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22 May 2025 - Performance Report: Insync Global Quality Equity Fund
[Current Manager Report if available]
22 May 2025 - Jurassic farce
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Jurassic farce Redwheel May 2025 |
Blockbusters and buyoutsAs career moves go, it's certainly an unusual one. In 1969, a newly-minted Harvard Medical School graduate abandoned his promising career as a doctor to pursue his true passion: writing novels. As it turned out, this was a wise choice. That graduate - Michael Crichton - would go on to forge a highly successful career, churning out a string of famous novels. One of his books was catapulted to huge fame when it was immortalised in 1993 as a Steven Spielberg movie classic: Jurassic Park. In the epic film, where lab-created dinosaurs roam free on an island-resort-gone-wrong, one scene is particularly memorable. In a storm, the park's electric fences lose power just as our hero, palaeontologist Dr. Alan Grant, is sitting in a Jeep outside the Tyrannosaurus Rex enclosure - with two children in the car with him. Inevitably, the dinosaur dramatically escapes, flipping the car as it searches for an easy meal. Grabbing one of the children and standing perfectly still before the bellowing dinosaur, Dr. Grant delivers an iconic line: "Don't move. He can't see us if we don't move" [1]. Those who have read my previous blogs posts will know that I am an advocate of learning important investment lessons from all forms of art, including books, TV shows, and movies. In this case, however, I think that one cohort of investors - our cousins in private equity - have learned perhaps the wrong lesson from this film, and from this line in particular. In Private Equity Park [2], their approach to valuation and volatility is a warped version of Dr. Grant's famous line: if you can't see it, it doesn't move. The illusion of stabilityOrdinarily, when an investor wants to know the current market value of their investments, they check the listed price of their assets. Not so in private markets. Here, investors get a periodic and often lagged valuation concocted by an opaque internal process undertaken by the manager [3] rather than via a market of buyers and sellers setting a clearing price. This process is understandable - after all, they have to put a number on the investments somehow. What is perhaps less forgivable is the claim [4] that, as a result of this process, private investments are more stable and less risky asset classes - with risk often conflated with volatility - when compared to the daily price changes in public markets. To this assertion, we must object. Simply because one cannot see valuations of private companies change does not mean that they do not move in lockstep with public peers. After all, one cannot forget the "equity" part of private equity: if they are truly buying operating companies, as we do in public markets, why would the value of those companies not simply move alongside their listed peers? Moreover, private equity-owned companies typically carry larger amounts of debt [5] than their public equivalents, meaning that, all else being equal, their equity valuations should swing more than those of listed companies:
Source: Redwheel. The information shown above is for illustrative purposes. As a result, claiming that the value of your companies is more stable than public equivalents simply because they are unlisted is pure fantasy (vocal critics have termed it volatility laundering). The persistence of such claims, despite many in the industry pointing out the obvious flaws, is a reflection of the eagerness of investors to see a smooth chart, rather than a lumpy one, a mindset that seems to us to be prevalent amongst many allocators today. It's the destination, not the journeyWhilst we certainly endorse the view that investors should ignore day-to-day volatility and focus on the long-term compounding of their capital, we believe that the way to do this is simply by being more willing to tolerate short-term volatility. In our view however, it is not done by paying extremely high fees to managers to employ huge leverage - often supplied by the credit arms of their own firms, who are in turn charging high fees to their investors - to buy small companies and then only report to you their (highly subjective) valuations at various protracted intervals. Impatience is not cured by avoiding anything that requires patience. As we have argued in the past, we believe that public markets can offer better investment opportunities than those available to private equity investors, and the fact that the market value of our portfolio companies bounces around every day does not change that. What matters for investors with a long-term focus is simply how much capital they end up with, compared with how much they put in, and how long it takes them to grow that amount of money. What private markets are selling - at a steep price - is enforced long-term thinking. If investors think they can develop this ability on their own, they can save themselves a 2% management fee and possibly earn a better return by turning to public markets. We would urge allocators with private equity investments - who are to some degree self-selecting as long-term investors - to acknowledge to themselves that if they are confident in the long-term prospects of the intrinsic value of their businesses, it does not matter whether the market prices for those businesses swing on a daily or weekly basis. What matters is the potential to buy something for substantially less than it is worth and to sell it, years later, for its true value:
