Hedge Clippings | Friday, 11 December 2020

From Gloom & Doom in 2020, through to Zoom, and in 2021, Boom!

As we've mentioned previously, 2020 has been a pretty extraordinary year. However the icing on the cake (is that one metaphor too many?) would have to be The Westpac-Melbourne Institute's index of Australian consumer sentiment, which now sits at a 10 year high.

This is surely the snap-back to end all snap-backs, and one just hopes it's not like the proverbial bungee jump, where you never quite reach the previous level before going into a series of dips, and eventually coming to rest at rock bottom. But, as they say in the classics, "maybe this time it's different".

And all the indicators are that it is different this time. It was certainly the shortest, sharpest recession, and it elicited the fastest, most drastic, and financially dramatic government response that in any other circumstance would have been considered totally irresponsible. The same could be said of Victoria's lockdown, which while it attracted much criticism at the time, was in hindsight the only available option open to Daniel Andrews.

So, assuming Australia is not struck by a "second wave", we now have consumers and households who, having been the recipients of financial support they were not expecting, and not having much opportunity to actually consume, have built up their household savings (or raided their super), and now appear to have a pent-up, relief driven urge to spend it.

And while overseas travel is still a long way off, they only have one place in which to do so.

Many businesses meanwhile, depending on the sector they are in, have also benefited from the government's job keeper and other programs, or for the tradies, a renovation boom and the prospect of a massive infrastructure pipeline. The local tourism sector might be missing the overseas traveller, but they've been replaced by locals, many of whom will spend a lot more than some of the backpackers they replaced.

Enthusiasm and confidence is infectious, and will flow from consumers, through to business, and thus through to employment. Happy Days.

Of course trade with China remains a problem, and one that is unlikely to be resolved in the short or even medium term. It may be easy to say, but possibly there is a silver lining there in the long term as well.

Certain sectors, such as agriculture and education, had possibly become overly reliant on one dominant customer. So being forced to diversify their risk by having to seek out new markets, whilst painful in the short term, could lead to a more robust and broad customer base in the long-term. Paul Keating once famously said "this is the recession Australia had to have", and maybe there is an element of that logic in having to search out new markets.

The release of COVID vaccines will further boost consumer confidence, but is unlikely to see overseas travel - in or outbound - taking off (excuse the pun) in the short term. Not only will it take some considerable time to roll out vaccinations across a sufficient proportion of the US, Europe or the majority of the world's population, but one would assume that the depth and extent of the pandemic's grip will significantly delay a return to normal.

Which takes us to the great unknown in 2021, namely what sort of President will Joe Biden turn out to be, and how quickly will his presidency impact on both the domestic and international stage? 

The other question of course is how Donald Trump will behave at Biden's inauguration?

One would expect predictably!

News & Insights

Video interview with Rodney Brott from DS Capital

Hedge Clippings | Friday, 04 December 2020

It's been what one might call a Topsy-Turvey year. We understand that is not a very technical or well-recognised financial term, but from where we sit (or stand) it seems to sum it up. Topsy-Turvy it might have been, but compared with where we were in April or May, or where Victoria was during their winter lockdown, Australia seems to have fared relatively well all things considered.

We are certainly fortunate to be an island nation, tucked away down at the bottom end of the globe. We are fortunate not to have had the chaos that has enveloped Europe and North America, and seems likely to continue to do so for a while yet in spite of the recent announcements regarding the release of COVID vaccines.

In reality of course it's been a shocker of a year, thanks to COVID and its aftermath. The domestic economy has been battered, but has amazingly bounced back from one of its worst quarters of financial growth to record one of its best. There is a significant cloud on the horizon for the agricultural and education sectors as they struggle to deal with their largest trading partner, but the reality is probably that they became complacent and over-dependent in the first place.

If nothing else, both Australia and the world are now seeing the Chinese government's true colours. Exporters might as well get used to it and find new markets, even though in the short to medium term that will be a painful exercise.

