NEWS
5 Jul 2021 - What Are Central Bank Digital Currencies?
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What Are Central Bank Digital Currencies? Arminius Capital 18 June 2021
INTRODUCTION We've all heard of digital currencies like Bitcoin, Dogecoin, and other cryptocurrencies. What most people haven't noticed is that the world's central banks are planning to issue their own digital currencies. In fact, China has already been trialling digital renminbi on its unsuspecting citizens. What will central bank digital currencies (CBDCs) mean for banks, payment systems, and national economies? CBDCs differ from other cashless payment instruments such as credit transfers, direct debit, stablecoins, or cryptocurrencies, because they are "government money", being direct liabilities of the central banks. Issuing this "extra currency" involves costs, but CBDCs also allow central banks to see real-time transactions, create audit trails, monitor criminal activities, and prevent money laundering. Central banks had been quietly pondering CBDCs for several years, but most of them kept their ideas under wraps for fear of confusing their political masters. The world's parliaments are largely composed of middle-aged white men who know less about online phenomena than their teenage kids do. Until two years ago, talking about CBDCs would simply confuse the politicians. The turning point came in June 2019 when Facebook unveiled its plan for a global digital currency called "Libra" (as in the tampon). Libra was to be a blockchain-based currency operating under Swiss regulation, which could be used in any country and also for money transfers between countries. In order to avoid the wild fluctuations in value which we have seen in Bitcoin and other crypto-currencies, Libra was to be a "stablecoin", which meant that its value was to be based on a fund of actual currencies and US government bonds. Unfortunately or not, Facebook completely screwed up the launch of Libra. Management was not prepared for the regulatory requirements, even for such basic issues as talking to the Swiss regulator (that speaks 4 languages, in addition to English), incorporating privacy protections, and complying with anti-money-laundering rules. More importantly, the company was totally deluded about its reputation in the eyes of US politicians and the US public. Questioning by US congressmen was mostly very hostile, making it abundantly clear that Facebook was neither liked nor trusted. No, really. Politicians in other countries expressed similar criticisms of Libra and Facebook. In response, the company announced in September 2019 that it would not launch Libra anywhere in the world until it had gained approval from US regulators. This public relations disaster saw the departure of some of Facebook's key partners, extensive re-design of Libra (including basing it on the US dollar alone), the renaming of Libra as "Diem", and the indefinite deferral of any launch. For central banks, however, it now became possible - even desirable! - for them to talk about their plans for digital currencies. A new sense of urgency also came from the Chinese central bank's announcement in October 2019 that it had been developing a digital renminbi since 2014, and would start public trials in April 2020.
TRIALLING CHINA'S DIGITAL RENMINBI China's central bank has not yet finalized the design of its digital renminbi, which is also known as the e-CNY (for electronic Chinese yuan) or DCEP (for Digital Currency and Electronic Payment). DCEP is intended to simplify retail and wholesale digital transactions and inter-bank settlements, with the added aim of reducing money laundering, gambling, corruption, and terrorism financing. The DCEP technology will allow users to transfer money by touching each other's phones, regardless of whether they are connected to the internet. But the DCEP will operate entirely through the banking system - Chinese individuals and companies will not have accounts at the central bank. DCEP will certainly not undermine the Chinese banking system. The four biggest banks, with about 40% market share, are not only State-owned but also play essential roles in the Chinese government's fiscal and monetary policy mechanisms. DCEP will employ encryption which will allow users to carry out transactions without identifying themselves to merchants. The Chinese authorities may also choose to pay some salaries or benefits in DCEP, and they may require some taxes to be paid in DCEP. According to the central bank, DCEP is not intended to replace cash completely, or to supersede the two privately-owned digital payments systems, Alipay and WeChat Pay, which are used by more than 90% of China's population. The two systems are operated by the tech giants Alibaba and Tencent respectively. These systems are able to collect detailed data on all users and their transactions, then to analyse this data in order to market other products to them. Although the central bank has said that DCEP will not replace Alipay and WeChatPay, the owners of these two payment systems know very well that they are being targeted. China's financial regulators have spent the last three years bringing both payments systems very firmly under government control in terms of settling, reporting, and reserving. In 2021 the regulators forced the parent companies to become fully regulated financial holding companies, which meant that they had to clean up their activities, and also to divest a number of lucrative peripheral businesses which they had started in recent years. In addition, Alibaba and Tencent have "given" DCEP access to the details of their hundreds of millions of users. China's tech giants will do exactly what the Party tells them to do, and they WILL do so with visible enthusiasm (cue the enthusiasm, please). The Chinese central bank will be able to see and record all account balances and all transactions for every DCEP unit, and the resulting economy-wide picture will give it a fine-grained, real-time view of macro and micro trends. It will, however, apply the principle of "controllable anonymity" to sharing this information. Participating banks and merchants will only be able to see transactions in which they are involved, and they will not be permitted to retain their part of the transaction data for any longer than needed. The DCEP will eventually be used for cross-border payments, once all the kinks have been ironed out of its domestic operations. For example, it is not yet clear how overseas DCEP users could make purchases in China, or what DCEP access would be given to foreigners visiting China. (See Chorzempa 2021.) But China's central bankers have been at pains to stress that, although DCEP may eventually facilitate the internationalization of the renminbi, it is not intended to compete with the US dollar as a means of international transactions or a global reserve currency. These functions depend on long-term factors such as capital export controls, trade volumes, available swap lines, user preferences, and relative volatility, which are mostly outside government control. (See Zhou 2021.)
