over.

Unfortunately, the quality of Zoom videos for both interviews wasn't what we would like it to have been so we will produce full transcripts of each interview and publish them as "Insights" articles early next week.

However, what was interesting was their different take on what lies ahead. Monik was looking at it through the prism of secular trends and the global "mega" companies in which Insync invest, while Chris Watling from Longview was naturally considering the global implications and the effects on consumers and small companies, or those with high levels of debt which might be more severely damaged by the pandemic.

Insync are optimistic that the pricing of companies in which they invest is not unreasonable. Longview are questioning the extraordinary bounce in global markets since the March lows, and what lies beyond Q3 when life might have returned to a near-normal state.

As Hedge Clippings views the future, while we can see the lockdown being eased both here and overseas, we can't see a return to normal until a cure or, failing that, an effective vaccination is found and deployed around the globe. There is also the significant risk of a second, and possibly third, wave of infections. It also seems that there is a huge amount that is not known about the disease, and unless and until the Chinese government agrees to release information about its source, this is likely to remain the case.

Come to think of it, the Chinese government's intransigence and reluctance to have any kind of open dialogue on the matter seems inevitable. While that is the case, the possibility of a further outbreak or other outbreaks of as yet unknown diseases remains high.

So, maybe for the foreseeable future at least, we live with the threat.