While on the subject of painful exercises, sooner or later Australia's own government (of whatever hue) needs to bite the bullet and address the issue of our highly inefficient tax system. Yesterday the OECD released "Revenue Statistics 1965-2019" which showed that at 60% we have the second highest dependence on taxes raised from income and profits among 37 advanced countries.

This isn't even close to the OECD average of 34.3%. Equally, the GST makes up just 11.7% of total tax revenue, compared with the OECD average of 20.4%. Part of that issue of course is that the GST is only levied on less than half of Australia's overall consumption.

In spite of this, Australia's overall tax level is 28.7% of the economy, which is below the OECD average of 33.9%. This tells us two things: firstly that the major source of taxation revenue that the government relies on, whether it be company tax or personal income tax, is inefficient and in many ways counter-productive.

Secondly, and the politicians in Canberra must know this, they lack the fortitude or ability to address the issue at the ballot box. Last week's Hedge Clippings had a whinge about Australia's superannuation system which, when all is said and done, is another arm of the taxation system.

So we are left with two highly inefficient and overly complex systems. One of our ongoing dreams is that the GST will be raised and expanded as a tax on consumption, such that the higher the consumer's level of spending, the more they contribute. That at least would lead to a simpler collection system.

Another is that there should be a strong incentive (or should that be a penalty) to encourage superannuation funds to invest long-term in infrastructure projects, thereby merging the opportunity with the need for investment into that sector.

Of course it's not easy for the government, when a logical and sensible plan to limit cash transactions to $10,000 (as is required in the banking and financial services sector) was this week dumped, or should we say torpedoed, by the cross benches. That luminary from Far North Queensland, Bob Katter, somehow described the proposed ban on cash transactions as representing a danger to Australian freedoms "greater than the danger to our lives through terrorism".

Meanwhile, One Nation Senator Malcolm Roberts claimed that the ban "criminalises the use of legal tender, cash, for everyday Australians".

What planet are these two on? If Katter and Roberts don't realise it, terrorism is financed through donations made in cash, simply because it's untraceable - or difficult to trace. And it is the criminals that use wads of cash greater than $10,000 to conduct their "business", not everyday Australians.

The mind boggles! But it's Friday. Where's that glass of pinot?

News & Insights

Staying Overweight Japan by Arminius Capital

Hedge Clippings | Friday, 27 November 2020

Australia's Superannuation System - Maybe not so "super" after all?

Regular readers of Hedge Clippings would know that we're big fans of Australia's compulsory superannuation system. In fact, it is admired around the world. However, that doesn't mean it's perfect by any means.

How do we know that? Well for a start, if it were perfect the government wouldn't have had to commission a Retirement Income Review to take a look at it. And again, if it were perfect the resulting report wouldn't have had to run to 650 odd pages, and it wouldn't have taken the government 5 months or so to "review the Review".

Bear in mind the Review itself was only produced on the recommendation of the Productivity Commission in its own report, "Superannuation: Assessing Efficiency and Competitiveness".

Put it all together, and that's a lot of paper. Thank goodness it's all online, so we don't contribute to global deforestation when reading (skimming?) through it. But we digress...

The Treasurer in his media statement (not surprisingly) leads with the statement that "the Australian retirement income system is effective, sound and its costs are broadly sustainable". It goes on to mention three over-arching observations about the system, the first of which is positive: "the system, being the Age Pension, compulsory superannuation and voluntary savings, continue to provide effective support to Australian retirees and are sustainable in the long term", while only then mentioning that "there is a need to improve understanding" and then "the system would benefit from a clear objective..."

Did we mention it was a media release and therefore no doubt written by a spin doctor? The government is going to use this to argue that the SGL doesn't need to - or should not for the time being - increase above the current 9.5%, partly due to the effects of COVID putting excessive stress on wages and other parts of the system.

That's not really our current gripe, which is that the super system is far too complex. The Treasurer notes that reducing fees and improving returns will lead to an extra $17.9 billion in the system over the next 10 years. Admittedly we have not done the maths, but simplifying the complexity such that the average person can understand it without needing an accountant or tax agent to unravel or explain it might also lead to considerable savings.

