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Equitable Investors

January 2023

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.

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

Hedge Clippings | 10 February 2023

As expected, on Tuesday the RBA did what everyone expected, and what they had to, raising rates by 0.25% in the sharpest and fastest series of increases in recent (and probably longer) memory. Even though expected by 100% of market economists,  investors didn't take too kindly to it, with the ASX falling almost half a percent on the day, and after a brief rally on Wednesday, continuing to fall since. It wasn't what the RBA did that upset the market, but what RBA Governor Philip Lowe said - particularly, as we always point out - in the last paragraph (and in this case the last sentence) or so of their statement: "The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve this."

That's RBA speak for "expect more rates rises to come," so unless things on the inflation front change direction quickly, 3.85% seems a forgone conclusion, possibly by May or June, and with every chance of that tripping the 4% mark in the second half of the year.

Amid all the forecasts of widespread mortgage stress and damage to household budgets, the hard and nasty truth is that's what the RBA is aiming at - or at least to force consumers to rein in spending - to try to quell inflation. Unfortunately, it's not a level playing field in mortgage land, and to quote Bill Gates, "Life's not fair. Get used to it". Of course, Bill can afford to say that, but the RBA has a problem with the un-level field when using mortgage rates - as only one third of households have a mortgage - to tame inflation. The other two thirds are less, or not impacted, so they're probably still spending, even if their morning flat white is now costing them over $4 a pop.

But there's more to the un-level field: Amongst the one third of households with mortgages, there are those who are more stressed than others - either by virtue of being on lower incomes, having only recently taken out a mortgage thanks to the RBA's "no rate rise until 2024" prediction, those about to come off a low fixed rate onto a higher variable one, or those with smaller savings to dip into to buffer to rise. Assuming (this is a guess) 20% of all mortgages are in the above categories, that's less than 7% of the overall population. At 50%, it rises to just over 15% of the total.

This may sound as if we're being callous or uncaring.  Far from it. The point is that the RBA needs to change the spending habits of the majority, not just the minority, a point they acknowledge (along with the lagging effect of higher rates) in the penultimate paragraph of their February Statement on Monetary Policy. So while they may be mindful of the uneven pain they're causing on the un-level playing field of life, "The Board's priority is to return inflation to target." And that's not going to happen at least until Santa's been around again (if we have a recession) or possibly after he's been back twice (if there's a soft landing). So, as Bill said, "get used to it".

Over to markets and fund performance: As everyone knows, last year's outbreak of inflation was a shock to everyone, including the RBA, as was Ukraine, (except to Putin). The market tanked for the first nine months of the year and has since recovered strongly, such that the 12 month performance of the ASX200 Total Return to the end of January was +12.21%, significantly better than the S&P500 equivalent of -8.22% for an out-performance of over 20%.

AFM's Peer Group Comparison tables show a similar, although more variable pattern, such that over both three and six months to the end of January, ALL Peer Groups, with one exception (Alternatives, which includes Crypto funds) were in positive territory. The top performing Peer Group over 12 months was the Equity Long Large Cap group, which returned just over 8% on average, with 25% of those out-performing the ASX200 TR and the top performer, the Lazard Select Australian Fund returning 32%.

News & Insights

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January 2023 Performance News

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L1 Capital Long Short Fund (Monthly Class)

Bennelong Kardinia Absolute Return Fund

ASCF High Yield Fund

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Review: The Price of Time (The Real Story of Interest)

by Edward Chancellor

Channel Capital

January 2023

Funds operated by this manager:

Key information:

No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. Past performance is not a guide to future results. The prices of investments and income from them may fall as well as rise and an investor's investment is subject to potential loss, in whole or in part. Forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of Redwheel. This article does not constitute investment advice and the information shown is for illustrative purposes only.

Emerging Markets: December quarter shows

positive signs after a challenging 2022

Pendal

January 2023

IT was a difficult year for emerging equity markets in 2022, but the December quarter was more positive despite ongoing growth and inflation pressures in key economies.

Last year Russia's invasion of Ukraine drove prices of key commodities sharply higher in an environment where inflation was already high and the outlook for interest rates was difficult.

This was combined with ongoing economic weakness in China.

The MSCI EM Index returned -20.1% in USD terms.

Here is a recap of the main EM themes in 2022 and what we learned in the closing months of the year.

Russia

In Russia, the equity market in Moscow closed in February 2022 and did not re-open in a meaningful sense.

