Stupid is Good

Marcus Today

June 2023

Las Vegas houses some of the world's most magnificent hotels. The Wynn, the Encore, the Bellagio, the Venetian, the Palazzo, the Palms, the Trump Hotel, the Aria, the Mandarin Oriental, the Mirage, the MGM Grand and Caesars Palace, to name just a few. And Caesars Palace in particular. It's the most colossal hotel and casino complex you have ever seen.

Begun in 1966, it now boasts six massive towers. The Forum, Roman, Centurion, Palace, the Augustus and now the Octavius. It has 3960 rooms, eight Roman-style swimming pools, 160 restaurants and shops, four gigantic ballrooms and three wedding chapels.

The game in Vegas is to wow you with so much pizzazz that you don't see what's going on until it's too late. The classic example is the Palazzo, which is completely indoors and designed to feel like Venice at 8pm, at night, all day. Who wants to gamble at 9am? At the Palazzo, you don't have to.

Of course, most people buy into the whole thing and have a blast - they go hard, spend their money and retire hurt with lifelong memories that make it worthwhile. But stay long enough and you see through it, if you care to, which is why Vegas is only ever a place you visit. It's not a place you live because if you stray too far from the game plan, walk about during the day, turn the lights on and stop to notice what's going on, then your epiphany will be that all those hotels, all those towers, all those incredible casinos were built on the backs of losers.

It is rather incredible, really, that despite Caesars Palace standing right out in the middle of the Strip as a gigantic, unembarrassed testament to the odds at a casino, people still turn up to play. Maybe that's why they bus you straight into the underground car parks - so you don't look around, so you don't notice, so you don't begin to question too soon just where all the money came from.

Then there's Australia. A nation of gamblers whose courage and risk taking is legendary. After all, Australia is a nation built by people who took a risk, simply by coming to its shores.

The legacy is that half of adult Australians gamble on a regular basis. And to the incredulity of Bill Bryson, an objective English Author, we have close to 200,000 gaming machines, which is almost one per on hundred adults and our total gambling turnover is around $225 billion a year, and more during the pandemic when the proportion of online gamblers rose to 78%.

See this article in the Washington Post about Australians. We have half a per cent of the World's population but 20% of the World's pokies.

Gambling is in the Australian DNA, it must be, because faced with almost certain loss, we have still turned up, and keep turning up, with hope in our hearts. In Australia we admire a winner. We laud a "Boy done good" particularly if they were lucky. In Australia taking risk and luck is a noble, not stupid, trait.

Lucky Country? Or unlucky country?

The comparisons between gambling and the share market are unashamedly unconcealed. In the casino, they distract you with flash and feathers and disable you with drink. Meanwhile, somebody has their hand in your back pocket.

In the share market, they dazzle you with colourful software, trading platforms, average returns, IPOs, dividend yields, franking, charts and the media iced by jargon, urgency and ever-thinning sophistication, whilst someone has their hand in your SMSF.

And the marketing is the same. Drive from the Las Vegas airport to your hotel and you will hear the taxi driver's story of the girl who put a single dollar in the pokie machine at the airport and won a million dollars; a delusion of success reinforced by casino-floor plasma screens showing winners and their hauls.

And so it is that the share market also blinds us with the winners and their books about "How I Made $2,000,000 in the Share market". It is no different. The stock market's casino owners are out lauding the winners as well, by glorifying the success of Warren Buffett and by suggesting that you too can achieve a limo at 24 by trading forex on your mobile phone.

And one of the most convenient truths of all, for the casinos as well as the stock market, is that in any betting/gambling industry, while the winners buy Ferraris so we will notice them, the losers seek the dark corners of anonymity. The winners stay and play, and the losers go away. Perfect.

Perfect for any industry that sells transformation through risk taking. Thankfully for them, no one ever publishes a book called "How I Lost My Kids' School Fees in Leveraged Derivatives". Even the losers wouldn't want anyone telling their stories, and they don't. Convenient.