Next, back to the SGL of 9.5% - or 12% or whatever. This is essentially a "flat tax" levied at the same rate, irrespective of income. So a wage earner on $50,000 pa "pays" the same percentage rate as someone on $500,000. Like it or not, the wage earner is probably still going to end up on the pension on retirement and may not even own their own home, while the person on $500,000 will have accumulated significant assets, both in super and elsewhere, and have no doubt paid off the mortgage on a substantial home.

Having done so, the affluent don't spend their super or their other assets. They sensibly do everything they can to preserve their hard-earned wealth, which doesn't help the economy much. Meanwhile, the $50,000 wage earner would spend the 9.5% over their working life, tipping it back into the economy.

There are other examples of where or how the government could increase spending - HECS for example. Instead of graduates paying interest to the government on their student loans, why not forgive their debt? As young people they'd have more in their pockets, and as young(er) people they'd spend it at the time they need it - buying a house, shopping at 100 year old Gerry Harvey's stores, and starting a family for example.

This all may seem far-fetched, but consider this: The government has kept the economy from completely tanking during COVID by (correctly in our view) showering the working population with helicopter money, and permitting the early withdrawal of super, all - or most of which - has made its way back into the system. Except from the wealthy or retirees, who have probably used it to shore up their savings - or to make up for the reduction in dividends from the likes of Westpac.

We could go on, as there are many, many aspects of the super system which could - and hopefully will - be introduced following the government's "careful consideration" of the Review, including allowing a portion of one's super to be used as a deposit by first home-owners, but time and space doesn't permit.

News & Insights

Video interview with Charlie Aitken from Aitken Investment Management

Video interview with Alex Lee from Laureola Advisors

Australia's Banks Are On The Road To Recovery by Arminius Capital

Hedge Clippings | Friday, 20 November 2020

It would seem that with the recount over in Georgia that Donald Trump will finally have to concede, although he's still fighting hard to have the result in Pennsylvania overturned and let the Republican controlled legislature choose the winner instead of the electorate.

And guess who they'd presumably choose?  One can't accuse the Donald of being a defeatist or giving up early, irrespective of the cost and damage done on the way out of the White House.

Back to reality, as opposed to Reality TV politics.

While the US and Europe (and most of the rest of the world) are entering a dangerous winter as COVID cases surge, Australia and South Australia in particular, appear to have worked out that if you strike hard enough, and early enough (perhaps not early enough in Victoria's case, but hindsight's a wonderful thing) then the chances of things getting out of control are significantly diminished. 

Irrespective of the timing of a release of an effective vaccine, it's going to be well towards the end of 2021 that life returns to semi normal, and that's without factoring in how the economy, both here and overseas, will respond and recover.

Meanwhile in China, there's another potential storm brewing - and not one of name calling and rhetoric, at least not yet. Rather, defaults by three state owned companies (SOE's), a chipmaker, car manufacturer and a coal company, have sent jitters through China's credit markets. As Bloomberg reports, "the big questions when it comes to SOE's is whether they are happening with the blessing of Beijing as authorities try to reform the bond market, or whether they're happening outside of government control".

In a controlled economy (and state) such as China, it's difficult to determine, but if it's the latter and more SOE's default on their debt repayments, then it will be a case of "Beijing, you have a problem". How the government will react is anyone's guess, but based on past performances they're unlikely to 'fess up and admit making a mistake, or being at fault.

Bloomberg is suggesting that if it is being controlled, - by deflating a massive debt balloon slowly rather than letting it pop suddenly, then using friendly (controlled) Chinese credit rating agencies would be one way of doing it. However, Chinese ratings agencies aren't that good at doing their job.  The coal company, that was one of the three defaulters mentioned above, was issued with a triple-A rating just a few weeks before defaulting.

Either way it's potentially a risky environment - as anything is when dealing with China. Just ask Scomo! And don't you dare mention where COVID-19 originated!

