"Noddy" - You appear to me to be operating under a fake name. False and personal attacks are unwelcome.
Hi Catherine. How do investors gain confidence that their minority interests in Chinese entities will be respected - given the ongoing strategic and trade war between the US and China (where capital has been raised as a potential battle axe) - and other factors such as the institutional and governance structures, strong government involvement in corporate entities, and massive historic frauds perpetrated against minority shareholders?
Hi Graeme - I would make the point that genuine active strategies aren't all the same and can't be easily grouped together! Furthermore, as Head of Research, I actually reviewed many of those strategies you have mentioned pre-GFC. Interestingly, we gave them poor ratings at the time. They are not all the same! Furthermore, the multi-asset fund I started and actually ran during the GFC period had a very different and positive return outcome. I believe I would still be running it if the institution hadn't have sold the business. Hi "Noddy" - Can I suggest that if you continually don't like reading my articles - or anyone else's - you simply stop reading them? There are many livewire readers who enjoy reading my articles, which are very well viewed and liked. Hi Craig and others - I am happy to speak to you or any reader personally if you would like to engage with me directly to answer your questions in great detail.
Negatively yielding bonds could (?should) also simply be considered a highly speculative asset - given one definitely loses money holding them to maturity. Of course, one could gamble upon the "greater fool" theory to sell them to someone else even more expensively in the interim i.e. there may be someone else in future who will buy them at even more negative yields (e..g in the current environment, central banks or insurance and pension funds forced to hold them by government policy). Up until the turning point when a bubble bursts, past returns always look good! This is no different if the bubble is in bonds. Relying upon past returns and correlations during a bubble period is highly problematic, should the bubble deflate - which bubbles eventually have a nasty habit of doing.
Useful article - thanks Hugh
Hi Peter Thanks for your interest. The Lucerne Alternative Investments Fund is a unit trust offered by Lucerne Investment Partners, and Dynamic Asset's Wealth Protector portfolio is a managed account for goals based advisers and their clients. By way of example, both of these went up in August when equity markets fell. There is little else in Australia that I am aware of which is diversified and similarly managed. Indeed, it is difficult to find diversified options which are likely to perform well over a full cycle including a recession and bear market, and most investment products are heavily market dependent. There are also individual manager strategies such as the Harvest Lane Absolute Return fund, which can form part of a more diversified portfolio. I'd suggest you speak to an adviser about the suitability of any investment to your own needs and preferences, before investing.
Given the widespread overvaluation of the asset classes you discuss herein, investors can also look for real diversification to skilled dynamic management of their allocations and liquid alternative strategies. This can provide a return stream that is not prone to a sudden or massive devaluation risk, and one which doesn't rely entirely on a miraculous economic recovery or ever decreasing negative interest rates or government policy to keep its price elevated.
Many listed investment vehicles are trading at large discounts to NAV on market. Most importantly - and something many investors are unaware of - is that many should routinely be expected to trade at a discount! Investors need to decide then is it better to buy a new one trading at NAV, or one already trading on market at a discount which isn't promoted...Hmm.
Record flows in to Property. Sounds like index investing. "The herd follows the trend until it breaks." Great stuff.
On Petrol and property -
Good read Dominic. Thanks for sharing.
Some great comments and a really important point raised by this article. Having come from working in the institutional market (admittedly, several years ago now), I understand that the "mark to make believe" valuations are very popular with large super funds, for a number of reasons - some of which might reasonably be argued are not in the interest of their members, but are in the shorter term interest of the staff. Delayed valuations can act in the interest of the agents or the internal investment staff, for example by (enabling them to keep their jobs longer) by delaying or preventing price discovery and reducing transparency, and enabling them to leverage risk asset exposures to compete in performance orientated league tables (which don't report properly on the risk taken to achieve their results). Of course, without an understanding of risk, what does return mean? But that is another point.). Arguably one could cynically consider the preference for unlisted assets a copycat strategy from the private equity market. Imagine two private equity funds who are 'friends'. They each sell an asset to the other one at an inflated price, and both assets are now marked up at the latest sale price. Both funds report a valuation uplift and strong performance - and are hence able to raise new funds, given past performance sells (whether it is real or not). Do you not think this happens? There are probably enormous numbers of unrealistic valuations and many frauds in private equity and unlisted land. WeWork is a flagship example of an alleged fraud that couldn't stand up to public market scrutiny. Without being in properly functioning listed markets, there is much danger for investors in believing that the the unlisted assets they pay for will be able to be exited at the same price to a fully informed market. Last time I checked, super funds don't openly provide the valuation methodologies they are using to the public for unlisted assets - so that they can be scrutinised by informed industry participants and competitors as to their "realism". Buyer beware indeed.
