NEWS
29 Aug 2022 - 'Small Talk' - Where have all the IPOs gone?
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'Small Talk' - Where have all the IPOs gone? Equitable Investors August 2022 In this Small Talk update, we show a chart which highlights IPO activity...or lack of it. IPOs in Australasia are down 88% so far in calendar 2022, relative to the same point in time in 2021, as measured in US dollars raised. That's slightly worse than the global decline of 74%, as per data from Dealogic. The ASX's current list of upcoming IPOs features 10 with an expected listing date, of which only one is not a miner/explorer. Funds operated by this manager: Equitable Investors Dragonfly Fund Disclaimer Nothing in this blog constitutes investment advice - or advice in any other field. Neither the information, commentary or any opinion contained in this blog constitutes a solicitation or offer by Equitable Investors Pty Ltd (Equitable Investors) or its affiliates to buy or sell any securities or other financial instruments. Nor shall any such security be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. The content of this blog should not be relied upon in making investment decisions.Any decisions based on information contained on this blog are the sole responsibility of the visitor. In exchange for using this blog, the visitor agree to indemnify Equitable Investors and hold Equitable Investors, its officers, directors, employees, affiliates, agents, licensors and suppliers harmless against any and all claims, losses, liability, costs and expenses (including but not limited to legal fees) arising from your use of this blog, from your violation of these Terms or from any decisions that the visitor makes based on such information. This blog is for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. The information on this blog does not constitute a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Although this material is based upon information that Equitable Investors considers reliable and endeavours to keep current, Equitable Investors does not assure that this material is accurate, current or complete, and it should not be relied upon as such. Any opinions expressed on this blog may change as subsequent conditions vary. Equitable Investors does not warrant, either expressly or implied, the accuracy or completeness of the information, text, graphics, links or other items contained on this blog and does not warrant that the functions contained in this blog will be uninterrupted or error-free, that defects will be corrected, or that the blog will be free of viruses or other harmful components.Equitable Investors expressly disclaims all liability for errors and omissions in the materials on this blog and for the use or interpretation by others of information contained on the blog |
26 Aug 2022 - Could the US Supreme Court's decision against the EPA derail decarbonisation efforts?
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Could the US Supreme Court's decision against the EPA derail decarbonisation efforts? 4D Infrastructure August 2022 On 30 June 2022, the Supreme Court of the United States (SCOTUS) ruled in favour of West Virginia and a group of other states in their lawsuit against the Environmental Protection Agency (EPA), potentially limiting the agency's ability to enforce actions to limit greenhouse gas (GHG) emissions.
In a majority vote of 6-3, where all six conservative judges sided against the EPA, SCOTUS ruled that the agency overstepped its authority and required 'clear congressional authorisation' to enforce switching from fossil fuel generation to low/no carbon energy. Until now, the EPA had relied on powers provided under the Clean Air Act (1970) in regulating and restricting certain types and volumes of GHG emissions from fossil fuel generation facilities. In this article, we consider what this ruling means for decarbonisation efforts in the US, and for us as global infrastructure investors. Ramifications of the rulingIn its ruling, SCOTUS relied on the 'major questions' doctrine; an academic term the Court used in a ruling for the first time. The doctrine allows judges to strike down regulations or agency actions that 'address questions of vast economic or political significance' without explicit authorisation from Congress[1]. The ruling raises legal questions about the ongoing authority and powers available to the EPA in regulating emissions, and, specifically, what constitutes 'major' - in short increasing legal uncertainty[2]. Some observers have questioned whether the US' commitments to decarbonisation, and specifically the Paris Agreement, can be achieved with the current uncertainty around the EPA's ability to enforce emissions reductions. And if the US is unlikely to achieve its commitments to the Paris Agreement, does that put global efforts to achieve net-zero and limit global temperature increases to well below two degrees Celsius at risk?[3] Does this impede the US' Paris Agreement commitments?Under President Biden, the US made commitments to achieve net-zero by 2050, and reduce GHG by 50% to 52% below 2005 levels by 2030. In light of the SCOTUS ruling, arguments for and against the US' ability to achieve these targets are summarised in the table below.