And on that note have a great week-end!

News & Insights

Video interview with Dean Fergie from Cyan Investment Management

4 Answers to the RBA's Toughest Questions by Nikko Asset Management

Hedge Clippings | Friday, 13 November 2020

Hedge Clippings is at a loss for words (not a frequent occurrence, as some might understand) when it comes to the US election - or at least to Trump's reaction to his loss. Come to think of it, is seems the Donald himself is also at a loss for words as well, as his public statements have been few and far between. There's an underlying concern about the state of democracy in the US, and the turmoil his refusal to accept the result is creating.

Of course, The Donald has never been shy when it comes to controversy, whatever the expense. Sadly his legacy is one victim of his personality, however one might view his achievements over his single term. The other, more concerning issue is the potential damage done between now and the 20th January, and the opportunity it provides to other powers - China and Russia in particular - to take advantage of the vacuum.

Meanwhile back to business! In the managed fund sector, or the broader equity market, and for that matter in financial markets as a whole, we are constantly faced with "averages" which although technically accurate, can be highly misleading.

There's an old saying regarding averages: "When your head is in the freezer, and your toes are in the oven, your temperature is average." So it is with managed funds, particularly with actively managed funds. And even with ETFs and index tracking funds the reality of course is that the index itself is an average. In the case of the ASX 200 made up of 200 stocks, each of which perform significantly differently to produce the average or index return.

At www.fundmonitors.com we frequently quote a whole range of averages, but behind those there is a wide distribution of returns from individual funds. As can be seen from the chart below which just singles out Australian Long Short funds (including Equity Market Neutral, and 130/30 funds) the performance over 12 months to the end of October ranges from -50% through to +20%.

However even the headline returns of individual funds can be misleading - or at least need to be investigated as shown by the results for best and worst month highlighted by the green and red dots. While there are a number of other key performance indicators that need to be looked at such as volatility, Sharpe ratio and up-and-down capture, the best and worst month can give a good indication. Risk and return varies from investor to investor and whilst all investors seeking good return many of also wanting to do so without access volatility or risk.

What is also interesting from the chart below is that, in spite of the big variances between the best and worst months, the majority of Long Short funds, which are often considered to be more risky and more volatile than the market, have in fact outperformed the ASX 200 accumulation index (shown in orange) which has fallen just over 8% over the 12 months to the end of October.

The above chart is interesting: the bars clearly show the majority of funds out performed the ASX200 Accumulation Index, generally accepted as the relevant benchmark, although some may argue that as long/short or absolute return the appropriate benchmark is anything above 0%. However, equally telling are the red dots representing each funds worst month, and to a lesser degree the corresponding green dots.  Simply put it is much easier to perform well over the longer term (even though we have only focussed on 12 months in this instance) if you can avoid the market's worst months. Protection of the downside is a vital aspect of performance, and depending on the investor's risk appetite, an important KPI when evaluating any fund.

News & Insights

Video interview with Garry Rollo from Montgomery Investment Management

Amazon, Volatility, and the Virtue of Patience by Aitken Investment Management

Hedge Clippings | Friday, 06 November 2020

"It has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time...." So said Winston Churchill on Armistice Day in 1947.

But Churchill's quote also included:

"Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise."

Isn't that the truth!

And while we accept that the US system is democracy in action, one would have thought it is not what George Washington and his fellow founding fathers quite had in mind way back when they created the Constitution. They obviously hadn't allowed for Donald Trump, who, irrespective of one's liking or disliking of his policies, seems to be playing by his own rules.

It's been wall to wall, and minute by minute on the news channels, and if nothing else has pushed COVID, record low interest rates, and a record loss by the Wallabies to the inside pages. In the case of the Wallabies, thankfully so.

Amongst all the commentary and humour, we think this one sums it up best:

"A new analysis by some guy on Twitter has found that Donald Trump would have been re-elected with an overwhelming majority if none of the votes for Joe Biden had been counted."

You can read the full text here.