THE FIRST CBDC IS ALREADY UP AND RUNNING The Bahamas launched its Sand Dollar on 20 October 2020 after ten months of trials. The new digital currency is not a stablecoin or a cryptocurrency. It is issued as a liability of the Central Bank of the Bahamas, equivalent to the existing paper currency and backed by the same reserves as the paper currency. It is open to wholesale and retail use by all banks, merchants, and payments providers operating in the Bahamas, although prohibited from acceptance by non-domestic payees. The transactions trail is fully auditable and will be monitored for fraud prevention and criminal activities, but user confidentiality will be preserved by strict regulatory standards. Holdings of Sand Dollars by individuals, businesses, and non-supervised financial institutions are subject to size restrictions, so that the Sand Dollar does not operate as a close substitute for traditional bank deposits. Circuit breakers will be used to prevent systemic failures or bank runs. (See Central Bank of the Bahamas 2019.) The Bahamas is over-endowed with banks, but most of them do not cater to the local population of 389,000, who are scattered across more than 700 islands. GDP per head is USD$27,000 (about half of Australia's), with a sharp division between rich and poor. The Sand Dollar is intended to:
The Sand Dollar could be described as cash without the anonymity. Its use is also subject to some restrictions which are intended to reduce systemic risk and protect financial stability. Its economic function is similar to the effect which the spread of mobile phones had in many under-developed countries, where they improved national connectivity quickly and cheaply by skipping the traditional step of building a landline network.
POLICY CONSIDERATIONS For the next few years, CBDCs will be in the design and testing stage. Their parent central banks know that they enjoy the crucial advantage of total security, because a central bank can't go broke, whereas any privately-owned bank may default at any time. (Remember how the GFC took down Lehman, Bear Stearns, Wachovia, ABN Amro, Royal Bank of Scotland, Northern Rock, and many more banks?). But, in order to achieve broad acceptance, CBDCs also need to be cheaper or faster or more efficient or more private or more convenient than the alternatives. (See Brainard 2020.) CBDCs also bring new risks for financial stability. For example, they may be so attractive that they begin to replace bank deposits, thereby depriving banks of a vital source of funds. They may crowd out cash in retail transactions, and thereby limit the choices of the poor, rural, and elderly, as has been happening in China. Because CBDCs can be moved from account to account almost instantaneously, they could trigger a run on a bank, or even a run on the currency. Thanks to Facebook's PR disaster, many governments are now legitimately worried that their money supply and payments system - as well as their citizens' personal data - may one day fall under the control of some foreign technology company. (See Panetta 2021.) Two weeks ago, Fed Governor Lael Brainard set out some of the major policy considerations which need to be taken into account when designing a CBDC:
No matter how a CBDC is designed, it will have to be written into a country's legislation regarding the central bank, legal tender, and the banking system. This task will be neither quick nor easy. What regulators will not do is to give legal tender status to unregulated stablecoins or crypto-currencies, because if these become legal tender, they may be hoarded or suddenly transferred, which would make it possible for financial stability risk to be concentrated in issuers or holders whose operations, cash flows, and balance sheets are not visible to the authorities. That means the regulators might have to deal with "a run on the bank" when it didn't even know there was a bank, let alone that it was in trouble. (See Brainard 2021.)
DESIGN FEATURES OF CBDCS China's DCEP and the Bahamas' Sand Dollar are not the only ways to run a CBDC. For example, both are designed as an account-based, centralized ledger with total visibility for the purpose of preventing money-laundering and other crimes. A CBDC could also be designed as a token-based, anonymous transaction tool, offering the same level of privacy as cash. (See Bache 2021.) To Chinese policymakers, a CBDC is a means of resisting the dominance of the two tech giants Alibaba and Tencent in the payments system. CBDCs may be retail (for everyone) or wholesale (big users only). A retail CBDC may operate through the banking system, like China's, or it may interface directly with consumers and companies, allowing them to own accounts at the central bank. A wholesale CBDC would be restricted to wholesale users (such as banks) who will use them for inter-bank transfers of large sums, or for their reserve accounts at the central bank. (See Estenssoro 2021.) A CBDC may be subject to complete centralized control, like China's, or it may be run as a distributed ledger ("blockchain"), perhaps with partial oversight and selective permissioning in order to restrict its use for illegal activities. No central bank is likely to issue a CBDC which is purely based on a distributed ledger (blockchain), because this would lack the essential functions of transparency and control. Would a CBDC pay interest to its holders? Of course, cash does not pay interest, but there may be reasons why a retail CBDC would do so. A CBDC which paid negative interest (i.e. its value decreased the longer it was owned) would contain a powerful incentive to be spent sooner rather than later. For a wholesale CBDC, however, the issuing central bank might pay variable rates of interest when it wished to incentivize banks to hold CBDC deposits or reserves rather in alternative forms. It is unlikely that CBDCs will be used for cross-border transactions in the near future, because of the legal and administrative difficulties. Any cross-border CBDC would have to meet the regulatory obligations of every jurisdiction where it was used. Because these obligations can differ widely from country to country, the regulatory burden would be considerable. The same goes for the administrative requirements of each country's payment systems. Any cross-border CBDC would have to interface perfectly with payment systems on both sides. There are two forms of cross-border CBDC which might be adopted relatively early. The first is a CBDC which was restricted to central banks only: it might be adopted by a small group of countries, with its acceptance widening over time. The second is what Facebook still hopes to do with Libra/Diem: a CBDC which handles small-value international transfers such as the remittances of migrant workers. Such a CBDC would need regulatory approval of the sending and receiving countries, but it could be hedged around with restrictions to prevent domestic use, money laundering, and criminal activities. This "remittance CBDC" would fill a market gap, because current global payments systems charge 5% to 7% commission on small remittances.