Yet gambling is one of the oldest industries in the world. And for a reason. People love gambling, you can't stop them and they don't want to be stopped.

The confusion for you as a long time sensible investor is that this short term momentum driven activity has no reference in value, and has added volatility, noise and predators. It is hard to tell them apart these days, the bookies from the financial services providers. The bookies use the same jargon, dress code, media outlets and, even, licences, as everyone else in the industry. And as they do so they are plundering the limited store of stock market respectability and integrity built over hundreds of years, as a camouflage for their bet-taking platforms and products.

They are using us, well, our share prices, as the base price for many highly marketed gambling options.

And that's before we mention crypto. What a perfect combination for predators. A pandemic of government stimulated gamblers combined with a brand new highly volatile hard to explain, hard to argue against, social media driven, hyped up plaything, that anyone old, experienced and sensible couldn't possibly know anything about. Don't listen to us.

Brilliant. For the now failing platforms that clipped the ticket. 

But its not all bad. The stock market may be more volatile now than ever, there may be more sentiment that value in the share price equation, and there may be more guesswork than science in the trend, but don't give up on the stock market just yet.

While stock market price integrity has become more fluid, volatile and vacuous, the underlying fundamental value of the companies on whose share prices the gamblers now rely, are still there. In the long term. And no manner of hype and herd will take that away.

So rest easy.

And for traditional investors, this is your take home. Do not dismiss the gamblers, welcome them. They are a gift, delivered to you daily. For two reasons.

The first is that short term momentum-based activity based on urgent guesswork creates volatility and price extremes. For the investor that creates regular, exploitable opportunity. That's great.

And secondly, you should welcome the stupid into the market. The more uninformed people in the market, the more people there are to exploit.

Or let me put it this way. In a paddock packed with bunnies, even the sheep start to look like wolves. 

Author: Marcus Padley, Founder of Marcus Today

Funds operated by this manager:

Marcus Today Equity Income SMA, Marcus Today Growth SMA

Power-hungry AI a watch-out for equities investors

Pendal

June 2023

Big US tech stocks are soaring on a wave of new, advanced AI applications.

But similar to Bitcoin's early days, excited AI investors may be overlooking the technology's extremely high power costs and potential associated sustainability issues, argues Pendal Aussie equities analyst Elise McKay.

While the remarkable progress of AI promises to revolutionise industries, the sheer cost of the electricity needed to train and run the systems puts a question mark over the long-term prospects of adoption.

"There's three key components of power usage required for running a generative AI model," says McKay.

"First of all, there's the power needed to simply build the equipment that it runs on.

"Then there is the enormous power required to train the model.

"And then every time you ask it a question it requires new computations — and that means more power."

Even before generative AI became widely available, demand for data was expected to increase at a compound annual growth rate of 40 per cent per year.

The data centre industry is already estimated to account for about 1 per cent of global energy demand, says McKay.

"Just because it's on your phone doesn't mean it's not in a data centre somewhere — and data centres need electricity. Any new technology just increases demand for power."

McKay uses the example of bitcoin mining, which rapidly increased its share of global energy consumption from next to nothing to an estimated 0.5 per cent in 2021.

"Emerging technologies like bitcoin mining can see very rapid adoption and dramatic increases in demand for power," says McKay.

"We are now seeing the broad take up of generative AI, which is significantly more power hungry than existing technologies."

A study by Stanford found that training the popular GPT-3 generative AI system contributed almost 10 times the emissions that the average car consumes in its lifetime, says McKay.

Estimates are the newer GPT-4 model was eight times more power intensive again, she says.

"And you don't just do this once, you do it regularly."

OpenAI — the company behind ChatGPT — says it continuously improves its AI model by "training on the conversations people have with it".

"And each model can only do one search at a time," says McKay. "So, if 100,000 people search for something at the exact same time you need 100,000 copies of the model otherwise queries will be queued.