So there's nothing much that Hedge Clippings can really add to our comments of last week - namely that the polls might be incorrect, the result seemed to be up in the air, and that a tie or contested result wasn't out of the question. The sad reality is that whatever the result, the USA, as "leader" of the democratic world, will be at best divided, and at worst...

Back to interest rates, but more importantly to their "QE" program - namely buying $100 bn. of government bonds ($80bn Federal, $20bn State) over the next six months. While the new ultra-low rates won't make much difference to borrowers once the banks do/don't pass all the savings on, from the perspective of a depositor there doesn't seem to be much of a case for leaving any money in the bank. Unless of course you're worried about loss of capital.

While caution is required when reading glitzy ads (for example Mayfair 101 as reported by the AFR's Jonathan Shapiro) there are good opportunities to get both a reasonable return with acceptable risk. Check out www.fundmonitors.com.

We're living in strange times, and a strange economy. Major exports are under threat from China, who seem intent on punishing Australia for not kow-towing when told to, and having the temerity to have an independent opinion.

Domestic and regional tourism however seems to be going gangbusters, and with the opening up of state borders (more or less) likely to make up for much of the loss of overseas tourists.

Meanwhile Europe, and much of the rest of the world, continues to suffer with little end in sight to a long (indoor) winter.

As the old Chinese curse goes, "May you live in interesting times".

News & Insights

Video interview with Richard Ivers from Prime Value

ESG INSIGHTS Biden's most critical investment by Nikko Asset Management

Hedge Clippings | Friday, 30 October 2020

Next Tuesday - well, it will actually be Wednesday in Australia - the world as we've known it for the past 4 years or so will have changed, or not as the case may be. In any event, the US election will be all over bar the shouting, and there's been plenty of that.

Or will it? While the polls are pointing to a Biden victory, we all know that polls can be misleading, (just ask Bill Shorten). However in the US there is a greater chance of the polls getting it wrong (refer Hilary Clinton) partly as voting is voluntary, and partly due to the "system", whereby whoever wins in each State effectively receives 100% of that State's vote.

As such, from what we understand of it, Florida could hold the key to the White House, although an interesting spectacle may arise if Trump decides he does not want to hand the keys over. Further complicating the pollster's task is the record level of pre-election day voting, and further complicating that is the complexity of the pre-polling rules and regulations.

A result that seemed clear cut a few weeks ago would appear to be up in the air with just three or four days to go, so Hedge Clippings is going to hedge our bets, and predict it could go either way, with a tie, or at least a contested result, not out of the question.

This week we had the opportunity to run a webinar to canvass the views of three fund managers, namely Rodney Brott from DS Capital (Australian equities), Robert Swift of Delft Partners (Asia), and Chris Wheldon from Magellan (US/Global). The discussion was not so much on the politics and personalities behind the election (although that's difficult to avoid), but on the economic and market effect of the outcome - win, lose or "draw" - to either side.

What was interesting was that, in spite of the different strategies involved (or at least their geographical focus), while there were different views, there was also a broad overall consensus. A Trump win would mean more of the same, Biden would see a marginal move to the left, particularly given the hard left views elsewhere within the Democrats, and a "draw" would lead to uncertainty, and markets hate uncertainty.

Other key themes to emerge were that, whoever wins, the US is waaaay overdue increasing spending on infrastructure, and that the race for the White House is only part of the issue, with predictions that the Senate could well change to Democratic hands, potentially giving them the trifecta of the Presidency, Senate and the House of Representatives which they already control.

Whichever way, possibly excluding a Trump victory and a Republic Senate victory, volatility was expected to increase. To the average investor volatility is a negative, but as Chris Wheldon from Magellan pointed out, to a fund manager volatility can create opportunity - namely to buy stocks that are oversold, that were previously overpriced.

Another theme to emerge was that even though Trump's persona (narcissistic personality disorder) alienates many of his countrymen and women, and seemingly a majority of Australians, from a policy perspective (up until COVID) he had some significant achievements: No war on his watch (in fact, troop withdrawals), increased employment, reductions in taxation.