HOW FAR BEHIND ARE OTHER CENTRAL BANKS? At present, more than fifty central banks are researching the costs and benefits associated with issuing their own CBDCs. (See Boar and Wehrli 2021.) Few of them have made their research public, but the European Central Bank (ECB) set out its ideas in detail last year. (See ECB 2020.) The ECB described seven scenarios under which a digital Euro (e-euro) would be worth creating:
The ECB's retail euro would be legal tender, operating through banks and other authorised intermediaries. Protecting privacy would be important, subject to the trade-off against identifying money laundering, tax evasion, and other criminal activities. The amounts which individuals and businesses could hold in their accounts would be limited in size. Initially at least, the e-euro would be restricted to EU residents, with the possibility of short-term exemptions and later expansion. The ECB does leave open the possibility of allowing "bearer e-euros" which would not require the usual identification by users. It also considers the possibility of issuing two types of e-euro: one would be used for basic transactions, offline as well as online, while the other would function as a policy instrument carrying a variable (and potentially negative) interest rate.
WHAT WILL HAPPEN WHEN THE RESERVE BANK OF AUSTRALIA CREATES ITS OWN CBDC? Last year the Reserve Bank of Australia ("RBA") published a short paper outlining the issues associated with a CBDC. (See Richards 2020 and Richards et al. 2020.) The paper concluded that CBDCs were a solution for problems that did not exist in Australia. We already have financial inclusivity, in that almost all Australians have transaction accounts and the means to execute online transactions via mobile phones, credit cards, etc. The current payments system is efficient, relatively cheap, and open to new players. The other policy considerations listed by The US Federal Reserve's Governor Brainard are not material issues in Australia. So Australia's big four banks need not worry about CBDCs in the next few years. The RBA indicated that it would continue to monitor developments in the global CBDC space, and that it would not hesitate to introduce a CBDC if there were compelling reasons. The RBA paper did discuss some of the design choices for an Australian CBDC. Preliminary indications are:
CONCLUSION The digitization of money has only just begun. It will take at least five years before we will have realistic assessments of what works and what doesn't. The design choices which central banks make in their digital currencies will eventually affect all the players in the financial system. Arminius Capital will provide regular updates on significant developments. REFERENCES Bache, Ida Wolden. 2021. Fintech, Big Tech, and Cryptos - will new technology render banks obsolete? Oslo: Norges Bank. Speech 11 May 2021. Boar, Condruta and Wehrli, Andreas. 2021. Ready, steady, go? - Results of the third BIS survey on central bank digital currency. Basel: Bank for International Settlements. BIS Paper 114. Brainard, Lael. 2021. Private Money and Central Bank Money as Payments Go Digital: an Update on CBDCs. Washington DC: US Federal Reserve. Speech 24 May 2021. Brainard, Lael. 2020. The Digitalization of Payments and Currency: Some Issues for Consideration. Washington DC: US Federal Reserve. Speech 05 Feb 2020. Brunnermeier, Markus K., James, Harold, and Landau, Jean-Pierre. 2021. The Digitalization of Money. Basel: Bank for International Settlements. BIS Working Paper 941. Central Bank of the Bahamas. 2019. Project Sand Dollar: A Bahamas Payments System Modernization Initiative. Nassau: Central Bank of the Bahamas. Chorzempa, Martin. 2021. Testimony to US-China Economic and Security Review Commission. Panel 4: China's Pursuit of Leadership in Digital Currency. Washington DC: Peter G. Peterson Institute of International Economics. Estenssoro, Amalia. 2021. Central Bank Digital Currencies: Back to the Future. St Louis: Federal Reserve Bank of St Louis. European Central Bank. 2020. Report on a Digital Euro. Frankfurt: European Central Bank. Panetta, Fabio. 2021. Evolution or revolution: the impact of a digital Euro on the financial system. Frankfurt: European Central Bank. Speech 10 February 2021. Richards, Tony. 2020. Retail Central Bank Digital Currency: Design Considerations, Rationales, and Implications. Sydney: Reserve Bank of Australia. Speech 14 October 2020. Richards, Tony, et al. 2020. "Retail Central Bank Digital Currency: Design Considerations, Rationales, and Implications." Reserve Bank Bulletin, September 2020. Sydney: Reserve Bank of Australia. Zhou, Xiaochuan. 2021. The Digital Currency and Electronic Payment System. Beijing: Tsinghua PBSCF Global Finance Forum. Speech 22 May 2021.
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1 Jul 2021 - Does Higher Volatility Translate into a Higher Return?
