Hedge Clippings | Friday 14 February, 2020

Being the old-time romantic type, Hedge Clippings duly (and thankfully) remembered that today marks St Valentine's day, but we'd guess there's not too much kissing aboard the Coronavirus stricken Diamond Princess in Yokahama. Before we're accused of being insensitive (have you ever heard of an insensitive romantic type?) the point we're getting to is whether isolating 4,000 passengers on a ship with known cases of a highly contagious and dangerous disease was the correct strategy.

We have to admit that we wouldn't have a clue WHAT the best strategy would have been, and hindsight is a wonderful view to have, but is there a chance that by keeping all the passengers on board it is just a matter of time before more and more become infected in a somewhat gruesome version of the domino theory?

Meanwhile as our government tries to limit further cases in Australia by extending travel bans from China for non-citizens, and as noted in last week's Hedge Clippings the economic ripple is continuing. The issue is not only affecting direct imports and exports to and from China, with reports that Korean vehicle manufacturers Kia and Hyundai have had to halt car production due to the shortage of some components manufactured in China.

Maybe we're being alarmist, but it would seem that the risks associated with a longer than expected duration of the crisis are considerable - and unknown.

Also in the media this week has been the court case involving the Goldsky Ponzi fund, the founders of which managed to misappropriate large sums of money from unwitting investors. Once again hindsight can be a wonderful thing, but in this case, just like most other Ponzi schemes before (Astarra in Australia, or Bernie Madoff for example), there are some tell-tale signs, and some simple rules to follow.

One is to beware of the marketing spin, but to be fair, smart marketing to gullible or even greedy investors is just what Ponzi operators survive and thrive on. There's an old saying that if "something sounds too good to be true, then maybe it is". Famous sportspeople and other household name "brand ambassadors" should not be relied on for so-called financial advice.

So as a rule of thumb, do some basic research and due diligence. Who is the scheme's administrator, custodian or trustee? Even this can be difficult, particularly for the unsuspecting, or unsophisticated investor chasing exceptional returns. In the case of Goldsky, they falsely claimed to use Citco, a well known global fund administrator for independent pricing of assets, and reporting of returns.

The implied endorsements of industry awards aren't foolproof. Awards are frequently there for the manager's marketing purposes - and have been known to be less than reliable as an indicator of future returns.

Even relying on financial advice or paid for research isn't foolproof, as shown in the case of Shawn Richard's Astarra, which way back pre 2010 cost investors over $100 million in spite of a positive research report written by a party who also consulted to Astarra (for a fee of course), shared office space, and sat on the investment committee of the advisory group (AIOFP) which just happened to be the main distribution channel for the fund.

For the whole sorry tale click here. Suffice to say Astarra was paying advisors high commissions, and lending money to the associated dealer groups. For the record (excuse the pun), Richards was sentenced to 3 years in the slammer.

While on the subject of advisors (and no connection with the above) an excellent and interesting piece of research from Mark Hoven's Adviser Ratings summarising the changes to the advisor landscape in 2019 entitled "Musical Chairs", the key findings of which showed adviser numbers fell 4,378 (-15.6%), three out of every five advisers are now privately licenced, 21% of the industry is now made up of "Micro-licensees" of 10 advisers or less, and that 30% of the entire industry has been on the move (ceased or switched) in some form or another in 2019.

(And finally, for the pedantic types who noticed the varied spelling of the word advisor/adviser, the dictionary allows both.)

Hedge Clippings | Friday 07 February, 2020

"Unknown unknowns"

The above (now famous) response by US Secretary of Defence, Donald Rumsfeld, to a journalist's question way back in 2002 regarding the presence of weapons of mass destruction in Iraq could well apply to the way the investment (and political) landscape has changed over the past 30 to 60 days given firstly the bushfires, and subsequently the outbreak of the coronavirus.

Some might argue that Australia's bushfires might not qualify as unknown unknowns, as there would have been some who predicted the extent and severity of the fires, without of course the benefit of hindsight which so many people seem to suddenly acquire when the opportunity arises.

The coronavirus, on the other hand, has not only come out of the blue, but the outcome at this stage is surely unknown, not only from a medical perspective, but also an economic one. Alternatively one could argue that the real "known known" is that the economic fallout is likely to be significant depending on the progression of the rate of infection.

And of course, the speed of progression is a "known unknown".

With a lockdown in China post lunar new year celebrations for the Year of the Rat (ironic that it was reportedly a live food market in China that was the source of the outbreak), Chinese industrial production is unknown, affecting both imports of raw materials and output of finished goods. Given that China has become the dominant supplier of so much of what the world consumes, how long before retailers' shelves are showing the signs?

What is better known is the damage to specific sectors in Australia - particularly tourism and education. Even then, the duration of the virus, or China's ability to control its spread, is a known unknown - as indicated by the now out of date statistics in Frazis Capital's insights article here, published earlier this week.

As is the effect on not only Australia's economy, and GDP, but that of the world at large.