Meanwhile in the foreign policy sphere: Standing up to North Korea (and Iran), confronting China's threats to security (and particularly  IP theft), moving the US embassy to Jerusalem, leading to the recognition of Israel by the UAE.

If you have the time (45 minutes) you can watch the recording here. 

One other topic canvassed was the recent move upwards in US 10-year bond yields, as highlighted last Friday in Longview Economics' weekly report, headlined "Bonds - the BIG SHORT?". As Longview's research states, "Bond yields dictate and determine key big picture sector allocations. Getting bond yields right, therefore, is critical for most money managers/investors."

Longview point out that having made a record low on 4th August, 10-year bond yields have been edging higher, and more recently accelerating such that they have broken the 50 day moving average and have now reached their 200 day moving average, a key technical resistance level.

Longview conclude that the level of stimulus in the pipeline is especially large, and the case for a global economic boom is growing - assuming a vaccine can be successfully developed and released. And finally, the potential for further fiscal stimulus post US election (and presuming increased infrastructure spending) could see an increase in medium term US inflationary pressures, and thus higher bond yields.

Watch out!

Of course, also in the diary next Tuesday is the Melbourne Cup, which this year will be spectator free and therefore presumably silent. At least Victorians will be able to party, even if not at Flemington itself. Congratulations to all Victorians for their patience (even though we've heard a few grumbles from some quarters) while under lockdown.

News & Insights

Webinar: Fund Manager Roundtable on the US Election

The Presidential Volatility Kink by Arminius Capital

Hedge Clippings | Friday, 23 October 2020

Hedge Clippings has limited knowledge of the US Presidential election outside of that which is dished up via the internet, email, social media, in the print media or on the nightly TV news. So while not one to readily agree with much of what emerges from the Donald's mouth, we do concede that the world and global media is full of "Fake News", albeit much of it coming from the White House itself.

The issue is that in order to get a balanced view, one has to consume or source news and opinion from multiple sources, and then try to pick one's way between them all in an effort to decide what is real and what's being fed to you. Some is highly slanted - take your choice, left or right, or possibly somewhere in between.

The problem is of course that there doesn't seemed to be any truly neutral news or information feed - every piece of news or opinion is written by someone (self included) with an opinion, view, or bias built in. One thing we can be certain about is that if it's coming from a politician, then it's what they want you to believe - otherwise they're out of a job (or at least the one they currently occupy) next time around.

Once upon a time the media wasn't so powerful, persuasive, or invasive. That was before television (yes, Hedge Clippings has vague recollections of such a time), but even TV was relatively benign way back then - or maybe we weren't as aware or cynical as we have become. However, the internet, email, and social media has totally changed the "news" landscape. Visit Google, YouTube, Facebook (if you must) and the algorithms behind the scenes to a large extent dictate what you are presented with.

Even if you do a Google search for a specific category, you're likely to be presented with ads or articles which target you based on your demographics, previous page views, searches, likes or dislikes. YouTube, and you're going to get video content delivered according to your past viewing habits. That's ok, and very convenient up to a point as it saves you time, but when it comes to news and opinion you're either going to get what you want, or what you deserve.

Email's no different - you can block messages from those you don't like, but they have ways and means of getting around that. Particularly politicians, which gets us back to our original theme: The US Election. Just check out this article from the ABC (itself not unknown for, if not bias, certainly a hefty slant) outlining the email tactics of US politicians, and Trump in particular.

It's clear we have NO idea of the average American's intelligence or outlook. Based on what we see, or believe, and is dished up in the media, The Donald's chance of being elected Prime Minister of Australia is probably zero - or at least no better than Clive Palmer's. Yet in the US it seems there are sufficient voters who think he's the Messiah, such that in spite of being behind in the polls, he might still be in the White House next February.

And if you believe some, including the man himself, he might dig in anyway and refuse to leave even if he loses the election.