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Does Higher Volatility Translate into a Higher Return? Australian Fund Monitors 30 June 2021 There is a long held ideal that when investing in equities, the level of volatility is correlated to the return; the more risk you put on the table the greater the return you expect to get back. Of course, the amount of time invested also needs to be considered, but for investments over 3 years (and beyond) this ideal is generally accepted, as evidenced by the number of scatter graphs used in fund marketing material. Volatility is managed by fund managers in several different ways, but generally it comes down to portfolio construction. The number of stocks in the portfolio, the size of the position held in each stock (and sector), and the buy and sell triggers, all affect the volatility of the portfolio. Typically, the funds management industry uses Standard Deviation as a measure of volatility. Standard Deviation measures the dispersion of monthly returns both above, and below the average monthly return. The smaller the funds standard deviation, the less volatile it is. The larger the standard deviation, the more dispersed the returns are and the more volatile it is. But does this show through in data, and is past volatility any sort of indicator of how a manager should have performed? We have looked at the returns and standard deviation over the past 3 and 5 years of all Long Only Australian Equity Funds (107 funds) on the www.fundmonitors.com database and broken these into quintile rankings. The funds with the best performance fall into the 5th quintile (best) and funds with the lowest standard deviation fall into the 5th quintile (best). Looking at the data over 3 years as at the end of May 2021:
Running the data over 5 years shows that standard deviation and return become slightly more correlated:
Clearly, while there is some minor correlation in this data, the ideal of using standard deviation as a measure of manager skill, especially in isolation, is not a prudent investment conclusion. Investors and advisors should be looking at multiple risk data points such as Sharpe Ratio, Sortino Ratio, Up and Down Capture and Downside Deviation, to help them make the most effective investment decisions.
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1 Jul 2021 - New Funds on Fundmonitors.com
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New Funds on Fundmonitors.com |
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Below are some of the funds we've recently added to our database. Follow the links to view each fund's profile, where you'll have access to their offer documents, monthly reports, historical returns, performance analytics, rankings, research, platform availability, and news & insights. |
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Holon Photon Fund |
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Legg Mason Martin Currie Emerging Markets Fund
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Blackmore Capital Australian Equities Income Portfolio
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Blackmore Capital Blended Australian Equities Portfolio
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Ares Diversified Credit Fund
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Ares Global Credit Income Fund
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28 Jun 2021 - Private Equity: Why Exit strategies are key to performance
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Private Equity: Why Exit Strategies Are Key to Performance Vantage Asset Management 25 June 2021 The value creation that Private Equity can bring to businesses, by contributing expertise across strategy, M & A and process enhancement is well documented and particularly applicable to private family or founder owned companies. This value creation comes when growth is accelerated through customer expansion, operational efficiencies are improved, cost are reduced, IT systems are implemented and additional talent is employed. In an analysis of the US Private Equity mid-market, Adams Street Partners found that over 70% of value creation either came from revenue growth or multiple expansion largely as a result of business process enhancement, as opposed to value growth through financial engineering or debt leverage, which is often the perception of how value is created. What is possibly more important but less well-documented is the value that is created through the "art of the exit": being able to determine the right time to sell and identifying the best method of selling a company to maximise investor returns. There is a common misconception that the primary source of equity release or exit from a private equity fund's portfolio comes from an Initial Public Offerings (IPO) and listing on a public share market, which was predominately the case in the late 1990's and early to mid 2000's where there were a number of high profile Private Equity IPO exits that generated significant returns for private equity investors. However, there are at least three main methods of equity release that Private Equity fund managers consider when planning to exit a business, often years in advance of the actual exit outcome:
Private equity managers add significant value when it is time to sell / exit a portfolio company by allowing the company's executives to remain focussed on growing the business while the private equity managers utilise their expertise to pinpoint the right method and time to achieve the best price for the sale of the business. In this article we will look at examples of some recent exits from the Vantage's Private Equity Growth Fund portfolios (VPEG2 & VPEG3) to illustrate how Vantage's private equity managers are able to generate significant returns for Vantage Fund investors:
During April 2021, VPEG2 underlying fund Next Capital Fund III, completed the fully underwritten bookbuild for the IPO of portfolio company Lynch Group. Lynch Group successfully listed on the ASX on 6 April 2021, raising ~$206 million at $3.40 per share. The transaction followed a transformational investment period for the Company across the 5.4 years of ownership by Next Capital. ynch Group has evolved from predominantly an Australian supermarket wholesale business with a fledgling growing asset in China, to the largest Asian vertically integrated grower and multi-channel wholesaler of cut flowers and potted plants across Australia and China. Next Capital sold ~50% of the fund's shareholding into the IPO. The remaining ~17.0% holding will be in escrow until release of Lynch's audited 1H FY22 financial results in March 2022. This IPO exit delivered Next Capital Fund III and its investors, including VPEG2's investors a strong multiple of invested capital.
During June 2021, Vantage's VPEG2 & VPEG3 underlying funds Mercury Capital Fund 2 (MCF2) and Fund 3 (MCF3) announced the sale of MessageMedia for USD$1.3 billion (AUD$1.7 billion) to Sinch, a leading global cloud communications business listed on the Nasdaq Sweden. This exit marks an excellent investment for Mercury Capital Fund 2 and Fund 3 and is representative of the strong partnership that Mercury formed with the founder Grant Rule and the management team. Following MCF2's investment in MessageMedia in August 2018, the business transformed from a primarily Australia and NZ based SMS provider to the leading global Server Message Block (SMB) Customer Engagement platform. MCF3 subsequently made an additional investment in MessageMedia during November 2019, which further supported the business's transformation in rebuilding the management team, consolidating the platform and the successful add-on investment of US-based messaging platform SimpleTexting. Once completed, the sale will deliver MCF2 and 3 investors, including VPEG2 & VPEG3 investors with an exceptionally strong return on investment.