4D's internal viewThere's no doubt SCOTUS' decision raises questions as to the EPA's ongoing effectiveness in enforcing emissions reductions. This could see some fossil fuel generation facilities, which would otherwise be decommissioned or retrofitted with technology to reduce emissions (such as carbon capture), continue to operate and emit GHGs for longer. This is more likely in states that are economically dependent on the fossil fuel industry. Importantly, however, the US' interim 2030 commitment under the Paris Agreement is more dependent upon the economic benefit argument in transitioning coal generation to renewables, combined with batteries and/or peaking natural gas generation. These economic benefits are supported by technological improvement in low/no carbon technologies and tax subsidies which are currently in place. Biden has communicated the ambition to improve and/or extend these subsidies as part of proposed legislation, which will improve the economics of the transition. Either on their own, or because of investor activism, most US utilities have set GHG reduction targets for 2030 that are in-line with, or more aggressive than, the US' economy wide targets. This improves our confidence that despite SCOTUS' ruling, the US can still achieve its interim commitment under the Paris Agreement. Net-zero still provides a real, long-term investment opportunityWhile the speed of ultimate decarbonisation may remain unclear, as infrastructure investors, we continue to see a real opportunity for multi-decade investment as every country moves towards a cleaner environment. At 4D, sustainability assessments have always played a key role in our investment process. As such, we continue to favour those companies that have been forward-thinking and are capitalising on the decarbonisation opportunity while generating attractive returns for investors. In the US, this includes American Electric Power and NextEra Energy; both of which are investing heavily in energy transition and will unlikely be derailed by the recent SCOTUS decision. |
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Funds operated by this manager: 4D Global Infrastructure Fund, 4D Emerging Markets Infrastructure FundThe content contained in this article represents the opinions of the authors. The authors may hold either long or short positions in securities of various companies discussed in the article. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader. |
25 Aug 2022 - Equities responding to a higher rate environment
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Equities responding to a higher rate environment Eley Griffiths Group August 2022 Global equity markets (ex-China) rebounded strongly in July. The Small Ordinaries Accumulation Index rallied +11.4% over the month, a significant outperformance against large caps which gained +5.5%. There was early indication that bad news is now being discounted into stock prices. Markets pushed higher despite the US CPI report for June the highest print in 41 years, 9.1% year on year compared to the 8.8% estimate. Equities took the number in its stride failing to extinguish the "risk on" sentiment. As predicted, The Federal Reserve (Fed) raised rates by 75bp in response and whilst Fed Chair Powell's broader messaging didn't overly change, comments that the US economy may be showing signs of slowing were less hawkish than expected. The war on inflation is being won. The market responded by pricing in a lower peak Federal Funds rate and increasing the likelihood that rates may be eased in 2023 reflecting the impact higher rates will have the on real economy. Locally, the Reserve Bank of Australia delivered +50bps after the Q2 CPI came in at 6.1% YoY, the highest since 1990. Once more, equity markets responded positively to the dovish post-meeting statements, "we don't need to return inflation to target immediately… we are seeking to do this in a way in which the economy continues to grow, and unemployment remains low" (Australian Strategic Business Forum, 20 July 2022 Governor Lowe). Outside non-gold resource names and agricultural stocks, the upswing was sectorally broad based. Standing out were those most beaten-up by inflation and central bank rate hike fears, namely Information Technology (+18%) and Financials (+15%). Focus now turns to the August corporate earnings results and whether investors have been heavy handed in their treatment of stocks. The lead from the US 2Q reporting season has been adequate. Attention will be trained on the impacts of inflation on operating cost structures, a higher rate environment and the health of the consumer. Funds operated by this manager: Eley Griffiths Emerging Companies Fund, Eley Griffiths Small Companies Fund |
24 Aug 2022 - The outlook for equities is unclear
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The outlook for equities is unclear Airlie Funds Management July 2022 |
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The outlook for equities is incredibly unclear. We have talked prior that markets are at the crossroads after a +10-year bull market - inflation and interest rates are on the rise and so central banks are reversing course after a decade plus of super easy policies. The early result of this, and exacerbated by the Ukraine invasion, is a return of market volatility. After being super strong in the March quarter, even commodity prices are now weakening, putting further pressure on the Aussie market. As fabled investor Peter Lynch says - "If you can only follow one piece of data - follow the earnings...". Given profit margins overall are at record highs; stimulus is unwinding; costs pressures abound; and consumers will likely have less disposable income - then an easy bear case for the direction of earnings can be outlined. PORTFOLIO POSITIONING
