Hedge Clippings | Friday, 17 September 2021

"You can please some of the people all of the time, you can please all of the people some of the time, but you can't please all of the people all of the time."

In the past we have, (along with none other than Bob Dylan) incorrectly attributed the above quote to Abraham Lincoln. Maybe we should leave Bob to his music and poetry. After all,  his 1965 classic "Like a Rolling Stone" is still ranked in the all time top 10 hit songs, in spite of him being booed for playing it on stage at the time.  

The quote actually precedes Lincoln by some 400 years, as it should be correctly sourced to John Lydgate, an English monk and poet who lived from 1370 to 1450 and was a follower of Chaucer. Probably enough information for a Friday, but you may need it next time you play trivia.

But, yet again, we digress. The point is, it seems - possibly thanks to or because of Covid - everyone's either pleased or displeased, and not only about Covid either. (By the way, who would have thought that being an epidemiologist would put you on the nightly news?)

We're either whingeing because we're locked down and there's not many cases, or because they're lifting restrictions too early in the places where there are too many. That probably depends on which LGA you live in. Or you're pleased because you want everyone in the restaurant to be double jabbed, or unhappy because you can't go there if you're not.

Then there are those complaining about "personal freedom" about having to have a jab (which as far as we know is not the case) and ignoring the personal freedom of those around us wanting to get out and about without getting sick. While not dismissing the seriousness and effect of COVID in Australia let's look at some cold hard facts:

We have now had 3,158 cases and 44 deaths from Covid per million of the population. The USA has had 129,492 cases and 2,088 deaths per million, while the UK has had 111.601 cases and 2,050 deaths per million. In other words, on a per capita basis, you're close to 50 times more likely to have died of Covid in the US or UK than in Australia.

BTW, and still on Covid and trivia, but serious trivia, Covid ranks as the 26th most common cause of death since January 2020 in Australia, whilst in the US it ranks 1st, with 685,295, and the UK the second, with 134,805 (behind dementia and alzheimers). For more details see worldlifeexpectancy.com.

And in spite of this, Matt Canavan, a federal government senator, claimed this week that vaccinations aren't effective or should be optional, and "we should take a leaf out of the UK's book"!  We're assuming his only excuse is that he's from FNQ, and perhaps the news hasn't reached him yet: Covid kills lots of people, but particularly the unprotected.

So back to John Lydgate's quote. It seems nothing has changed over the ensuing 600 odd years. Or 700 if it comes to that, when the plague known as the Black Death wrought havoc across the world, (which according to the website History was also possibly passed to humans by a tarabagan, a type of marmot in Mongolia) and which eventually petered out, possibly due to the then quarantine efforts.

What's all this got to do with managed funds you might ask?  Precious little, except that there's a perpetual debate around active vs passive funds, returns vs. risk, and any number of other aspects that you agree or disagree on.

You can please some of the people.......

News & Insights

Vantage Private Equity Growth 4 Close Date: 30 September 2021 | Vantage Asset Management

10k Words - September 2021 | article by Equitable Investors

The Rise of the Contactless Economy - A Global Megatrend | video by Insync Fund Monitors

The Long and The Short: What reporting season can tell us about life in Australia  | article by Kardinia Capital

August 2021 Performance News

Premium Asia Fund

Equitable Investors Dragonfly Fund

Collins St Value Fund

Longlead Pan-Asian Absolute Return Fund

Airlie Australian Share Fund

4D Global Infrastructure Fund

Prime Value Emerging Opportunities Fund

Hedge Clippings | Friday, 10 September 2021

China - Risk vs Opportunity

This week we had the opportunity to catch up with three fund managers in the now normal 'Zoom Room' to explore the current investment risks - or opportunities, depending on one's point of view - of investing in China.

Quite deliberately we chose individual managers who hold opposing views as we've always been advised that it takes two to create an argument. Of course, we chose carefully there, so while everything was conducted with absolute civility, we did want to explore both sides of the debate.  

We were joined by Robert Swift of Delft Partners, a global asset manager with significant experience across the Asia-Pacific markets. His view can be summarised in his opening statements - opportunities in China may not be what they were, but it certainly remains an investable market.

Jack Dwyer, from Conduit Capital is a global manager, investing with an eye on the future, noting that 70% of the world's population will be millennials or Gen Z by 2030. Hedge Clippings is just getting used to being termed a Baby Boomer, so always has to calculate what these generations represent, other than billions of people with a different taste in music, and who have probably never heard of Dylan, Dire Straits, or Van 'The Man' Morrison.