As we mentioned at the outset, Hedge Clippings has limited knowledge of the US election process. Looking behind the person and trying to get a clear view of policy - on either side - can be difficult given the focus on what sells on TV. Normally we'd view a Republican victory as good for markets, and a Democrat victory as bad, but will that be the case this time around?

On Wednesday next week we will be holding a webinar to discuss the potential market and investment outlook post the US election. I will be joined by three excellent fund managers, each with significant experience in their particular field and sector:

We'll be speaking with Rodney Brott from DS Capital, Rob Swift from Delft Partners and Chris Wheldon from Magellan Asset Management to get their perspectives on the upcoming US election and how they expect it to influence their investment decisions.

The session will be interactive with the opportunity to ask questions of the panelists.

When: Oct 28, 2020 4:15 PM Canberra, Melbourne, Sydney

Register in advance for this webinar: Register Here.

After registering, you will receive a confirmation email containing information about joining the webinar.

And on that note we will now turn on the TV to receive the latest opinion on who won (or lost) today's Trump/Biden debate, check emails from those wishing to influence me one way or the other (in spite of the fact I'm not a US voter) and try to steer my own path through the media jungle.

News & Insights

Video interview with Emanuel Datt from Datt Capital

3 Places to Invest as Interest Rates Head South by Montgomery Investment Management

Hedge Clippings | Friday, 16 October 2020

For those readers of Hedge Clippings who recall the pre-Covid days when we could be a little more light-hearted in our weekly comments, join the club! Life seemed less tedious then, when even the Donald's latest missive or tweet, while still raising eyebrows, sometimes made for interesting reactions. Now we're subjected to daily statistics - be they counting cases and testing, or the trillions being spent to overcome the effects.

Not to be outdone, a couple of weeks ago Hedge Clippings included the comment that Active Equity Managers (be they long-only, long-short, or other alternative strategies) would be under pressure to justify their fee structure compared with the apparent attraction of low cost ETF's or Index funds. At that time it was too early in the month to provide the necessary statistics for the 12 months to September.

The fee debate is one that is regularly raised, not only relating to managed funds, but also when considering superannuation funds. While it is justifiable to consider fees, whether in total, or as a percentage of cost, the real test investors and advisors should also be considering is "value for money". Of course, in the case of managed funds this comes down to relative performance and risk - or at least avoidance or reduction of risk - which one would assume are what the investor is looking for, and the manager is hoping to provide.

There are some who object to high fees in principle (in spite of those same people owning or coveting expensive cars, or happily paying for quality elsewhere) but this ignores the value for money argument. Would you rather invest in an ETF which replicates the ASX or ASX200 with fees close to 0.5 or 0.10%, or an Active Equity Manager charging say 1 or 1.5% plus a performance fee of say 15%?

The answer of course is "it all depends on the performance - or the risk/reward ratio" - assuming that when comparing performances one looks at net performance after fees. That allows the investor or their advisor to make an informed decision about value for money - in conjunction of course with the myriad of other evaluation factors to take into consideration.

So is it worth paying the various fees charged by "Active Managers"? In some cases the answer is a resounding YES, in others, sadly NOT as the charts below clearly show:

Firstly, let's take the last 12 months (to the end of September) when the ASX200 Accumulation Index (ASX200 AI) returned -10.21% vs. Active Funds -0.94%. Over that period 76% of Active Equity Funds outperformed, with the "outperformers" returning on average 4.16% - or over 14% against the ASX - and by implication, an Index ETF.

But within that group there was widespread divergence or distribution of returns - negative -10.03% through to +39.13%. One would assume that a manager returning -10.03% charging 1.3% management and 15% performance (obviously not paid as it was negative) would not qualify as good value for money, whilst the one returning +39.13% was well worth their higher management fee of 1.6% and 20% of performance.

Over 3 and 5 years the numbers for the ASX200 AI have been better (but not stellar thanks to the past 12 months) but Active Managers on average have still outperformed, but not to the same extent, perhaps strengthening the argument that they don't provide value for money. Once again however, this is dependent on selecting the right fund, as the charts below show.