During June 2021, VPEG2 underlying fund Next Capital Fund III announced the sale of iseek, Australia's leading cloud, Data Centre and Connectivity provider to a UK based Information Technologies and Telecommunications Infrastructure Fund. Following Next's acquisition of iseek in August 2018, management have heavily invested in the construction of two state of the art physical data centres in Brisbane and Townsville and captured material contract tenders from large state government agencies and tier one corporate clients. These initiatives, along with the industry tailwinds of organisations outsourcing data storage providers, positioned the business to have a strong long-term opportunity set, representing an attractive investment for the international acquirer. The sale of iseek will deliver another robust investment return to Next Capital Fund III investors, including VPEG2 investors. All three of these transactions will result in excellent performance outcomes for our investors. In fact, across the June 2021 quarter, five underlying company exits were either completed or announced from Vantage Fund portfolios. These exits will deliver Vantage's Funds an average gross 4.9 X return on invested capital, representing an average gross Internal Rate of Return of 73.9% per annum.
MORE EXITS PLANNED FOR THE SECOND HALF OF CY2021 The market environment and economy generally remains very supportive of exits at the moment and a number of other companies across Vantage's portfolios are also positioning for exit across the second half of 2021. As managers across each of Vantage's Funds position each underlying company for sale, the number of exits from each Vantage Private Equity Growth Fund portfolio is expected to increase. These exits will ultimately provide Vantage Fund investors with an increase in returns and further distributions, providing a robust platform for each Vantage Fund to deliver their targeted returns to investors over the term of each fund. Vantage Private Equity Growth 4 (VPEG4) remains open for investment to new investor until 30 September 2021. Please click below to access further information about VPEG4
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28 Jun 2021 - Is ESG investing just plain investing?
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Is ESG investing just plain investing? Tom Stevenson, Fidelity International June 2021 A few weeks ago, I hosted some teenagers from an East London school on a (virtual) visit to learn about the investment business. In search of common ground, we focused on environmental, social and governance (ESG) questions and had an interesting exchange on climate change, sweat shops and overpaid bosses. We also discussed the difficulty of deciding how a company stacks up on its ESG credentials. To help us along, I asked them to look through a sustainability lens at the websites of Tesla, Boohoo and BP and to review the recent news flow. Their conclusions were not what I predicted. Needless to say, all three companies have had ESG challenges along the way so it seemed a fair question to ask the students which they would score most highly from a sustainability point of view on their day as a pretend investment analyst. To cut a long story short, they all singled out BP. I had expected Tesla's electric vehicle story to put it on top, especially as the visit pre-dated the company's recent bitcoin embarrassment. But while they were all over Boohoo's employment record, what really caught their attention was the oil major's description of its clean energy ambitions. All credit to BP's comms, but it was not what I expected. It's good to get out of the investment bubble where ESG is an article of faith and into the real world where these issues are just one among many. That's true whether you are still at school or the boss of a quoted company, as a recent sustainability-focused survey of our actual investment analysts confirmed. What is abundantly clear from this global snapshot of 150 researchers, and the thousands of companies they follow, is that ESG as an investment approach is new, fragmented, complicated and inconsistent. There are huge variations in how companies view sustainability and in how investors are attempting to measure it. The absence of common standards is glaring. Focusing in on climate, some of the findings are unsurprising. Some sectors are well on the way to a new and cleaner world. Utilities represent an obvious green investment opportunity as the proportion of renewables rises. The energy sector, on the other hand, is more notable for its risks as fossil fuels are phased out and companies are left owning worthless stranded assets. Industrials sit in the middle, with clear opportunities to benefit from the climate transition but major risks too in the form of tighter regulation, disrupted supply chains and old-world legacy businesses. What is also evident is a yawning gap between the parts of the world where the environmental challenge is well understood and factored into long-term business plans and the places where it is not. More than 70pc of analysts in Europe think companies have the right plans in place to decarbonise by 2050. In Latin America, Eastern Europe, the Middle East and Africa that proportion falls to a big round zero. American and Chinese companies are notable laggards on this front too, although the latter are starting to catch up fast since President Xi's adoption last year of a 2060 net zero target. A couple of significant problems emerge from the survey. The first is that companies have been slow to link executive pay to real achievement on reducing emissions. Only a third of companies do this and only half expect their boards to demonstrate a focus on ESG more generally. Without financial incentives, sufficient progress is unlikely. Secondly, while companies are increasingly keen to talk about ESG and sustainability, there remains a woeful lack of the internationally agreed standards that would enable investors and consumers alike to scrutinise their claims. Interestingly, in some countries like Japan, there are as many companies understating their progress in this area as over-inflating their achievements. The problem is bigger and more nuanced than greenwashing. There's no shortage of regional standards being developed but none has yet gained any traction on a global scale. Until Europe, Asia and the US talk the same language about ESG, employ the same taxonomies and implement the same criteria to decide what is and what is not sustainable, we'll all be flailing around trying to make sense of different reporting frameworks, or worse, no reports at all. One further problem is the clumping together of environmental, social and governance factors under one sustainability umbrella. It is too easy for companies to trumpet progress in one area while quietly glossing over their lack of interest in one or both of the others. The solutions to the problems in each of these areas are different too. Driving change on the environmental front is most effective when governments are engaged via regulation and financial incentives. Consumers have more power when it comes to social issues. Investors have long recognised that they may be best placed to encourage progress on governance through engagement, votes or, more crudely, divestment. Perhaps the real conclusion from all this is that, quite rapidly, ESG investing is becoming just plain investing. Companies that rate highly on the imperfect and inconsistent sustainability measures that we currently have perform well in stock market terms because they are, quite simply, better companies. It makes sense to work towards common standards for fair comparison, but I suspect there will always be an extensive menu of these, not a single aggregate number for every company. Environmental, social and governance factors are just too varied to be corralled into one framework in the way that a company's income statement and balance sheet have been by the adoption of standardised accounting principles. While we're working out how to measure sustainability ourselves, perhaps we could do worse than getting the kids from Tower Hamlets in to surprise us. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 ("Fidelity Australia"). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. © 2021 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited. Funds operated by this manager: Fidelity Asia Fund, Fidelity Australian Equities Fund, Fidelity China Fund, Fidelity Future Leaders Fund, Fidelity Global Emerging Markets Fund, Fidelity India Fund |
25 Jun 2021 - Webinar Invitation | Private Equity
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Tuesday, July 06, 2021 4:00 PM AEST Webinar - Private Equity
Australian Private Equity has outperformed listed markets now for over 15 years, but has generally always been a relatively small allocation in investor portfolios.