Chris, spot on in terms of the essence of the economic problem and investment challenge. This rightfully should frighten everyone into rethinking the standard speculative approach to investment which is risky, inflexible and fragile in nature. Depending entirely on inflated asset prices becoming more inflated is a gambler's approach to investing in the current markets. A much more dynamic and diversified approach is necessary because the future has such a wide and unknowable spectrum of potential movement. Very few firms or investors are set up to handle the huge challenge of all this. If investors are not frightened by what is happening around the world right now, then they probably have no idea about the huge risks we are all facing - unfortunately, the risks will probably become all too obvious with time as they move to realisation.
On Capitalism is dead -
Thanks Brad - quite sensible. The bull case most espouse for traditional risk premia really rests on merely just one thing - low rates and inflation (for a long time), and more central bank intervention (without a loss of confidence in these, and despite their admissions they're now 'pushing on a string'). The bear case has a huge number of different arguments. Certainly seems prudent to emphasise much more diversification than what most are. The real trick is how do you get this diversification - this requires real skill with product choice, skilled active management and implementation.
Patrick, there are very few asset class specific managers who can 'consistently outperform' over a long period of time. Often picking individual managers is about knowing how to weight them in a broader portfolio, knowing when to hire them, and knowing when to reduce their weighting. This is not something many industry participants or well known financial firms do. Instead they present a "blue chip" list of well known brands and strong past performances (many of which are due to luck and selection bias) to clients. It is easier to sell to clients that way! All great managers go through periods of stronger and weaker performance, often affected by underlying market conditions which one needs to understand in conjunction with a detailed manager assessment. Understanding manager specific factors as well as the environment and one's objectives when hiring an active manager is absolutely critical to success. It is also foolish to believe that most investors will ever pick great managers by themselves when (1) many industry insiders can't, and (2) they don't have the appropriate qualifications (such as CIMA certification) and significant expertise and experience in this area, and they don't have access to the detailed level of information required to make an informed manager assessment. Investors might be best served working with a firm who can demonstrate that they have significant personnel expertise in this area, who they trust (i.e. they're not just presenting them "blue chip" names and strong past performers, which won't repeat), and firms whose objectives are aligned with what the investor themselves is looking for e.g. absolute return orientated approaches, rather than the standard benchmark orientated approach. Benchmark orientated firms always talk about overweight and underweight, for example, whereas absolute return orientated firms talk about 'making money' in absolute terms through managing downside risks to capital. The latter dynamically combine and adjusting weightings to underlying assets and manager strategies and understand what role the underlying investments play in a broader portfolio.
Fantastic article Gopi. As I've highlighted in my prior articles, negative yields are a great example of the Bubble in Everything and the need to be different.
Hi Matthew, you are welcome to contact me if desired to discuss your question.
Graeme, I am an advocate for the need for alternatives to the standard SAA approach - to align with common objectives and risk tolerances (such as reducing the risk of catastrophic losses). These can take many forms. They are often time-consuming and generally require professional implementation and skilled management to deliver results. The way I best "put up" personally is as a portfolio manager delivering outstanding risk-adjusted returns. Note that I am not a financial adviser and can't advise anyone what is appropriate for them personally.
It was interesting to watch your panel, which decided on a neutral SAA allocation despite the specific task of responding to the audiences' fat tailed distribution! This highlights the entire problem with an SAA approach and traditional portfolio construction, where the anchoring effect overwhelms everything - despite when it is quite obviously inappropriate. In addition, I'd dispute your assertion that "the relationship to equities is such that if equities sell-off, bonds will act as a cushion". I'm sure you are aware that this hasn't always been the case historically and certainly prospectively, we could well be getting gradually closer to the time when bonds and equities both go down together, destroying the traditional and commonly used SAA portfolio - and most peoples' investment capital with it. This is why it is so important to seek genuine diversification away from traditional allocations. Instead, investors might prefer a genuinely outcome orientated approach with professional investors who are prepared to be different from consensus, and who will genuinely do the work and consider all the alternatives which are available.