"Estimates are that every time you query ChatGPT, it is 300 times more expensive than a Google search."

High power usage has also raised question marks over the carbon footprint of the technology industry, with many providers shifting to renewable energy to minimise their impact on the environment.

"The high cost of providing AI will hinder its adoption," says McKay.

"It may mean that only companies willing to pay a high price will be able to use it. There's a good use case for companies willing to pay for it because it improves productivity, but will we see broad adoption for low-paying use cases?"

Author: Elise McKay, Investment Analyst

Funds operated by this manager:

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

10k Words

Equitable Investors

May 2023

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Changes in the cost of capital remain front and centre with Japan's dividend yield surpassing the rest of the world's for the first time in 50 years and asset class yields converging as fund managers express bullishnes on bonds, with 30+ countries facing inverted yield curves and the futures market still pricing a decline in the Fed Funds rate. It is amazing how even having the ticker "AI" has been enough to attract buyers. Amidst such sentiment, Nvidia has joined the trillion dollar market cap club - being in the sector that has diverged from bonds of late. Such mega caps are living in a different world from small businesses facing into tighter lending. We look at the S&P 500's trends relative to interest rates and "QE" and how large cap growth has been above other market segments over the past decade. There's still not much joy in IPO markets - especially for those who didn't sell quickly. Finally, we take a look at the decline of cash in the Australian economy and the resurgence of commercial aircraft orders.

Japanese dividend yield exceeds the rest of the world for first time in 50 years

Source: Minack Advisors, Asian Century Stocks

Compression of yields across assets

Source: Financial Times

Fund Managers' bullish bonds, negative equities, relative to historical levels (June 2023 survey)

Source: Bank of America, [email protected]

33 countries have an inverted yield curves

Source: worldgovernmentbonds.com

Market expectations for Fed Funds Rate (as per futures)

Source: @CharlieBilello

Recent surge in price of C3.ai (Ticker "AI")

Source: TIKR

Stock code "ZOOM" took off when Zoom Video Communications (ZM) surged in 2020

Source: TIKR

Nvidia joins "Trillion Dollar" Market Cap Club

Source: Statista

Divergence between tech valuations & bond yields

Source: Bloomberg, Koyfin

Loan availability compared to three months ago

Source: NFIB Small Business Economic Trends May 2023

Fed tightening, EPS growth & PE multiple expansion/contraction

Source: @EquitOrr

S&P 500 performance and Federal Reserve net Quantitative Easing (QE)

Source: Bloomberg

US equities - growth v value over the past 10 years

Source: Equitable Investors, Koyfin

Recent US IPOs

Source: Koyfin

ASX IPOs in CY2023

Source: 61Financial

Sharp decline of cash's share of Australian payments

Source: RBA

Net orders for commercial aircraft

Source: The Economist

June Edition

Funds operated by this manager:

Equitable Investors Dragonfly Fund

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.

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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.

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Webinar Recording | Resource Funds -

Analysing the Opportunities and Risks 

FundMonitors.com

27 June 2023

Resource funds can offer a unique avenue for capitalising on the growing demand for natural resources and the global shift towards sustainable energy and materials. In this webinar, we looked at the strategies and approaches employed by three successful resource fund managers and learn how they navigate the opportunities and risks associated with this asset class.

Watch the recording of our manager round table webinar, where we were joined by Dan Porter from Pure Asset Management, David Franklyn from Argonaut Funds Management, and Matthew Langsford from Terra Capital. They shared their views on this interesting and diverse market sector.

AI Revolution

Insync Fund Managers

June 2023

Adobe has established itself as the indisputable standard in creative software. Commanding both recognition and reliance by professionals in graphic design, photography, videography, web design, and publishing. It is well positioned to benefit from AI.