Source: Redwheel. The information shown above is for illustrative purposes. The patience premiumOverall, what public markets offer is fundamentally no different to what investors are accessing in private equity wrappers: ownership of stakes in businesses, the chance to benefit from the growth and success of those businesses, and the talent of their executives. Public markets also tend to offer better liquidity, less leverage, greater transparency, access to larger companies, and all at typically lower prices - if investors are willing to be as patient as private options enforce. After all, corporate valuations are no dinosaurs: even if you can't see them, they move. Sources: [1] For those curious, Tyrannosaurus Rex could probably see motionless prey perfectly well. However, it is here that Crichton's attention to detail is magnificent. The book relays that, where the park scientists were unable to replicate dinosaur DNA, they used frog DNA as the next best thing, a kind of nucleic acid stopgap. As it turns out, some frogs do indeed have difficulty focussing on motionless prey, a detail that Crichton worked cleverly into the storyline of the novel, and which became a memorable line from the film [2] An island where gilet-clad private equity investors run from the EBITDAsaurus and the PIKodocus [3] Which some sceptical commentators might equate with marking your own homework [4] Such as can be found on the websites of many large PE firms (https://www.blackstone.com/en-emea/pws/essentials-of-private-equity/, https://www.kkr.com/alternatives-unlocked/private-equity#2) [5] https://verdadcap.com/archive/explaining-private-equity-returns-from-the-bottom-up?rq=leverage |
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Funds operated by this manager: Redwheel China Equity Fund, Redwheel Global Emerging Markets Fund |
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Key Information |
21 May 2025 - Performance Report: Canopy Global Small & Mid Cap Fund
[Current Manager Report if available]
21 May 2025 - The case for small caps: why small companies are set to outperform
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The case for small caps: why small companies are set to outperform Pendal May 2025 |
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THE prospect of rate cuts over the remainder of 2025 should buoy small cap stocks, says Pendal portfolio manager Lewis Edgley. Markets are increasingly confident that falling interest rates over the next 12 months will help Australia avoid a prolonged economic downturn, assisted by strong employment and continued immigration. That kind of macro-economic background has traditionally been positive for small caps, which are more cyclical and growth-oriented than their larger counterparts and hence tend to outperform during periods of monetary easing. "We know from experience that when rates go down, small caps, as a category, tend to outperform large caps," says Edgley. "So, if we believe that there's not going to be a recession but there is going to be a rate cutting cycle, then running a small cap fund is going to go from feeling like we've been driving with a hand brake on the last few years to letting the hand brake off and maybe even getting a bit of a wind behind us." Edgley and fellow portfolio manager Patrick Teodorowski co-manage the Pendal Smaller Companies Fund, an actively managed portfolio investing in companies outside the top 100 in Australia and NZ. Stock selection mattersEdgley says investors are often turned off small caps due to the poor performance of the benchmark ASX Small Ordinaries Index, which has returned 5.4 per cent a year over the past two decades, well below the S&P ASX 100's 8.8 per cent return. But the headline performance disguises the fact that the median small cap manager returned 11.15 per cent a year over the same period. "Small cap investing requires time and resources and the index returns have been lower than large caps," he says. "But if you do it well, there's a huge opportunity to add value and beat the broader market return, while benefiting from diversification. "We tell people, focus on earnings, not on macro -- that's where you make money in smalls." Beware cheap stocksEdgley says from a valuation perspective, small caps are currently trading in line with their large cap counterparts, despite historically trading at an 8 to 10 per cent premium. "So, you