As bottom-up stock-pickers, we invest on company fundamentals: seeking conservative balance sheets, businesses that generate good returns and are managed by competent people. However, from a top-down perspective we want to avoid "unintended bets"; i.e., positioning the portfolio in a way that leaves it vulnerable to certain macro events playing out. The key macro event to watch this year is inflation. There is no doubt in the near term that inflation will continue to increase: most of the companies we speak to are seeing significant input cost (and increasingly labour) inflation, and have signalled their intent to pass this on in the form of higher prices. Since we think inflation is heading up in the near-term, it's important to make sure our portfolio owns businesses with pricing power, that can protect margins and pass on higher costs to end consumers. We have analysed our portfolio through this lens and think we are well positioned. Businesses like James Hardie, Woolworths, Wesfarmers, Macquarie, the banks, Aristocrat and CSL should all benefit from (or at least not suffer from) higher inflation. The market has been quick to reprice those businesses whose valuations had benefited from the "lower-for-longer" interest rate tailwind of the last decade, chiefly high PE structural growth stories, loss-making tech companies and REITs. We believe there are additional nuances to consider. We are avoiding businesses with high ongoing capex needs, as inflation makes it more expensive to stand still, and businesses with material exposure to floating-rate debt. Meanwhile, we spend our time sifting through the wreckage of heavily sold-off companies for opportunities where good businesses have been mispriced with respect to stock selection for the portfolio, we weigh four factors when considering an investment: Financial strength: We want to own businesses with conservative levels of gearing and strong cash flows. While corporate balance sheets are in great shape across the board, with average net debt to EBITDA for ASX200 companies of 1.8x (well below the 10-year median of 2.5x), our portfolio has an average net debt to EBITDA of 0.3x. Further, 38% of our portfolio companies are in fact net cash. We believe this sets us up for strong future returns, whether through dividends, special dividends, buybacks, investment or acquisitions. Management quality: We look for alignment with shareholders, whether that be through significant management shareholdings, or appropriate long-term incentives. The ultimate model of alignment for us is owner- managed businesses, where the original founder remains in control. We believe these businesses tend to outperform over the long term, and owner-managed businesses comprise c30% of our portfolio, compared to 10% of the ASX200. Valuation: We believe the returns a business generates drive the value of the business, and seek to invest where the above factors are underappreciated in the prevailing market share price. Funds operated by this manager: Important Information: Units in the fund(s) referred to herein are issued by Magellan Asset Management Limited (ABN 31 120 593 946, AFS Licence No. 304 301) trading as Airlie Funds Management ('Airlie') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to an Airlie financial product or service may be obtained by calling +61 2 9235 4760 or by visiting www.airliefundsmanagement.com.au. Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of an Airlie financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. This material may include data, research and other information from third party sources. Airlie makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Airlie. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Any third party trademarks contained herein are the property of their respective owners and Airlie claims no ownership in, nor any affiliation with, such trademarks. Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks.. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Airlie. |
23 Aug 2022 - Are the businesses enjoying stock price rises today also the winners of tomorrow?
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Are the businesses enjoying stock price rises today also the winners of tomorrow? Insync Fund Managers July 2022 Lately we are all experiencing one tectonic event after the next. Foundations of the political and economic framework that have dominated much of the world since the 1980s are now being challenged; the impacts on globalisation, the questioning of the USD central role, and previously deeply embedded structural relationships in the energy markets to name a few. Our approach is far less dependent than our peers are on these issues, including inflation and interest rates. The jury is still out on whether inflation will be a temporary or a longer-term phenomenon. Covid and the tragic invasion of Ukraine have created significant commodity, energy, and labour mobility pressures. Companies that:
These are the required factors for a business to continue delivering healthy returns in real terms and are thus the same attributes Insync seeks. Most companies are not able to do this. Those companies possessing the most levers to pull going into an inflationary period are also the most likely to protect and even thrive for their investors. There will likely be tougher times ahead, quality growth investors should find themselves better positioned than most to weather the storm and come out substantially ahead. Why earnings power is crucial A shy, humble investor living on a suburban street in a small mid-western US city is often cited for his quips. "In the short-term markets are a voting machine. In the long-term it's a weighing machine" Over shorter periods sentiment in markets can shift wildly depending on the narrative of the day. This is driven by perceptions of investors trying to gauge where we are in the economic cycle, the path of inflation and interest rates, the impact of a geopolitical crisis, and what style of investing will be best equipped for the future. These are impossible to predict with any degree of certainty or to do so consistently. The one thing that is more certain over time is that in the long-term, share prices follow the consistent growth in the earnings of a business. We know that the most profitable companies remain profitable even ten years later fuelled by the enduring, large megatrends. Megatrends are so predictable you can set your watch by them. This is whether it is the rising importance of the Gen Z'ers, the acceleration in the number of people aged 70+, GDP+ growth in spending on skin and beauty, or the insatiable desire to spend on experiences. A portfolio of the most profitable companies tied to megatrends provides consistency in earnings leading to strong stock price returns. They are also mostly impervious to interest rate settings, the state of the economy or current commodity prices. 3 portfolio examples of why Earnings Growth is good for investors The evidence shows it all. Here are 3 companies in our portfolio. The coloured line in each graph is the path of earnings over the past 10 years. The white line is the share price performance. Observe the strong correlation between the earnings growth and share price performance. From time to time the two lines deviate based on an 'event', as is the case now. Obviously, present prices present an outstanding opportunity to invest.