Time: 04:00 PM AEST Date: Tuesday the 6th of July, 2021
We look forward to seeing you there! |
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Speakers |
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Michael Tobin |
| Managing Director, Vantage Asset Management | |
| Michael is responsible for the development and management of all private equity fund investment activity at Vantage and its authorized representatives, and has managed Vantage's funds share of investment into $6.64 billion of Australian Private Equity Funds resulting in more than $4.7 billion of equity funding across 106 underlying portfolio companies. Michael has over 30 years experience in private equity management, advisory and investment as well as in management operations. Michael was formerly Head of Development Capital and Private Equity at St George Bank where he was responsible for the management and ultimate sale of the bank's Commitments and investments in $140m worth of St George branded private equity funds. Michael has arranged and advised on direct private equity investments into more than 40 separate private companies in Australia across a range of industry sectors. | |
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Chris Gosselin |
| CEO, Australian Fund Monitors | |
| Australian Fund Monitors Pty Ltd was established in October 2006 to provide an information service to investors interested in the Australian Absolute Return sector. By providing an "eyes and ears" information and analysis service, both investors and Fund Managers are able to compare different funds and investment strategies using a common format and consistent analysis tools. As Founder and CEO, Chris has over 30 years experience in the Financial Services industry, including managing Macquarie Equities' and HSBC James Capel's Melbourne offices prior to establishing InfoChoice Ltd in 1993. | |
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23 Jun 2021 - Where to from here for AREITs?
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Where to from here for AREITs? Pete Morrissey, APN Property Group June 2021 Fifty years ago, General Property Trust (GPT) listed on the ASX. In so doing, it changed the lives of income investors for good. Since then, Australia has become a global leader in listed commercial property. Local and offshore investors have been attracted to the relatively high income of AREITs and their competitive, risk-adjusted returns. Then came Covid and an altogether different environment tailormade to tarnish the sector. The mighty Westfield had put Australia on the map as a global retail real estate leader but also gave us one of the highest exposures to retail real estate in the world. Within a few days of lockdown, shopping centres were empty with the enforced switch to online seeing several years of growth compressed into a few weeks. In offices across the country a similar shift was taking place. Having prevaricated for years over the pros and cons of working-from-home, managers and their staff were surprised at how smoothly and quickly the transition occurred. These factors were the writing on the wall for the AREIT sector. Having reached a high over 64,000 in late February 2020, the ASX300 AREIT accumulation (total return) index fell 37% in March as investors tried to comprehend the implications of the unknown. Shopping centre stocks were amongst the hardest hit, notably the large mall landlords Scentre (down 55%) and Vicinity (down 52%) as investors panicked around whether their shopping centres would ever re-open. ASX300 (Equities) vs AREIT300 Accumulation Index
The forlorn outlook many experts predicted back then hasn't eventuated, with Australia's largely successful control of the pandemic getting much of the credit. Those offshore investors that ran for the hills last March have since turned tail, realising Australia was a better place to invest in a pandemic. AREITs have since recovered significant ground with the vaccine announcement delivering a further boost. Still, the sector continues to trail the broader Australian equity market recovery (refer above chart) which is an opportunity for investors focusing on the long term. The structural concerns that first surfaced as the pandemic took hold, along with the absence of international tourists and immigration, explain much of the gap. The Government-mandated Leasing Code of Conduct was also a significant burden (not placed on most businesses) for landlords. The code removed a tenant's obligation to meet contracted rental payments under the lease contract, meaning landlords were having to support their business partner (tenants) which created great uncertainty for investors. As some support is still being provided, this continues to weigh on the sector's recovery. Thus far, AREIT landlords have provided more than $1b in support under the Code, with almost all of it ( more than 90%) delivered by owners of retail properties (notably large malls). The unintended consequence is that those businesses most impacted by the pandemic - namely large mall landlords, Scentre and Vicinity - have provided the highest levels of tenant support. The impact on their bottom lines has been pronounced and prolonged. Where are the opportunities? While all AREITs have recovered significantly from their March 2020 lows it is in the dispersion of that performance where opportunities lie. Those AREITs currently trading well below their pre-pandemic 2020 highs include Vicinity (down 40%), Scentre Group (down 34%) and GPT (down 27%) all of whom were burdened with additional Covid impacts (Lockdowns and the leasing Code). These names will recover, providing solid returns to investors focused on the long term. However, as always, there's a caveat. AREIT performance is inextricably linked to the Australian economy. On that score, the ongoing recovery will be boosted by six factors:
These factors point to AREITs performing well over coming years. Between 2010 and 2019 AREITs returned 11.6% p.a. (mainly from income). According to UBS data, over the past 20 years AREITs have delivered an average return of 9.6% a year, including an average distribution yield of 6.9% p.a. The income investors received is almost 50% higher than equities over this period. This is a key takeaway for income investors - it is the income component of AREIT returns that is the most predictable. With the recovery underway, investors can again expect to rely on it. The risks The major risks to the AREIT sector concern all those factors that may apprehend the economic recovery. Inflationary pressures that may result in higher interest rates, damaging the wealth effect, the continued slow pace of vaccine rollout and more damaging mutations should all be considered. While inflation has become a growing concern across financial markets, it could see more investors turn to commercial real estate which has leases that have inflation linked or fixed rental escalations providing a level of protection that other asset classes cannot provide. And there remain unknowns in the office and retail sectors, although in our view these are diminishing each day. In sticking to high quality, well-located properties with premium tenants, as APN Property Group likes to do, these risks can generally be offset. Three major trends 1. The benefits of funds management earnings to AREIT growth In recent years, Charter Hall and Goodman Group have grown their funds management operations. Their moves proved prescient. Covid highlighted the reliability of their earnings under significant market stress. As recognised leaders in real estate asset management, the growth in funds management earnings by AREITs is set to continue. 