could say small caps are a bit cheap, and maybe that's a good time to buy." But he cautions that low valuations can be misleading. "Don't be allured into buying cheap stocks. Because they're often cheap for a reason. Might be a bad management team, might be a poor industry, might be a poor capital structure. "We've made money out of cheap stocks in the past, but we've also made money out of buying expensive stocks that get more expensive. "The key is to focus on earnings - if you get that right, you make money." Why earnings matter: Breville vs MyerEdgley says a striking example of the power of focusing on earnings is the long divergence between two household names: Breville and Myer. In the 1970s, both were regarded as standout businesses. Each offered exposure to the Australian consumer, and both were widely seen as credible, reliable options for discretionary spending. But over the decades, their fortunes have sharply diverged. Breville has consistently innovated and delivered on what consumers want, from the 70s cult hit Melitta drip coffee machine to today's fully automated espresso stations. That has delivered sustained earnings growth. "As an investor 15 years ago, you probably would have thought Myer was the bigger, seemingly more credible, safer business to invest in than Breville," says Edgley. "But look what happened. Breville has had a five times increase in its earnings per share over this period, whereas Myer's earnings have faced significant challenges, down almost 90%." However, Edgley notes that Myer is currently embarking on a "self-help" journey, which presents a potential opportunity for improvement. "While Myer has had a tough history, we see a scenario where they could materially improve their earnings through a number of cost and productivity-related improvements that aren't necessarily understood or captured in today's share price," he says. "This reinforces the point that small caps are all about understanding earnings." According to Edgley, both Breville and Myer present as interesting investment prospects today. "Breville continues to have a robust outlook as it innovates and grows into new markets globally while carefully navigating the short-term uncertainties of US tariffs, while Myer has the potential to significantly improve its earnings through strategic internal changes. "Understanding these dynamics is key to making informed investment decisions in the small cap space." Author: Lewis Edgley and Patrick Teodorowski |
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Funds operated by this manager: Pendal Global Select Fund - Class R, Pendal Horizon Sustainable Australian Share Fund, Pendal MicroCap Opportunities Fund, Pendal Multi-Asset Target Return Fund, Pendal Sustainable Australian Fixed Interest Fund - Class R, Pendal Sustainable Australian Share Fund, Regnan Credit Impact Trust Fund, Regnan Global Equity Impact Solutions Fund - Class R |
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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 |
20 May 2025 - Performance Report: 4D Global Infrastructure Fund (Unhedged)
[Current Manager Report if available]
20 May 2025 - Glenmore Asset Management - Market Commentary
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Market Commentary - April Glenmore Asset Management May 2025 After steep falls in March, global equity markets stabilised in April. In the US, the S&P 500 fell -0.8%, the Nasdaq rose +0.9%, whilst in the UK, the FTSE declined -1.0%. Domestically, the All Ordinaries Accumulation index outperformed its global peers, rising +3.60%. On the ASX, the top performing sectors were consumer discretionary (beneficiary of expected interest rate cuts) and banks. The worst performing sector was energy, which was impacted by a -18% fall in the Brent oil price. Growth stocks recovered strongly in April, as investor risk appetite improved following the tariff driven sell off that was the key driver of weak investor sentiment in February and March. April was a very volatile month with the ASX falling sharply in the first week before staging a significant recovery as (in our view) investors realised the sell off was excessive, particularly given many Australian companies are not significantly impacted by Donald Trump's tariffs. In addition, it appears many of the tariffs may end up being less harsh than first announced. Pleasingly the fund was able to take advantage of this volatility by adding to many of its existing holdings at very attractive stock prices. In bond markets, the US 10-year bond yield fell -5 basis points (bp) to 4.16%, whilst its Australian counterpart declined -27 bp to close at 4.11%. The Australian dollar was stronger in April, rising +1.6 cents over the month, closing at US$0.64. The US dollar has been weakening against most major currencies as markets factor in the uncertainty from Donald Trump's tariff policies and their impact on the US economy. Funds operated by this manager: |
19 May 2025 - Performance Report: Cyan C3G Fund
[Current Manager Report if available]