Correlations are unstable and unreliable (they can change without notice), and are a very tenuous argument for owning negatively yielding bonds.
Hi Mark Thank you. We work for financial advisers and their clients as (1) the new portfolio manager for Lucerne Investment Partners (private wealth group in Melbourne) running their actively managed fund of funds, and (2) as portfolio manager for Dynamic Asset, running low volatility outcome based absolute return portfolios. These now offer clients real alternatives from the standard dross. If you'd like further details, feel free to connect with these advisers or myself. We're also an Authorised Representative of Harvest Lane Capital Pty Limited (AFSL No. 425334), which manages the Harvest Lane Absolute Return Fund.
Great article Jason with some different perspectives.
Thank you for this terrific and thoughtful article, the essence - and vast majority of which - is very hard to disagree with.
Thank you for your generous comments Gents. Much appreciated.
M&A action is happening, and is one great way to diversify portfolios that is actually working if conducted by an experienced team. In contrast, many overly popular active management and alternative strategies are struggling to deliver meaningful results. Good on you Luke for continuing to deliver great results for Harvest Lane's investors.
On Ready. Set. Go. -
Great summary Jonathan. Telling the truth might get one locked up these days, albeit I hope that doesn't happen to you given your fantastic eclectic news summaries!
Hi Nicholas . When this (long overdue) market cycle ends, I expect we'll find nearly everyone has been swimming naked - from your large institutional investors to most retail investors! After all, isn't it normal to have 70% in equities of some sort or another, with much of it very expensive versus history. It requires several unusual qualities not to have been sucked in to buying that which always seems to go up (at least so far), but which is quite obviously overvalued, risky and dependent purely on a (most probably grossly overestimated) belief in policy makers ability to prevent this cycle from ending...
How can one decide which of the loss making companies is better (relative) value! I'm not sure value is a primary focus of many of the "revenue growth" focussed punters buying the stock. If you want value, perhaps looks elsewhere.
Wouldn't it be nice if our central bank let the housing market continue its steady correction back towards a more reasonable valuation level, and stopped encouraging misallocation of capital, further speculation in property and housing bubbles. I wonder how much richer Australia could have been if government policy had have encouraged our capital into more productive purposes instead of property speculation. For starts, intergenerational inequity and populist movements might not be so prevalent. There is a general fallacy that central banks are omnipotent and drive the economy, but real economic growth is determined by so many other more important long term issues. And let's face it - if a mere 1.5% cash rate isn't low enough for you, what is!
Great article Stu
Good article Tracey, although I'm not sure that - having seen some very serious problems created or greatly exacerbated by (abnormal and easy monetary) policy being extended so long - we can count on future policy responses being effective at addressing the underlying issues! I wonder how long it will be until investors realise that policy is detrimentally affecting productive growth, is unsustainable, and that market returns have been pulled forward. The market appears to want to party while the path is superficially clear, with little regard to what the hangover will look like, what the dangers on the path are and what happens when the end of the path arrives. After all, good risk management hasn't matter much in the last few years and if anything has substantially detracted, so why should risk ever matter! (extrapolation is the current name of the game). More prudent investors might want to think about how diversified they really are e..g if - goodness gracious no - interest rates were to (unexpectedly) rise again for any reason...
Fantastic article. I wonder how much how this corporate banking executive - and others like him - have got paid over the years to destroy so many billions for others? And presumably contribute to poor corporate culture as well...
One has to wonder whether the huge premium of Sydney over Melbourne is justified, or whether it will continue to reduce as the multiple in Sydney comes off being stretched to the limit and as Melbourne benefits from greater population growth.
Let us hope the RBA don't try and create further distortions by 'rescuing' the current orderly correction of the massive Australian housing market bubble with further rate cuts. An official cash rate of just 1.5% is low enough! Australia needs to find more productive things to do than misallocating excessive capital to housing and creating great generational division by creating housing market bubbles and making housing unnecessarily expensive for the working generation.