With foreigners banned from selling, capital controls imposed and tight financial sanctions on the country, it became impossible for foreign investors to recover money from Russian equities.

The impact of wide economic and trade sanctions mean the fundamental value of Russian equities is highly uncertain.

GDRs and ADRs of Russian stocks have been suspended. MSCI deleted the Russia index from MSCI EM in March with a zero valuation.

Growth countries

Despite rising global interest rates and bond yields, growth surprised to the upside in several traditionally high-beta, current account economies.

Brazil, Indonesia, India and Mexico were among the better-performing major emerging markets in 2022.

MSCI country index returns were +14.2% in Brazil, + 3.6% in Indonesia, -2% in Mexico and
-8% in India (in USD terms).

Brazil and Mexico benefited from strong exports, while central bank currency support allowed domestic demand growth in India and Indonesia.

Meanwhile, higher energy prices, a sharp slowdown in global technology spending and a worse outlook for global growth meant that Korea and Taiwan both underperformed. MSCI country indices returned -29.4% and -29.8% respectively (in USD terms).

China

Despite improving credit and monetary aggregates data, the Chinese economy remained weak in 2022 as policymakers prepared to stimulate.

The key causes of the weakness were the ongoing policy-driven slowdown in the real estate sector and the impact of Covid lockdowns.

In the final quarter of the year - facing street protests and mounting evidence of the negative economic effect of lockdowns - Chinese authorities began a controlled re-opening of the economy.

MSCI China returned -21.9% in USD terms in 2022, but Chinese markets finished the year with a rising index and a sense of optimism

Positive signs in December quarter

The fourth quarter of 2022 was more positive for emerging and global equity markets, despite ongoing growth and inflation pressures in key economies.

October was difficult, but a shift to a more growth-friendly set of policies in China - and a sense that the outlook for US monetary policy is more positive - led to a stronger finish to the year.

In the quarter MSCI EM Index returned +9.7% in USD terms.

China's economy remained weak despite increasingly aggressive credit and monetary stimulus.

But markets focused on the more positive change in policymaker intentions. MSCI China returned +13.5%  in the quarter (USD terms).

The outlook for US monetary policy also improved in the quarter.

Although we saw interest rate hikes by the Federal Reserve, US CPI continued to trend lower in October and November.

In early November the US ten-year bond yield moved below policy interest rates.

This proved supportive for some emerging markets that had previously been held back by capital outflows.

Which countries are well placed

In the December quarter we saw strong MSCI index USD returns in Colombia (+19.7%), South Africa (+18.3%) and Peru (+17.4%).

Previous winners, especially those with high commodity exposure, generally underperformed in the quarter with softer commodity prices through the middle of the period and reallocation of investment flows towards China.

MSCI Brazil returned + 2.4% and MSCI Indonesia -3.6% (both USD terms).

The weaker oil price hit the Arab Gulf markets harder with MSCI Saudi Arabia returning -7.6%. UAE and Qatar also had negative returns.

Author: James Syme, Paul Wimborne, and Ada Chan, co-managers of Pendal's Global Emerging Markets Opportunities Fund

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

Market Commentary - December

Glenmore Asset Management

January 2023

Funds operated by this manager:

Glenmore Australian Equities Fund

Tips on Managing your own Super

Marcus Today

January 2023

I had a question about Portfolio Management from a Member. I sent him this. It might interest you.

Two processes run side-by-side:

• Stock picking and timing.
• Managing market risk.

STOCK PICKING AND TIMING

Stock picking and timing involves a few basic tenets that you might adopt. They include (and apologies for the simplicity):