And for those who prefer the numbers rather than the picture, below is the data for 12, 36 and 60 months to September 2020, or for details of all funds visit www.fundmonitors.com.

The graphs and table above only considered funds on the www.fundmonitors.com database that invest in Australian equities.

Hedge Clippings | Friday, 09 October 2020

As much as Hedge Clippings would like to avoid the "C" word, there's no escaping it. Covid is so much a part of all our lives, such that the news is dominated by infection, testing, and mortality statistics both at home and abroad. And looking back at recent editions of Hedge Clippings, we have been as guilty of being Covid focussed as anyone else.

Realistically, as much as we'd love to move on, Covid isn't just about the present as this week's delayed budget shows. Even allowing for some political spin, the Goverment's Budget 2020-21 summary included the following headline:

"The once-in-a-century COVID-19 pandemic has fundamentally reshaped Australia's economic and fiscal outlook."

Without the spin, the word "outlook" would, or should, have been replaced by "future". From a forecast surplus of $6.1 billion (0.3% of GDP) in 2020-21, the figure is now a deficit of $213.7 billion, or 11.0% of GDP. Somewhat optimistically this is expected to improve to 3% in 2023-24, and then decline further to 1.6% by the end of the medium term. Hedge Clippings is not exactly sure of the definition of "medium term", except it's likely to be well beyond 2024. Although we guess, like age, it's relative. A bit like a medium bodied wine, but maybe we're getting ahead of ourselves, even though it is Friday afternoon.

To be fair, there's a valid get-out included: "Until a vaccine is developed and widely deployed, significant uncertainty remains".

Equally, we did opine last week that the government shouldn't hold back, urging the Treasurer to spend more, not less, but just not to waste it. What he did waste was the opportunity to ensure more of the nation's superannuation was funnelled into infrastructure spending, and as a result employment and the future. Maybe next year...

And given the global effects of Covid, the financial and health risks here are minuscule compared with those elsewhere. With the US election less than 4 weeks away on the first Tuesday in November (coincidentally also Melbourne Cup day), the polls are increasingly looking like a Biden victory, which if correct is going to significantly impact the future.

As of 6 October, according to the Guardian's poll tracker, Biden is leading 50.4% to Trump's 41.3%. Polls, however, can be misleading (just ask Bill Shorten) and the US system is not simply a case of who gains the most votes on the day (just ask Hillary Clinton). The outcome will undoubtedly affect markets, but the view that Biden is far-left seems to be incorrect based on The Economist's latest edition, which describes a Biden win as "only a little lurch leftwards" based on his spending proposals of around 3% of GDP (presumably excluding any Covid stimulus), compared with Bernie Sanders' 23%.

However, that's still considerable, with a forecast total new spending of US$7.27 trillion between 2021 and 2030, about half of which might be covered by tax rises, and the balance by public debt which is forecast to double - from the current 100% of GDP to a mouthwatering (for some) 200% by 2050.

Over $3.5 trillion in increased taxes will certainly scare a few (and possibly Trump amongst them if he ever gets to pay tax), but in reality only a few. Again from the Economist, the greatest change in after-tax income (-18%) as a result of Biden's tax plan will only affect the top 0.1% of income earners, followed by a fall of less than 10% for those in the top 99 - 99.9%. Even those in the 95-99% of income earners will only be worse off by around 2%, so they still should be able to scrape by.

The Economist describes Biden as "The Pragmatist". Assuming he wins - not a sure-fire outcome, and even if he does, there's no guarantee the current President will vacate the White House - it will certainly make for a change to the evening news.

Finally, before signing off we remember that today would have been John Lennon's 80th birthday had he not been shot in New York aged just 40.

News & Insights

Sep '20 - Speculative Markets, Deteriorating Backdrop, Where to Hide? by Laureola Advisors

Deferred loan repayments are hitting the banks by Montgomery Investment Management

New Funds on Fundmonitors.com