But we digress - Jack is equally firmly on the opportunity side when it comes to investing in China, notwithstanding, or possibly in part as a result of recent concerns and weaknesses in Chinese-related markets. Jack believes the current situation is part of a strategic plan by Beijing that many in the West may be misunderstanding.

Alex Pollak from Loftus Peak Global Disruption Fund has a different opinion, having invested successfully across the Chinese 'theme' in the past, and while accepting that Chinese valuations might look attractive, believes that the shift away from shareholder benefits back to those of the Communist Party or State makes the risk unattractive for the time being.

As much as we tried to keep personal views and opinions out of the discussion, and accepting that our three guests are professional investors in their fields, with many decades of experience between them, compared with Hedge Clippings' mere position as a spectator on the sidelines, such was not to be the case. In any event, our bias evened up the argument, even if it didn't strengthen the 'risk' case.

You can watch the full interview here, and make your own mind up - assuming of course, you're not already on one side or the other.

Meanwhile, this week AFM's COO, Damen Purcell, also spoke with Jonathan Wu from Premium China Funds Management specifically regarding Asian Fixed Income, and some of the opportunities and challenges within the sector. You can watch the full interview here.

Staying on the China theme, at least locally, and maintaining the cynical view for which we may have been noted for previously, comes a report from Bloomberg earlier today that China is lobbying the Australian government to support its membership of a group called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, saying "China is committed to building a community with a shared future for mankind, and stands ready to work together with all the other parties to promote globalisation and regional economic integration."

Given China's attitude towards Australia over the past 18 months, this seems bizarre.

Did we mention we're a cynic?

And on that note, have a safe and happy weekend!

News & Insights

New Funds on Fundmonitors.com

The Outlook for China | Roundtable Interview with Delft Partners, Loftus Peak and Conduit Capital

Manager Insights Interview | video by Premium China Funds Management

A very good business | article by AIM

To invest or not to invest in China? | article by Delft Partners

Higher inflation can be a friend to real estate investors | article by Quay Global Investors

August 2021 Performance News

Paragon Australian Long Short Fund

Bennelong Australian Equities Fund

DS Capital Growth Fund

Bennelong Kardinia Absolute Return Fund

Cyan C3G Fund

AIM Global High Conviction Fund

Bennelong Long Short Equity Fund

Hedge Clippings | Friday, 03 September 2021

Last week we flagged the record second quarter earnings season in the US. By any measure the Australian reporting season just ended will also go down as one of the strongest on record, no doubt justifying market valuations which are also being supported by record low interest rates and government and RBA stimulus.

Along with the records goes a massive payout by listed companies of dividends or buybacks to the tune of over $6bn, which will hit shareholders' bank accounts in the December quarter, and/or be reinvested - either way further bolstering prices and valuations.

This week we spoke with two local fund managers, Rodney Brott from DS Capital and Graeme Carson from Cyan Investment Management, to get their take on reporting season. You can see each interview below.

Unsurprisingly, given the generally positive reports from the market as a whole and the companies each fund invests in, both Rodney and Graeme were cautiously optimistic about the market's overall direction. Both indicated that whilst face to face visits with company management have been hard to achieve over recent months, the level of guidance and communication from them has, if anything, improved - possibly as a result of lockdowns.

Reporting season is always an interesting time. It allows shareholders and the market to take stock and review past performance, as well as looking forward to gauge the company's future prospects, understanding that, all too often, today's fair value is based on future earnings 12 or 24 months ahead.

Unlike individual equities - which can suffer significant price swings and fluctuations on even a daily basis (but provide daily liquidity in return) - investing via managed funds, as both Rodney and Graeme emphasised, requires a longer term approach and, as good as things have been in the past 12 months, there's no guarantee that 2022 will produce another market performance of 25%.

Reporting season also gives investors the opportunity to measure the fund managers, and their ability to have made good investment decisions over the prior year, or years. As a result we'll watch with interest to see how the funds on www.fundmonitors.com have performed once their August results have been reported.

Meanwhile, we turn away from the local market to Asia, or more particularly, China - albeit whatever happens to China's economy affects Australia to some degree. The more many investors see of President (more correctly, Dictator) Xi's control over both the economy and everyday life, the more many of them seem to grow concerned.