19 May 2025 - Performance Report: ECCM Systematic Trend Fund
[Current Manager Report if available]
19 May 2025 - Investment Perspectives: The clear themes emerging from the tariff chaos
16 May 2025 - Hedge Clippings | 16 May 2025
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Hedge Clippings | 16 May 2025 Consensus expectations from a significant majority of economists anticipate a 25 basis point cut next Tuesday when the RBA announces their decision following the new format 2-day board meeting. If the economists are correct - and the market is certainly backing that view - it will bring the cash rate to 3.85%. For example, the CBA is amongst the pack, forecasting a 25 basis point cut, with potential further cuts in August and November, aiming for a year-end rate of 3.35%. Some analysts, like NAB's chief economist Sally Auld, suggest a more aggressive approach, proposing a 50 basis point cut in May, followed by additional reductions throughout the year, and potentially lowering the rate to 2.85% by December. ANZ has reportedly walked back from their previous call that the RBA would "definitely cut", now seemingly having a bet each way by suggesting there's around a 30% chance they'll stay on hold for at least another month. As usual, there are arguments both for and against a move: Inflation at 2.4% (12 months to March) is firmly in the RBA's 2-3% target range, although that number remains skewed by government subsidies on electricity prices, which fell 9.6%. The RBA's preferred trimmed mean measure is a tad higher at 2.7%, but still within the band. More recent CPI figures for April aren't due until the week after the RBA meets, but it would be surprising if it kicked up above 3% to spoil Albo and Jim Chalmers' post election party. Against that, Australia's labour market remains tight, with a notable increase of 89,000 jobs in April and a steady unemployment rate of 4.1%. Such strength could lead to wage pressures, potentially reigniting inflation, and Michele Bullock has previously pointed to this as a risk, preferring to see a number above 4.5%. The RBA has previously cited "uncertainty" as a significant reason for their reluctance to ease further, or earlier, and while the local political outlook now seems stable, uncertainty definitely persists despite an apparent easing of the tariff tit-for-tat between the US and China in particular. However, it is only an easing from the trade-stopping proposed levels of 145% and 125%, down to a US tariff of 30%, and a reciprocal tariff of 10% from China. That level of uncertainty may, or may not, impact the RBA's decision-making process, but it remains a major concern for the US itself, where the FED's Jerome Powell is standing firm against both Trump's threats and insults, and a decision on cutting rates from their current 4.25% to 4.50% level. The market had expected a cut at the FED's June meeting, but this has now been pushed out to July or possibly September. Looking further out, the market is still not convinced US rates will be much below 4% by December, and if Trump's tariffs lead to inflation kicking up (and it seems difficult to imagine why it would not, even at the new lower tariff levels) then maybe Powell's stance will be vindicated. That leads to another dilemma (or effect) on Australia and the RBA. If NAB's forecast of Australian rates of 2.85% by December is correct, and a worst-case scenario of 4% or more in the US, what does that do to the Aussie dollar? Meanwhile, while the chances of a recession might seem slim in Australia, the US economy is heading into uncharted Trump-induced waters. Slowing economic activity and consumer confidence in the US may force Powell to cut, leading to two significantly different policy decisions. In the meantime, next Tuesday afternoon's RBA announcement, due at 2:30 looms large. At 3:30 Michele Bullock will hold her traditional media conference. Hedge Clippings and Australian Fund Monitors have organised a webinar at 4:30 immediately after the Governor finishes her address to discuss the outcome of the meeting and, more importantly, the outlook for both Australia's markets, and the Global economy. We have assembled three expert fund managers to discuss, debate and share their views. Please register below to join the Zoom webinar, which should last between 30 to 45 minutes and will include a Q&A. Our guest panel of fund managers will be:
Each of our expert panel members will bring a different perspective, and we look forward to hearing from them. Registration is required - please click here or below.
News | Insights | Webinar Webinar | Impact of Tuesday's RBA rate decision The Resurgence of Nuclear Energy | 4D Infrastructure The Future of Travel: How AI-powered travel agents are revolutionising the industry | Magellan Asset Management April 2025 Performance News Skerryvore Global Emerging Markets All-Cap Equity Fund Bennelong Concentrated Australian Equities Fund Argonaut Natural Resources Fund |
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