Sometimes on a Friday Hedge Clippings wonders what on earth we're going to write about. Then you get days like today where there is plenty. I guess it's either a feast or famine.
So where to start? Well, it looks as if Donald Trump is going to be upping the ante by confirming his $200 billion trade wall (that was supposed to be "war", but I guess "wall" will do just as well) with China. It is yet to be determined whether this is going to develop from a significant skirmish into a full-blown battle, and also, depending on one's point of view, whether the damage will hit the Chinese or the American economy the most.
The current view is China the most, but the answer is quite possibly both, and of course, the rest of the world will suffer serious collateral damage. However, irrespective of one's view of Trump's rhetoric, it is unlikely to be empty as he tries to prevent what he sees as China's domination of, if not the world economy, at least that of most emerging markets. Depending on whether you are American or Chinese will no doubt determine which side of the fence you sit.
Overnight Trump received an unexpected vote of confidence, or reference if you like, from Kim Jong-un who is reportedly aiming at denuclearising North Korea before the end of the Donald's first term. China's President Xi Jinping may not be so easy.
Back home in Australia ASIC seems to have been encouraged by the Hayne Royal Commission, announcing legal action against NAB for charging customers fees for no service. Expect more of the same as ASIC moves from a policy of behind doors negotiation and penalties, through to putting perpetrators in court, even before the end of the HRC. The difficulties of getting an actual conviction however, and what the court may or may not decide as retribution for any proven wrongdoing, remain to be seen.
As predicted in last week's Hedge Clippings, two other big banks played catch up with the rate rise from Westpac, and adding a couple of bps for good measure, while the RBA kept interest rates on hold as expected on Tuesday, signalling that the economy was in good shape. By Wednesday it was evident just how good a shape the economy was in, with revised numbers lifting GDP by 3.4% over the year to June. There doesn't appear to be a negative cloud on the domestic economic horizon at the moment (unlike the political one) unless the slowdown in the housing market, which the RBA has been seeking for some time, accelerates further and overly damages consumer confidence.
Finally, there were warnings regarding the dangers of passive investing. We would have to declare a vested interest in this regard as we specialise in the actively managed fund sector. Whilst we can certainly see the benefits of passive investing as a way of reducing investment costs, it can distort valuations, particularly in rising markets, based on the premise of "a rising tide lifting all ships".
The risk of passive investing however comes as markets turn downwards, when index and passive funds will see indiscriminate outflows. Just as the rising tide lifts all ships, so too it lowers them when it falls. That's when actively managed and hedge funds come to the fore, (and thus justifying their fees) by protecting capital and hopefully without adding to the outflows.
While on the subject of performance, we frequently normally keep fund performance updates to a fairly dry commentary. However, the Bennelong Long Short Equity Management's (BLSEM) August performance of 10.59% (see report) was something special, even if the manager was at pains to point out that it should not be taken as normal. We can safely mention this fund as it is closed to new investors, but it is a terrific example of how a well-managed hedge fund can work. The fund has returned 16.77% annualised after all fees over 16 years since its inception in February 2002.
An important measure of a fund's risk is the Down Capture Ratio or DCR - in BLSEM's case of minus 201%. For those not familiar with the Down Capture Ratio, a DCR of 100% indicates that the fund falls in line with the market in negative months. A figure of less than 100% indicates that the fund falls less than the market. A negative number indicates that the fund rises when the market goes down. Negative Down Capture Ratios are rare but not unknown, and one of -201% is extraordinary, particularly over a period of 16 years. This was no flash in the pan!