These highly profitable businesses benefitting from Insync's identified megatrends have become even more attractive due to recent price falls. This is because their ongoing and established earnings power remains intact. Such excellent buying opportunities do not often present themselves. Funds operated by this manager: Insync Global Capital Aware Fund, Insync Global Quality Equity Fund Disclaimer |
22 Aug 2022 - New Funds on Fundmonitors.com
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New Funds on FundMonitors.com |
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Below are some of the funds we've recently added to our database. Follow the links to view each fund's profile, where you'll have access to their offer documents, monthly reports, historical returns, performance analytics, rankings, research, platform availability, and news & insights. |
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Macquarie Capital Stable Fund |
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Macquarie Dynamic Bond Fund |
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Macquarie Real Return Opportunities Fund |
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22 Aug 2022 - 10k Words
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10k Words Equitable Investors August 2022 It is almost compulsory to discuss interest rates and inflation, so the first charts this time around give us inflation for advanced economies and Australia, via the RBA, then US yield curve inversion and inflation-adjusted interest rates, courtesy of Bloomberg and Axios. The same sources have served up some charts on the strength of the US job market. Then we get into the tech sector with CB Insights mapping out billion-dollar acquisitions while Equitable Investors compares the dollar amount of stock compensation against operating cash flow for Amazon and Atlassian. The global IPO market is down 74% year-to-date in CY2022 and the Australasian component of that market is down 88%, using dealogic data. Finally, we return to Bloomberg and its table highlighting the world-beating frequency with which Australasian airlines have been cancelling flights.
Inflation in advanced economies
Source: RBA US yield curve v equities
Source: Bloomberg 5 year inflation-adjusted interest rate (US)
Source: Axios No. of US unemployed for 15 weeks or more
Source: Axios Change in employed from US payroll data
Source: Bloomberg Billion dollar acquisitions Source: CB Insights Amazon's stock compensation relative to its operating cash flow
Source: Equitable Investors, TIKR Atlassian's stock compensation relative to its operating cash flow
Source: Equitable Investors, TIKR Total Global IPOs by quarter in US dollars Source: WSJ, Dealogic Total Australasian IPOs by quarter in US dollars Source: WSJ, Dealogic Australasian airlines cancelling flights most frequently
Source: Bloomberg August Edition Funds operated by this manager: Equitable Investors Dragonfly Fund Disclaimer Nothing in this blog constitutes investment advice - or advice in any other field. Neither the information, commentary or any opinion contained in this blog constitutes a solicitation or offer by Equitable Investors Pty Ltd (Equitable Investors) or its affiliates to buy or sell any securities or other financial instruments. Nor shall any such security be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. The content of this blog should not be relied upon in making investment decisions. Any decisions based on information contained on this blog are the sole responsibility of the visitor. In exchange for using this blog, the visitor agree to indemnify Equitable Investors and hold Equitable Investors, its officers, directors, employees, affiliates, agents, licensors and suppliers harmless against any and all claims, losses, liability, costs and expenses (including but not limited to legal fees) arising from your use of this blog, from your violation of these Terms or from any decisions that the visitor makes based on such information. This blog is for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. The information on this blog does not constitute a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Although this material is based upon information that Equitable Investors considers reliable and endeavours to keep current, Equitable Investors does not assure that this material is accurate, current or complete, and it should not be relied upon as such. Any opinions expressed on this blog may change as subsequent conditions vary. Equitable Investors does not warrant, either expressly or implied, the accuracy or completeness of the information, text, graphics, links or other items contained on this blog and does not warrant that the functions contained in this blog will be uninterrupted or error-free, that defects will be corrected, or that the blog will be free of viruses or other harmful components. Equitable Investors expressly disclaims all liability for errors and omissions in the materials on this blog and for the use or interpretation by others of information contained on the blog |
22 Aug 2022 - Investment Perspectives: 12 charts we're thinking about right now
19 Aug 2022 - Tequila strategy pays off for Diageo
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Diageo strategy pays off Magellan Asset Management July 2022 |