2. Not all retail is created equal Large malls with heavy exposure to discretionary retail suffered from lockdowns and reduced foot traffic while non-discretionary convenience centres underpinned by supermarkets thrived. Large format retail (LFR) centres, meanwhile, fed our demand for homewares, electrical, furniture and everyday needs. A recent LFR transaction occurred at a 50% premium to the December 2020 valuation. Post-Covid, most assets will continue to deliver healthy income but investors should remember not all retail is created equal. 3. Say hello to new commercial property asset classes Already, there are two listed Childcare (or social infrastructure) REITs with more to come. Hotels (pubs) and primary produce is another sector getting attention from commercial property investors with FY21 seeing a record year of transactions. Service stations assets also deliver bond-like returns but with growing income, underpinned by high quality tenant covenants and strong investor demand (2020 saw a record level of transactions) with the added benefit of alternative use potential (when electric vehicles dominate our roads). The future AREIT index may look more like its US counterpart, where commercial property investors can add healthcare properties, life science and government buildings and even mobile phone towers to their portfolios. This article has been prepared by APN Funds Management Limited (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account. You should consider these matters and read the product disclosure statement (PDS) for each of the funds described in this article in its entirety before you make an investment decision. The PDS contains important information about risks, costs and fees associated with an investment in the relevant fund. For a copy of the PDS and more details about a fund and its performance, visit our website at www.apngroup.com.au. Funds operated by this manager: |
22 Jun 2021 - A disastrous approval
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A disastrous approval Michael Frazis, Frazis Capital Partners June 2021 At midnight a couple of days ago the FDA announced the approval Biogen's Alzheimer's drug aducanumab. Usually when a drug is approved it's cause for celebration, the culmination of perhaps decades of academic and clinical work. The moment is hugely meaningful for patients, doctors, and their families. Disclaimer The information in this note has been prepared and issued by Frazis Capital Partners Pty Ltd ABN 16 625 521 986 as a corporate authorised representative (CAR No. 1263393) of Frazis Capital Management Pty Ltd ABN 91 638 965 910 AFSL 521445. The Frazis Fund is open to wholesale investors only, as defined in the Corporations Act 2001 (Cth). The Company is not authorised to provide financial product advice to retail clients and information provided does not constitute financial product advice to retail clients. The information provided is for general information purposes only, and does not take into account the personal circumstances or needs of investors. The Company and its directors or employees or associates will use their endeavours to ensure that the information is accurate as at the time of its publication. Notwithstanding this, the Company excludes any representation or warranty as to the accuracy, reliability, or completeness of the information contained on the company website and published documents. The past results of the Company's investment strategy do not necessarily guarantee the future performance or profitability of any investment strategies devised or suggested by the Company. The Company, and its directors or employees or associates, do not guarantee the performance of any financial product or investment decision made in reliance of any material in this document. The Company does not accept any loss or liability which may be suffered by a reader of this document. Funds operated by this manager: |
18 Jun 2021 - Manager Insights | Laureola Advisors
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Damen Purcell, COO of Australian Fund Monitors, speaks with Alex Lee, Director of Investor Relations at Laureola Advisors. Laureola are a specialist investment management firm offering conservative, risk mitigated exposure to life settlements. The firm was established in 2012 to take advantage of the opportunities in the Life Settlements asset class which produces attractive non-correlated long-term returns. Since inception the fund has returned 15.65% p.a. with a standard deviation of just 5.51%.
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18 Jun 2021 - Investing During This New Paradigm
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Investing During This New Paradigm Delft Partners 11 June 2021 We have seen a range of increasingly interventionist monetary policies unleashed over the last 20 years, and we're now solidly onto the next version. This one will be loose money and loose fiscal. Should be fun, as long as you are prepared for inflation. Inflation is now here. It really never went away. Hedonic methods of calculating what was already an imprecise gauge of price changes, have obfuscated, and of course lowered, the official figures. If you wish to see what pre-hedonic calculations would have gauged inflation levels to be today, check out the two charts below on inflation as per the 1990 methodology and the 1980 methodology. Both are by courtesy of shadowstats whose authors provide a plethora of 'real' economic data. www.shadowstats.com
We now actually have an admission of sorts that inflation is here and, woops, higher than promised. Don't wait for any apology. There won't be one. https://www.zerohedge.com/markets/yellen-admits-inflation-about-soar-says-it-will-be-plus-society To be fair it's not entirely the current Administration's fault. The asymmetrical approach to interest rates, inflation and sound money in general, started with 'Maestro' and has snowballed since. Nonetheless a perverse sort of Gresham's Law is applying here - bad policies continue to drive out good. Inflation is the new good thing, and we should welcome it. Yet as Ronald Reagan said in 1978, "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." Memories indeed are short. We are potentially near the end of the liberal era of economic policy with which Regan and Thatcher were associated. Prepare for more government, more rules, and different risks. Since none of us is going to be in charge of macro-economic policy (at least anytime soon) and we have to invest to maintain our spending power in real terms, against this backdrop of understated inflation and carefully massaged negative real interest rates, how should we proceed? The answer is to invest in certain equities which are better inflation hedged and which simultaneously provide a better hedge against risk of catastrophic corporate failure. Do not ignore equities even if you are at an 'advanced age'. Conventional wisdom states that the allocation to fixed interest should rise as you get older. A rule of thumb is that you should have your age as a % in fixed income. So, at 60, you should have 60% in bonds. At current levels of interest rates and inflation, this will almost certainly guarantee an erosion in real purchasing power. Don't do it!