According to Jack Dwyer from Conduit Capital, in recent months over $1 trillion has been wiped off the value of US listed Chinese technology firms in response to regulatory developments. Many western commentators have called China 'un-investable' and as a result many fund managers' exposure over the past decade has never been lower than it is now.

Dywer's Conduit Capital has taken the opposite view and sees China as an opportunity, increasing exposure to selective Chinese assets and proxies in recent weeks. Hedge Clippings is not an expert, or close enough to either the opportunity or the risk to say which view will prevail. However, it is fair to say our opinion of China's Dictator and his authoritarian regime is not high, even though we are an admirer of many of China's achievements in the past, and Chinese culture as a whole.

To try to throw more light and knowledge on the subject, next week we will reach out to a number of fund managers to discuss China's current position and future outlook. Watch this space.

For the first time in many weeks we've thankfully managed to get to the end of Hedge Clippings without mentioning the 'C(ovid)' word.

Until the next time, stay safe and have a good weekend.

News & Insights

New Funds on Fundmonitors.com

Reporting Season Insights | Interview with DS Capital

Reporting Season Insights | Interview with Cyan Investment Management

Best and Less Group Case Study | article by Vantage Asset Management

Fund Review for FY21 | video by Frazis Capital Partners

Cutting Through the Noise | video by AIM

2021 Mid-Year Pan-Asian Equity Market Review | article by Longlead Capital Partners

Domino's set to fatten wallets too | article by Insync Fund Managers

Big Tech's success incites a backlash | article by Magellan Asset Management

Hedge Clippings | Friday, 27 August 2021

Driven by low/zero/negative interest rates, low inflation, Central Bank intervention, massive infrastructure spending and advances in technology, equity markets have been almost unstoppable since the GFC ended back in 2009/10.

Even the Covid correction in early 2020 only caused a temporary blip on the equity charts, before further government stimulation kicked things off again.

Hence the question is often asked about when and why we'll come to the end of one of the more significant bull runs in the history of equity markets. Short of some kind of left-field geopolitical event (Taiwan perhaps?) the 'why' is probably pretty clear: When governments and central banks take action, either on tapering their bond buying, or when interest rates rise as a result of inflation.

As for the 'when', well that might not be too far away, with all eyes on Fed Chair Jerome Powell at the current Jackson Hole virtual symposium, followed by three equally closely watched Federal Reserve meetings due before the end of the year.

The Fed's Powell has been at pains to keep the markets and economy as steady as possible for the past year or more, waiting until "substantial further progress has been made toward our maximum-employment and price-stability goals."

We'll have to wait until after the weekend to hear whether he thinks sufficient progress has yet been made, but in the meantime equity market second quarter reporting season in the US has probably been a case of as good as it gets, certainly according to data courtesy of Dr. Ed Yardeni's excellent research analysing y/y growth in S&P500 revenues and earnings per share in Q2.

Growth in revenue per share increased by 18.5% in Q2, while earnings per share rose 87.7% and both revenue and earnings grew to record levels, as did the S&P500's profit margin, at 14%.

Yardeni also reports a record number of positive and negative earnings surprises in Q2 - 87% beating expectations while only 9.8% were below expectations - the most and least since the data series started in 1987. For those old enough to remember, '87 was a memorable year on the market as well, but for all the wrong reasons.

Back to the present, 5 out of 11 of the S&P's sectors' profit margins were at record highs, and as for the future, Yardeni's expectations for forward revenues, earnings and profit margins all rose to new heights in August, suggesting Q3 will be another record quarter, and we're sure Jerome won't want to spoil the party.

Meanwhile, next Tuesday Australia is reaching the end of its own full year reporting season, and to get an up close and personal account of how our listed corporate sector has exceeded, met, or fallen short of expectations we'll be speaking to Rodney Brott from DS Capital, whose Growth Fund has an 8 year track record and has consistently outperformed the ASX200 each year, with lower volatility, and as a result, has a Sharpe Ratio of 1.31 since inception.

A recording of the interview will be available in next week's Hedge Clippings.

Last week's edition of Hedge Clippings briefly compared the tribulations of Australia's Covid restrictions with the life-threatening difficulties of people wanting to leave a locked down Afghanistan. Those difficulties tragically became more real overnight, with the added realisation that thanks to ISIS while the Taliban may now be in power, the country will remain as dangerous as it has been for the past 20 - and some will say 200 - years.