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In the mid-2010s, UK-based distiller Diageo invested in proprietary technology tools to uncover growth opportunities and improve returns on marketing spending. The analysis revealed the US was a ripe market for premium tequila, an alcoholic brew made from the blue agave plant that flourishes around the town of Tequila in the western Mexican state of Jalisco. Tequila volumes in the US doubled from 2003 to 2015, as Hispanic influence took hold and millennials-come-mixologists began making margaritas or sipping the liquid straight. Diageo's key step in its campaign to penetrate the high-end US tequila market came in 2017 when the company spent US$1 billion (including a US$300-million 'earn-out' based on sales) to acquire Casamigos tequila, a company founded four years earlier by US actor George Clooney and two others. Casamigos, which translates to 'house of friends in Spanish, was the fastest-growing (40%+) 'super premium' tequila in the US. With the purchase, Diageo added Casamigos, which Clooney still promotes, to its tequila portfolio that includes complementary brands such as Don Julio. By 2021, the campaign's success was obvious. Diageo's 'organic net sales' of tequila in fiscal 2021 had soared 79% from the previous year, numbers that meant tequila sales comprised 8% of the company's organic net sales. (This sales measurement excludes the effects of currency translation and takeovers and divestments.) The company subsequently announced it would spend US$500 million to expand production in Jalisco where it has two tequila plants. Thanks to strategic portfolio adjustments such as this, Diageo has outperformed peers in the US, which accounts for nearly 60% of group operating profit. Globally, the owner of Baileys Irish Cream liqueur, Captain Morgan rum, Johnnie Walker whisky, Tanqueray gin and Smirnoff vodka posted sales of 12.7 billion pounds in fiscal 2021, an increase of 12% from the year earlier. Diageo, whose spirits hold the No. 1 spot in six of the nine biggest spirit categories, extends beyond spirits. The company brews beer including Guinness, makes wine and offers ready-to-drink (pre-mixed) options. All up, the company boasts more than 200 global, local, and luxury brands that are sold in more than 180 countries. Through a 34% stake in LVMH's Moët Hennessy, Diageo stretches into the high-end cognac and champagne categories. Spirits represent about 80% of Diageo's revenue - scotch generates 25% of Diageo sales, while vodka accounts for 10%. Beer brings in about 15% of sales while other categories such as ready-to-drink products and wine generate the remainder. In terms of locations, the company sources about 40% of sales in North America, 20% in Europe (including Turkey) and another 20% in Asia Pacific. The modern history of Diageo, which can trace its start to 1759 when Arthur Guinness leased a brewery in Ireland, began in 1997 when Guinness and GrandMet merged. This union and subsequent bolt-on acquisitions have created a company with three key competitive advantages. The first is that Diageo owns the best brands for which consumers are prepared to pay a premium. Spirits variants are distinguishable in terms of flavour, production process, provenance, and vintage. Such points of differentiation allow distillers to charge higher prices for luxury categories. Johnnie Walker's 18-years-to-produce Black Label scotch, for instance, sells at 3.7 times the price of Johnnie Walker Red Label whisky. Diageo's second competitive advantage is that it has secured superior access to distribution channels. Bars, bottle shops, pubs, restaurants and supermarkets have finite space to display drinks. They favour brands that sell quickly and deliver higher margins. They want brands that can be supplied and restocked by a reputable and reliable company such as Diageo. The third advantage is Diageo has the turnover to achieve economies of scale in advertising, data analytics, distribution, manufacturing, research and development and procurement of ingredients. Lower average costs mean competitive pricing and higher margins. Diageo's three key advantages mean that the company is likely to generate superior returns for the foreseeable future, the attribute that stocks must possess to enter the Magellan global portfolio. To be sure, Diageo faces challenges. Hot categories such as tequila inevitably attract competition. Celebrities Dwayne Johnson (the Rock) and Kendall Jenner have launched tequila brands in recent years that they promote via their widely followed Instagram accounts. There is a risk that this could dent category returns, as new brands take market share and prompt existing players to increase their marketing spending. The counterargument to this point is that new celebrity-backed brands generate buzz for the category, and they typically compete based on product differentiation rather than unhealthy price competition. Diageo must be quick to adapt to fresh competitive threats and new industry trends, as the company did when it stormed the top end of the tequila category in the US in 2017. Sources: Dunn & Bradstreet, company filings and Bloomberg. |