• Have a quality overlay. Far better you play in reliable stocks. It reduces risk. I am so over holding smaller companies and risking 20% drops on announcements. Some stocks are very sexy, but when you are running other people's (joint Super?) money, you have to be sensible. That involves knowing the numbers and having a quality or (at the minimum) a market cap threshold you won't go below. That means trying to find (say) the most reliable growth stocks, and a lot of those, in order to reduce risk, end up being larger companies. Going down the market cap scale is fine as long as you are aware of the risk and keep that end of the portfolio in check. The smaller the company, the more research is required. Yes, you can narrow the risk, but it takes more effort. In other words, you wouldn't buy a lot of small stocks when looking after long-term important money, although one or two turbocharged popular stocks, on high PEs and stretched valuations, being priced on future, not current earnings, is very common as a side bet you can lose, just keep the size of the holdings smaller.
• Build a watchlist of stocks you like. You don't have to own every stock, so just put a good list of stocks together. If you don't hold the best-performing stock in the last year, it doesn't matter. Just as long as the stocks on your list suit you. Another way to do it is to list stocks you would avoid and why. Too small, unethical, unreliable earnings, yield too low. You choose. Build a list of stocks that suit you. Growth, income, quality, stocks in an industry you know, like, have a future, whatever. Keep it short. Don't worry about price, it's the inherent nature of the company/stocks that you are interested in at this point. You look at price, timing, charts, later.
• There are too many ideas. Ideas are never a problem. In order to filter them pop a Post-it note on your screen every time half decent stock idea comes up. If it's any good, you will now be aware of it and may end up researching it, may end up putting it on the watch list and may end up buying it eventually. The ideas process has to start somewhere. In other words, you don't need four months of Warren Buffettesque analysis to validate every idea. All you need do is note it and start thinking about it (the antennae are up) and see what comes of it.
• Don't buy stocks just because they make it onto the watch list, only buy them because they are also going up. This is the timing part of the equation, and it is mostly done on trends (charts). There is nothing I like more than finding a quality stock on the watchlist bottoming on the charts. When the market tips over, you should celebrate, not commiserate, because that's when those opportunities flourish, the opportunity to buy good stocks at good prices. We use a lot of charting software that quickly scans lists of stocks and highlights trends and turning points.
• Start small and build - You (the nervous) might emulate many fund managers by pyramiding in and pyramiding out. That involves buying a small holding to start with (especially in smaller companies) and adding to it if the stock goes up, cutting it if the stock goes down. It's a way to limit your risk. Go you good thing. Don't add exposure to a bad thing. Cut exposures when it's going wrong. Some people have trouble with big decisions, especially selling. So make a lot of small decisions. It's easier for the indecisive (most people).
• Watch out for liquidity issues - Some stocks hardly trade. Look at the spread. If there is a big spread and it has low volumes on a daily basis, then it can move fast and a lot. You might not want that. Just be aware of liquidity. If the chart has a lot of straight lines on it, beware.
• Sell stocks that go down. I have been running the newsletter portfolios for years. When you transparently manage a portfolio, you begin to understand that you cannot afford to have big negative performance numbers next to stocks or people don't subscribe. So I learned for commercial reasons to cut stocks that went down. You, too, should be drawn to the poor performers as a risk before you notice the glory of the good performers. Pull the weeds easily. If you can do that, you will find that you end up with a lot of stocks that are going up. After that the job is looking after stocks that go up (nurture the flowers). Stupidly simple, but this actually works. Possibly the most damaging weakness of amateur portfolio management is this rather pathetic inability to sell. I have no emotional attachment to stocks. They are share prices, not love affairs. If they don't behave, get rid of them - you don't need to be waking up to failure every morning. Clear the decks easily. If you can learn to do that, you are halfway there because if picking good stocks is half the game, the other half is not holding the wrong stocks. As a broker, every new client would come to us with a tale of tiny holdings with huge losses against them. Learn to sell.

MANAGING MARKET RISK

As you probably know by now, I believe you can time the market and everyone who says you can't is an inexperienced amateur that has heard too many Buffett quotes or is a financial professional that has an interest in you doing nothing (because they don't have to make decisions but still get your fee).

You can manage market risk by raising and lowering your cash weighting. One of the great advantages of managing your own money as an individual without oversight is that you can go to 100% cash. Something the big funds could never do. This allows you to protect capital in a bear market, whereas most of the major funds have no choice, they have a mandate which forces them to hold the market through thick and thin. They will play with a small cash weighting (5-15%?), but it is immaterial come a big market sell-off. They will never get out of the market in a bear market. You can.

How much cash you hold is a daily debate, and there are no rules. I simply wake up every morning and make a decision. I rarely get scared by the market but will rapidly run up cash levels if I think its going wrong. And reverse it again when the squall is over.

When it comes to running up the cash, I may sell a few stocks outright (the ones that are not performing) but will essentially take the top off every stock rather than stock pick. The main issue is to run up the cash and not get cute about which stocks to do it with.

When it comes to this decision - read the Strategy section - it's what it's all about!

Author: Marcus Padley, Founder of Marcus Today

Funds operated by this manager:

Marcus Today Equity Income SMA, Marcus Today Growth SMA