In 1946 Winston Churchill spoke of the Communist Iron Curtain coming down across Europe. Sadly, a different Iron Curtain is coming down for the people - and particularly the women - of Afghanistan.

And on that note, have a safe and happy weekend.

News & Insights

Video Interview with Vantage Asset Management

A (mostly) good news story article by Airlie Funds Management

Which payment provider? PayPal or Afterpay article by Insync Fund Managers

10k Words - August 2021 article by Equitable Investors

Hedge Clippings | Friday, 20 August 2021

'All the world's a stage, and all the men and women merely players...'

Hedge Clippings is not quite sure what made the above quote from Shakespeare's 'As You Like It' spring to mind, except perhaps the concept that life moves on, as in 'the acts being seven ages'.
  
Right now, in the middle of COVID and the seemingly never ending lockdown (maybe, but who knows, we might be progressing, albeit slowly), it seems the days and weeks are becoming very similar, and not moving on at all. The daily update from various premiers seems much like the days before, except for the actual numbers which seem to increase, including - encouragingly or in spite of - the number or percentage of vaccinations administered.

Fund managers meanwhile are continuing to make excellent returns on behalf of their investors, supported of course by equity markets both here and overseas.

To the end of July the ASX200 total return index gained over 28%, and the S&P500 over 36%, with the small and mid-cap sector equity based funds significantly outperforming both the market and their large-cap peers:

ASX200 Total Return      Large Cap Funds       Small/Mid Cap Funds
          +28%                              +29%                            +41%

S&P500 Total Return      Large Cap Funds       Small/Mid Cap Funds
          +36%                              +32%                            +40%

This may seem a little glib and trite coming from a corner of the financial services sector which has to date been inconvenienced, but remains largely financially unaffected by COVID. Life may be tedious, but thanks to technology, Zoom, government support, deal flow and low interest rates, tedium and lockdowns are merely a personal inconvenience.

Not so elsewhere, or in other sectors, be they geographic or industry. Discretionary retail, food and beverage (although we're doing our best to support the local bottle shop), entertainment and travel will, assuming they survive until vaccinations take over, simply struggle, as will their employees and suppliers. At what stage that economic activity (or lack of it) flows through to the broader economy remains to be seen.

In the meantime as life meanders on, our thoughts go out to those in Afghanistan for whom 'lock-down' takes on a whole different meaning. We'd all do well to consider that, before complaining of masks, lock-downs, or the removal of so called civil liberties.

The Bard would have put it better, but that's the best we can do.

And on that note have a safe, and happy weekend.

News & Insights

New Funds on Fundmonitors.com

Video Interview with Premium China Funds Management

An Deeply Unloved Sector and Deep Value Investing article by Collins St Asset Management

It's a Topsy Turvey World article by Delft Partners

Electric vehicles are the next revolution in automobiles article by Magellan Asset Management

Hedge Clippings | Friday, 13 August 2021

As we collectively grind deeper and deeper into lockdown or the threat of it (depending on your location), there's now no doubt that the only way forward is ensuring vaccinations reach a level where the majority of the population have immunity. The experts can throw out all the numbers they like, but if one thing's been proven over the past 18 months, it's that even with the best will in the world we can only be certain of being safe with the benefit of hindsight.

And of course hindsight by definition is something we never get in time - until the next time! So in the meantime there's only one thing to do: Play it safe, play by the rules, and get vaccinated as soon as you can.

Meanwhile equity markets keep on keeping on, even if only edging higher. So how do fund managers differentiate themselves when investing in what can only be described as a crowded market, or one dominated by the weight of passive investments which keep driving up markets and valuations? It's worth remembering the old saying that "a rising tide lifts all boats" but also don't forget the ebb tide which can leave the unprepared high and dry.

This week we reached out to two fund managers each taking a very different approach - from each other, and from the market in general - when looking for opportunities 'outside the square' in their investment strategy. Both have returned over 60% in the past 12 months, so they have shown an ability to provide their investors double the return of the ASX200 over the same time frame.

Vas Piperoglou and Michael Goldberg manage the Collins St. Value Fund, and it's fair to say they're not scared to back themselves in more ways than one. Not only do they invest alongside their investors, they don't charge a management fee, relying only on performance fees for their reward. In addition, they're prepared to invest in unloved assets or market sectors where their research indicates outstanding, and often hidden value.