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Funds operated by this manager: Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), MFG Core Infrastructure Fund Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. A copy of the relevant PDS relating to a Magellan financial product or service may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au. Past performance is not necessarily indicative of future results and no person guarantees the future performance of any strategy, the amount or timing of any return from it, that asset allocations will be met, that it will be able to be implemented and its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Magellan. |
18 Aug 2022 - Fundmonitors.com Spotlight - Past Performance Indicates Something... | 17 Aug 2022
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Fundmonitors.com Spotlight - Past Performance Indicates Something… FundMonitors.com 17 August 2022 |
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One of the benefits of working at FundMonitors.com is the easy access to data on over 700 funds, and to be able to analyse different concepts for fund analysis and portfolio construction. This can also be a drawback as it's easy to go down "data" rabbit holes trying to prove or disprove one concept or another. Recently we tested a portfolio that invested in those funds which performed best (based on returns) over the previous year, and then rebalanced at the end of year to a new list of the best performing funds. The premise of this idea is that the best performing funds in any year will continue to perform for 1-2 years, but accepting the reality that few funds remain on a "top ten" list every year. Using the Portfolio Builder on FundMonitors.com, we created a portfolio in July 2017 with the 10 best performing funds in the previous 12 months (July 2016-June 2017). We then rebalanced the portfolio every 12 months in July, investing in the 10 best performers in each of the previous 12 months. The results were interesting. Very few funds appeared in consecutive years, or more than once, and the geographic and sector exposure changed each year. Asian Equity Funds dominated in the 17/18 year, and the following year quality focused funds formed the bulk of exposure. Funds investing in the small and emerging sector made up the bulk of the portfolio's exposure the year to June 2020, followed by an increase in growth funds in the year to June 2021. The 21/22 year was dominated by funds investing in the tech sector, simply because of that sector's strong performance in the previous 12 months to June 2020. The outcome of the portfolio was a return of just 3.17% p.a. over 5 years with volatility of 26.36%, and a maximum drawdown of -47.64% in June 2022 thanks to the end of the tech sector's boom in November/December 2021. The graph below shows the portfolio's performance versus the ASX 200 Total Return and the S&P 500 Total Return benchmarks. To be fair, there were periods, particularly from July 2020 to December 2021 that the portfolio performed well, but the overall result, particularly in the 12 months to June 2022 was disappointing. However, what happens if we used longer term performance periods as a guide and didn't rebalance? Once again, using the Portfolio Analysis tool on FundMonitors.com, we constructed 2 portfolios, one comprised of the 10 top performing funds over a 5 year period to June 2017, and another with the 10 top funds over 3 years to June 2017. This time there was no rebalancing with the portfolio left to grow over the next 5 years to June 2022. As you can see from the cumulative graph below both portfolios managed to beat the ASX 200 Total Return benchmark but underperformed the S&P 500 Total Return Benchmark. Top performance means different things to different investors, and ignores ratios and KPI's such as Sharpe and Sortino, which adjust for risk. What about a portfolio made up of the 10 funds that had the highest 5 year up capture ratio in June 2017, or a portfolio of the 10 funds with the highest 5 year Sortino Ratio? The portfolio using the 10 funds with the highest Sortino Ratio shows some promising performance in this graph given the relatively low volatility. The portfolio only marginally underperformed the Australian Equity market with standard deviation of just 5.32% compared to 15.25% for the benchmark. For risk averse investors this might be an attractive option. There were a variety of conclusions from the various approaches: Certainly the most obvious is that chasing last year's "star" performers is not guarantee of future performance - if anything the opposite is the case as sector performance changes with the current economic and market conditions. Another is that rebalancing based on a specific time frame - in our case at the end of each financial year - ignores changes in the market. Finally "performance" means different things to different investors. For those just chasing high returns, accept that higher volatility frequently comes with it. Undoubtedly the disclaimers are right…past performance is not an indicator of future performance. Careful research, diversification and an eye on the market and macro environment are essential. Over the coming months we will continue to build out examples of portfolios created using the FundMonitors.com analysis tools. In the meantime, access to the Portfolio Builder is available to Premium Subscribers of FundMonitors.com and for those who want more information on what this tool can do, please have a look at this video. |