Adobe has been leveraging its AI engine - Adobe Sensei, to power new AI features across its various product lines. Many of these new AI features, especially for Creative Cloud products, represent a potential paradigm shift in the day-to-day workflow and content creation of their users.

The realm of Generative AI has Adobe Firefly competing with current industry giants (DALL-E and Mid-Journey). Adobe however gains an edge utilizing licensed and out-of-copyright content, making it highly appealing to corporate markets. Large companies, constrained in content creation, can now profit from Generative AI, while trusting Adobe's reputation for reliability.

As the AI revolution unfolds Adobe stands as the unrivalled leader in content creation. It is already transforming the creative landscape and propelling content creators into limitless realms of possibility. Importantly it's an extremely profitable business with compounding sustainable earnings. Precisely the kind of business Insync loves to own. 

Funds operated by this manager:

Insync Global Capital Aware Fund, Insync Global Quality Equity Fund

Disclaimer
Equity Trustees Limited ("EQT") (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) ("Insync"), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.

Channel Capital Cayman: Embracing Sustainability - Unveiling the Power of ESG Investing

Channel Capital

May 2023

Sources:

*The ESG potential - how mutual fund boards can manage risks and seize opportunities, E&Y, January 2021.

** How Well Has Environmental, Social, and Governance Investing Performed? Michael Iachini, September 2021.

Banks, interest rates and opportunities in the finance sector

Magellan Asset Management

June 2023

Alan Pullen, Portfolio Manager, discussed the recent bank defaults, the impact of interest rates on banks in general and where he sees opportunities in the financial sector.

Funds operated by this manager:

Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), MFG Core Infrastructure Fund

Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation.  This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. A copy of the relevant PDS relating to a Magellan financial product or service may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any strategy, the amount or timing of any return from it, that asset allocations will be met, that it will be able to be implemented and its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material.  Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.

Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan.

Risk-adjusting small-cap upside 

PURE Asset Management

June 2023

Those investing in smaller companies will appreciate the difficulties faced by this market segment since early 2022. Central banks have raised interest rates in unison, with liquidity and confidence evaporating as a result. The unfortunate outcome is that share price appreciation has been a mirage for most emerging businesses. When compared to large cap peers, the chart below illustrates the degree of such underperformance. Since January 2022, small cap equities have experienced their own 'GFC'.   

A key adage we live by at PURE is that share prices are not always reflective of underlying operational performance. Market sentiment and liquidity can savagely impact small cap valuations, and while painful for existing equity holders, create phenomenal opportunities for astute new investors. The risk is that equity prices remain under pressure for longer than an equity investor can stomach, resulting in further losses. Our key takeaway from the above chart, it that strong outperformance has always followed underperformance. When small cap share prices appreciate, they do so quickly. The unknown here is timing. 

While no investors have certainty on timing, hybrid investing is a unique way to 'risk-adjust' this variable. Hybrid investments involve entering a transaction via a credit instrument, yet retaining exposure to equity returns via a conversion mechanism. The outcome being sought is to remove downside equity volatility, yet retain exposure to upside equity volatility. This entails swapping some equity upside for capital structure protection, security, and a consistent interest income stream. Getting 'paid to wait' in the form of interest income ensures a cash yield is received as each investment thesis materialises.    

Today's conditions are extremely attractive to deploy capital via hybrid structures. Many borrowers are unable to access debt markets, with most dissatisfied with their cost of equity. The result is a strong negotiating position for deal originators, as value drivers (interest rates / conversion premiums) are being agreed from a position of power. If capital preservation can be achieved as a secured creditor, upside potential from this cycle low should be self-evident. 

While an attractive way to invest, hybrid deals are are difficult for investors to source as they involve a direct negotiation with the Borrower. PURE's funds were established as a vehicle to provide exposure to this form of investing, a strategy which remains unique to this day.

Have you considered hybrid investments as a way to risk-adjust your exposure to emerging companies? 

Funds operated by this manager:

PURE Income & Growth Fund, PURE Resources Fund