The Collins St. Value Fund invested in Uranium as a theme some years ago - an unloved or unpopular sector if ever there was one - which helped them to a return of 60% over the past 12 months, without one negative month. Far from resting on their laurels, they're going outside the square again with a special purpose fund solely investing in the Offshore Oil Servicing Sector.

Most investors and analysts, including Hedge Clippings, might question this approach - oil not being the darling of the ESG set. But as Vas points out in this interview when we spoke with him, they've done the numbers, and they're more than happy with what they show.  

Our second manager interview for the week was with Martin Pretty who manages Equitable Investors' Dragonfly Fund. Martin previously worked at well known Family Office, Thorney Investments, where he no doubt honed the art of investing in early stage, pre-IPO and small cap listed companies.

Like Vas at Collins St., Martin's Dragonfly Fund has returned over 60% in the past 12 months, where his approach is not only to invest alongside his investors in the fund, but Equitable also actively engages with the companies that the fund invests in. This can extend to taking positions on the board to assist in capital raising and capital market issues where the management and owners might not have experience or expertise.

Martin also 'takes his own medicine' or advice, by having on his own board well-known Melbourne stockbroker Hugh Roberston, and more recently by adding Paul Dwyer, founder of PSC Insurance (ASX:PSI) as both a shareholder and director.

You can watch our interview with Martin here.

Both interviews are longer than normal at over 10 minutes each, but hopefully worth listening to for different takes on how innovation in their respective investment approaches can provide an attractive return.

News & Insights

Video Interview with Collins St Asset Management

Video Interview with Equitable Investors

Silk Laser Clinics Case Study: How do Private Equity Managers Make Money? article by Vantage Asset Management

History, a Useful Tool - Not a Looking Glass article by Insync Fund Managers

Hedge Clippings | Friday, 06 August 2021

Over the past few weeks Hedge Clippings has been trying to avoid COVID-19, both literally and as a subject matter. There's not much more that can be said, other than 'everyone is over it', but we're still all up to our armpits in it. And for those in or around lockdown there's not much that can be suggested other than to keep safe, get tested, and above all get the jab.

We're thankful we never considered a career in politics.

And if we think we're in trouble, take a look elsewhere: 210.7 million cases worldwide and 4.28 million deaths. And before we start complaining about how badly we're handling the current outbreak and lockdown, consider this: In the UK there has been 1 case of Covid for every 11 people, and one death for every 525. Out of 220 countries, that puts them in equal 28th and 33rd place respectively.

In the USA the numbers are similar - 1 case for every 9 people, 1 death for every 527. Equal 11th and 36th.

Australia, even with the current crisis, is way down the list. Even with 308 new cases, we have 1 case for every 723 people and 1 death for every 27,677. That puts us at position 180 and 190 respectively.

If it doesn't sound too glib, we're also doing well in the Olympics, at the other end of the rankings. At present we're a credible 4th overall, but on a per capita basis we're right up there. We don't usually crow about our sporting prowess, we'd rather just sit back,enjoy it, and congratulate the achievements (and behaviour) of every athlete who even made it to Tokyo.

Normally, of course, we're looking at fund performances, not medical or sporting statistics. So this week we took a deep dive into the average performance of a peer group of Australian and Global "Long Only" funds over the last 3 years to 30 June 2021. Instead of pulling out the top performers individually, we reviewed the performance based on the length of their track record.

We've done this before but once again it reinforces the point: The best performance comes from  managers with a track record of less than 5 years, who returned on average 14.9% per annum over the past 3 years, followed by 13.58% for those with a 6-8 years track record, after which it flattens out to around 11%, and then dropped to 10% for managers with a track record of more than 20 years.

However, given the bias in some investment committees towards managers with a longer track record (and sometimes with good reason) early stage managers are worth including in many portfolios.

News & Insights

Have Emerging Market Funds Passed Their Used-By Date?: Part II by Premium China Funds Management

The Long and The Short: The running of the bull by Kardinia Capital, a Bennelong boutique

How REA Group became the great Aussie multi-decade compounder by Chris Demasi, Montaka Global Investments

Hedge Clippings | Friday, 30 July 2021

As we noted last week in Hedge Clippings, the twelve months to 30th of June were extraordinary, with the ASX200 only recording 1 negative month. As we've come to the end of July that record has been extended, and should it continue through September it will make it 12 continuous positive months. Hopefully this doesn't put a jinx on the market's positive run as it heads into reporting season, and it can overcome the effects of current lock down restrictions.