Some Australian managers are finding the conditions highly prospective, unlike what you mention for the average Australian equity manager. For example, event driven market neutral manager Harvest Lane does not depend on the vagaries of central bankers 180 degree policy turns. They had a fantastic year in 2018 when all others wilted (they made double digit returns - including making money through the devastating October to December quarter) and are highly enthused by their future prospects. Furthermore, Harvest Lane don't earn any fees for themselves unless they make clients absolute returns > cash. Given the environment, having a genuinely aligned manager makes a lot of sense and I for one believe is worth supporting.
1-2% net yields in Sydney which are falling....This means a serious reality check when speculation is removed from the equation.
Excellent article Jonathan. Thank you.
Very interesting article. Thank you
On The Goldilocks Crop -
Outside a few large vehicles, the LIC space in Australia is very illiquid and hence can largely only be considered seriously by investors with very small funds under management. And as you highlight Dominic, the risks are generally under-appreciated currently by a market unwilling to spend sufficient money on due diligence and research (and which may not be justified in many cases given the illiquidity), and where manager and broker interests have too often been put first. Of course, the ease and accessibility is what makes this market attractive to investors, and made it so easy to forget about the potential hidden costs of investing this way.
Concise analysis Tony. Thanks for sharing.
Having predicted the market falls this year also, I can't wait to see the next article and how far Sydney needs to fall before it becomes fair value! The falls to fair value (or below) might be a lot bigger than most readers realise. There is good news in this though - hopefully Sydney will eventually become affordable to 'normal' hard-working productive people and their families so that they can live here 'adequately well' (poor building quality aside). Although the transition may be painful, these falls may finally kill the illogical love affair with Australian property and stop it being a huge source of wasted savings and capital - with the latter better directed elsewhere to support Australian productivity, innovation, investment, competitiveness and industry.
Hi John and Mark Thank you for your comments. Performance needs to consider the risks taken to get that performance and whether it is sustainable. PoorIy performing managers frequently don't improve unfortunately - a deep researched understanding of the individual manager is required to make this assessment. My livewire article "Making money through the cycle" provides investors (through their advisers) with some pointers and ideas to help them carefully select the better alternative managers. I am also happy to be contacted by your advisers, and may be able to help advisers improve their offering to their clients. I will also aim to write more on selecting fund managers for Livewire in due course given the strong importance and expressed interest in this area, both from yourselves and from others directly contacting me.
Hi Carlos Indeed, but hopefully this article provides investors (through their advisers) with some pointers and ideas to help them carefully select the better alternative managers, given what a valuable part of a portfolio they can be over time!
This is fantastic to see a fund manager's efforts to publicly hold both AMP and the ASX accountable, and to consider the potential broader adverse impacts. Thank you Hamish.
Spot on Jon. There is no point betting very heavily on whether an expensive equity market goes up or not from here if you don't have to....There are other ways to make more resilient consistent returns with less downside risk which are much better aligned with most people's preferences (less likely to lose large amounts of money!)
Matthew, while you alone may have "no idea where prices will go in the short term" and "it’s impossible to forecast where things go next" it remains blatantly obvious that Sydney and Melbourne property have a very high chance of falling again in the short term, just as it was in the last few months.... Sorry, but that really is (once again) a very possible forecast to make!
Often promulgated is the notion that one can only buy equities or bonds or cash or some mixture of these, as if there are no other choices. Good alternative managers are an underappreciated option for investors, albeit to be effective one needs aligned managers who have genuine resilience to the downside, with an ability to still actually make good returns. Indeed, alternatives are routinely being massively under-utilised - due in part to a lack of skills and expertise on the part of allocators to choose the good ones - along with an unwillingness to be different (we might define this as putting yourself on the line for the sake of your clients rather than backing mainstream dogma). Too much rearview mirror investing (e.g. confusing a bull market with a notion that equities or properties or bonds or whatever always go up) also doesn't help...
Rents - already great relative value for renters - are indeed falling in many places! Whether it falls 40% or 10%, housing appears a waste of capital.. From an economic perspective, what a shame Australian house prices have become so inflated at the expense of good productive use of our capital.
Nice article Hugh
The 'core' part is risky and suboptimal. It is cheaper for a reason.