Inflation and corporate failure hedges Two dimensions should be used to assess which are the better equities to currently overweight if you wish to buy inflation protection. One is Governance as in the 'G' in "ESG" (We think ESG is still improperly used); the other is sector membership and the stability of revenue growth and asset base. Both have an impact on returns, downside protection and survivability. Below we show how and why better Governed companies have a better survival rate and thus should have a lower discount rate applied to their dividends. These companies are still currently undervalued. We then show that in the last 40 years, the risk of catastrophic loss in certain USA sectors has been much greater in some than others. Any investor with a time horizon beyond 5 minutes should thus weight their equity exposure to companies in these sectors. We have written before on ESG and why we think G is relevant as a risk factor but not necessarily as an alpha factor. We show again below the wide range of ESG cores from different ESG ratings agencies, courtesy of Northfield. No alignment here which implies there is no single ESG standard that can be applied.
This article provides a recent assessment of ESG scores and how they are barely useful. https://www.ipe.com/viewpoint-why-companies-and-investors-must-leave-esg-ratings-behind/10053120.article Nonetheless, good G as measured by its impact on corporate financials, IS useful. Sensible leverage, correct levels of re-investment, and staff retention are all part of any Fundamental or Qualitative assessment in deriving the correct discount rate to apply to a companies' future earnings. Good G can justify lower discount rates through higher survival rates, and thus lower risk. Below is some analysis of the performance of high G companies in a crisis. Think of it as built-in downside protection to favour high G companies.
Sector membership matters too with respect to survival rates. Most companies do not last. Many companies fail and will continue to fail. Go back and watch any sporting event from 40 years ago. How many of the companies on the advertising billboards are still around today? What really hurts compounding of returns is a catastrophic loss of capital; it only takes a few stocks to seriously fall for the poorly designed portfolio to suffer serious damage. So how to avoid this risk, and not expose your wealth to risk of failure? Check out the table below drawn from Factset and Refinitiv data. So, a 70% decline in price aka catastrophic loss, hurts 40% of all listed USA stocks. However, some sectors have historically seen more casualties than others. If you wish to be safer, especially at this juncture, then look within Utilities, Consumer Staples, Financials Materials and Industrials. By market cap these comprise much less than half of the stock market so active management will prove its worth here. Companies meeting these two criteria of good G and sector membership, are priced and behave as "index linked corporate bonds". In this regard they are unique. They provide a decent yield compared to the pitifully low or even negative rate on 'safe' government bonds and the current yield on index linked bonds, which of course is negative; AND they offer a measure of hedge against inflation since equities are a claim on nominal growth which conventional bonds are not. Index Linked bonds do provide a hedge against inflation but with negative yields, they are expensive. Buying an index linked bond with a negative yield of 1.5% and not a utility company with a dividend yield of 4% is giving up annually, a 5.5% return. Equities we own which meet these criteria are in the Global Listed Infrastructure Strategy and the Global Equity Strategy. They include AES, Quanta Services, Johnson Controls, OneOK, Enbridge, Terna, ENEL, Rubis, General Mills, Kroger, Iron Mountain, ENN, Hydro One and Verizon. We view this as getting a yield in line with corporate bonds, AND the index linking of an inflation proof bond. These companies will have a greater chance of survival in the long run if history is a guide. The chances of a macro policy misstep are now high, so this is the time to be thinking about survivor strategies. Here is a slide of returns over the last 18 years accruing to equities, government bonds, infrastructure equities and blends of each. Even during this period of 'growth' equity excitement, one didn't lose out too much by having exposure to defensive stocks in sectors with high chances of surviving a shock. Currently therefore we are overweight Utilities, Infrastructure and Industrials. Given their superior survival characteristics, their lower P/E multiples and higher dividend yields they look attractive. Add in the likely buying frenzy to be unleashed as other investors scramble to get behind the newly discovered infrastructure spending plans in the USA and Europe, the best place to have risk would appear to be in these companies rather than the now very vulnerable to regulation, non-tax paying, non-voting share class issuing, expensive stocks of yesteryear. The great thing about the stock market is that complacency, one trick ponies, and luck, get found out over time. Betting on price momentum with an absence of thoughtful, rigorous, analysis on valuations, risks, and portfolio construction tools and without any knowledge of long-term history, is a disaster waiting to happen. Funds operated by this manager: Delft Partners Asia Small Companies Strategy, Delft Partners Global High Conviction Strategy, Delft Partners Global Infrastructure Strategy |