As welcome as these positive numbers are for most investors, they distort the longer term numbers and averages in much the same way as the drawdown of over 25% suffered at the start of the pandemic. Understandably top-performing managers, and their investors, are happy with their returns, but it does make it more difficult to evaluate longer-term performance, not only of individual funds, but also of specific sectors.

AFM's analysis segregates funds in many different ways, such as strategy and geography, but to really compare funds, it can be necessary to drill down to specific "peer groups" to do so - in other words, to compare "apples with apples" and "oranges with oranges". Even this can be easier said than done, particularly in the "Alternatives" sector, which can see a crypto fund placed into the same asset allocation "bucket" as life settlements.

We might leave that debate for another day, except to say one of (in fact the only) common feature between the two is their low (or zero) correlation to traditional asset classes, and therefore capacity to provide welcome diversification when equity markets do, as they eventually will, return to a more normal pattern of returns and volatility.

In the meantime let's look at more traditional investments, and equities in particular, where Peer Group comparisons really come into their own, particularly when looking at fund selection via a sector, rather than an asset allocation lens.

Returns are always on top of most investors' minds, closely followed by risk - generally most easily judged by the Sharpe ratio which measures the degree of risk - as determined by standard deviation or volatility of monthly returns. So while Australian Equity Small to Mid Cap funds in Australia have clearly performed first or second amongst the six Equity Peer Groups over 1, 3 and 5 years, they have done so with a lower Sharpe ratio - and therefore with greater risk - ranking 4th over each time frame.

Averages are of course dangerous, and drilling down into the fund list will show a wide variance between the 79 funds which make up the Australian Equity Small to Mid Cap Peer Group in AFM's database, with returns which over the past year have ranged between +13.5% through to +130%, and over 5 years from +2.57% to +22.71% per annum.

News & Insights

Interview with Collins St Asset Management

Is Greed Feeding the Macro Environment? by Jesse Moors from Spatium Capital

Have Emerging Market Funds Passed Their Used-By Date?: Part I by Premium China Funds Management

Inflation: Raising the Stakes by AIM

Hedge Clippings | Friday, 23 July 2021

Many years ago Hedge Clippings used to wait with bated breath to hear the latest result of the Top 10 records on the hit parade. Nowadays of course he wouldn't know any of them, let alone listen to any of the current crop, even though he can still sing along to the songs of his youth. (Notice how there's no clue to the decades involved, and with good reason!)

But it goes to show that everyone loves 'top this' or 'top that' tables which, while they may change, never go out of fashion. The finance sector is no different, whether the focus is on individual equities, asset classes, superannuation funds, or in AFM's case, managed funds. As such, at the end of each financial year (and calendar year if it comes to that), this creates the opportunity to review the best performing funds in various categories.

But the 2020/21 financial year was one for the books. Not only did the ASX 200 Total Return Index record its 3rd best performance over the last 25 years, but it was also the first time since the 1996/97 financial year that the index had only one month of negative performance.

To put that into context, in the financial years between 1997 and 2021 the index averaged 5 negative monthly returns each year, with an average negative monthly return of -3.59%, coincidentally close to the only negative month last year, when in September the index recorded a negative -3.66%.

It probably comes as no surprise that 2020/21 was an extraordinary financial year given the world we live in, but it is worth digging deeper into the numbers to get a feel for how extraordinary it was.

• In the year to June, the index returned 27.80%. Small and mid cap funds returned an average of 41.42%, compared to the large cap sector where the average was 29.1%.
• The top 10 managers returned an average of 84.55%.
• Funds in the highest quintile (or one fifth of the 160 relevant funds) returned an average of 60.16% for the year.

Exactly 100, or 62.5% of Australian based equity funds outperformed the ASX200:  

• These funds out-performed by an average of 15.31%.
• As might be expected, 87 of these were 'long only' leaving only 13 long/short funds that outperformed.
• 7 funds returned positive returns each month.

Of the 60 funds that failed to beat the index:

• The average return was 20.62%.
• Only one fund failed to register a positive return (-2.94%).
• 32, or 53% of the funds, were long only, leaving 47% of the 'underperformers' in the equity alternative category.

Clearly such short-term performance has to be viewed in a broader context, but the 2021 financial year will affect the longer term performance of all funds, investors and advisors' portfolios for some time. This should not be ignored when assessing managers, and while short term return tables are great for a manager's bragging rights, they are only part of the longer term picture.

For those interested in doing this sort of analysis themselves, we encourage you to explore our Custom Statistics tool. Watch this video for a short demo. 

And on that note, enjoy the locked-down weekend, and stay safe. Tune in to your favourite sounds, turn up the volume, and drown out the COVID news.

News & Insights

What to learn from the last year's IPO Winners and Losers by Montgomery Investment Mgt

Global megatrend observations by Insync Fund Managers

Hedge Clippings | Friday, 16 July 2021

"Words are words, and promises are promises, but only performance is reality"
Harold S. Geneen, former president of ITT Corporation.

When looking at managed funds, or any financial product, Geneen's quote is increasingly relevant. It probably holds true for politicians as well, but maybe best not to go there just now...

When looking at the performance of managed funds it is not only important to get accurate information, it is equally important to be able to understand and interpret it correctly, and in context.

For instance, a fund that has provided a return of 15% p.a. over the past five years would reasonably be understood to have good performance. But performance compared to what? What if the fund's underlying index or asset class has returned 20% p.a. over the same period, or another fund returned 15% p.a. but with lower fees?

A fund might have outperformed its index or benchmark, but has it performed in line with, above, or below, similar funds with similar strategies and similar geographic mandates - in other words, its Peer Group?

Looking at a fund's total return is only part of the solution - there are a range of key performance indicators that should be taken into consideration.

Next, let's look at consistency. The fund may have returned 15% p.a. on a cumulative basis over 5 years but it's rare - although not impossible - to consistently return 15% for each of those five years simply because market conditions vary. The volatility of those returns - measured as standard deviation over either a monthly or annual basis - is a prime consideration for most investors as it indicates potential risk of loss of earnings or capital.

Generally speaking, the higher the return, the higher the risk, so the Sharpe ratio is used to measure the return relative to the level of risk (volatility) that is being taken.

The Sharpe ratio (named after William Sharpe, later Professor Sharpe) was developed in 1966 to try to provide a single measure to describe the excess return an investment provides for the extra risk (volatility) involved. For those in lockdown and looking for some light reading over the week-end, the details can be found here.

As economists will do, (and noting Hedge Clippings does not lay any claim to being one) others of the same profession developed alternative measures: The Sortino ratio for instance, named after Frank A. Sortino, effectively removes upside volatility from the equation, and therefore only measures downside, or negative volatility. (Further details here)

Both Sharpe and Sortino each attempted to create a single number to allow any investment in any asset class to be measured against any other investment, irrespective of asset class, although in reality it is better to use it as a measure of similar asset classes, so aspects such as liquidity and length of investment can be taken into account.

When looking at managed funds, both are useful but can equally disguise other KPI's - depth and length of drawdowns for instance. For many investors, holding a 'losing' investment, or a fund which has a large negative return, for more than a few months, the situation can be distressing and outside their level of risk tolerance. So let's add size and length of drawdowns to the KPI equation.

Still going? How about Up Capture and Down Capture? Two ratios that are less well used or understood, and which are particularly relevant to potentially volatile assets such as equities.

There are different ways of calculating Up and Down Capture, but www.fundmonitors.com measures the cumulative performance of the underlying market in positive months, and measures the cumulative performance of the fund when the market is positive against that. In rising markets a number above 100% indicates a fund which outperforms, and less than 100% indicates it underperforms.

Possibly of more interest to risk-averse investors is the Down Capture equivalent which measures how a fund performs in negative markets - again on a cumulative basis. Any number less than 100% is good, and a negative number indicates a fund which typically rises in negative markets.

Each of these measures help the investor or advisor look through the words and promises of the fund manager or their advertising, and 'lift the lid' to get a real understanding of how each fund performs.

But wait - there's more! Where and how a fund fits into an overall investment portfolio and provides low correlation to achieve diversification and reduce risk needs to be added to the analysis equation.

After all, "only performance is reality".

News & Insights

Video Interview with Richard Ivers of Prime Value Asset Management

Video Interview with Robert Swift of Delft Partners

Why You Should Look at Capture Ratios When Assessing Fund Managers article by         Australian Fund Monitors