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Cuffelinks Newsletter Edition 290

  •   25 January 2019

At conferences for retail investors, I always wonder what audience members achieve by filling pages with notes on share tips from stock-pickers on the stage. If people believe a fund manager has some special talent, attendees should simply invest in the relevant fund. Or do they plan to ring the company CEO for a private chat to check the numbers, or carry out more extensive research for additional clarifying insights?

Nikki Thomas, Portfolio Manager at Alphinity, told the AFR on 12 January 2019:

"I always told people who asked for a stock tip that unless they were prepared to ring me every week for the sell decision, a stock tip was worthless."

Exactly right. I once attended a conference where a high-profile fund manager recommended one stock from the thousands of listed companies available to him. Over the next six months, the stock fell heavily. When I next spoke to him, I asked him about it. "I was out of that months ago," he said.

Some newsletters offer hundreds of tips a year. What is a retail investor supposed to do? Investigate them further and select a few quality names, or hold a portfolio that looks like Noah's Ark, with two of everything? Outside of the banks, the most commonly-held retail stock is Telstra, and we all know how that has gone. For every expert recommendation, there's an opposite view, so does it come down to who is the most impressive presenter? Some great talkers do well for inflows despite mediocre results.

One thing you can guarantee about stock tips. The person giving the tip already owns the stock and would like others to be convinced of its merits. 

Which is why Cuffelinks does not focus on stock-picking. What if you had attended presentations given by respected fund managers Charlie Aitken (Global High Conviction Fund down 23.8% in 2018) or Mark East (Emerging Companies Fund down 23% in December quarter) three months ago? Maybe go back and check your notes for the sell signal. Use the Have Your Say section if you have an opposing view.

At least these guys take an active stance. There is a notable line in a new paper by GMO's Martin Tarlie, called: "Is the US stock market bubble bursting? A new model suggests Yes", when he concludes:  

"Given that valuation is still high, our advice, consistent with our portfolio positions, is to continue to own as little U.S. equity as career risk allows."

That's how a lot of money in the industry is invested. Many fund managers do not position their portfolios based on their market beliefs because too much diversion from the index may jeopardise their careers. Investors should ensure they don't pay high active fees for benchmark huggers.

Anyone who selects a fund manager should be prepared to hang in for the long term, say seven years. The peril of judging fund managers on short-term performance is illustrated in the table below, which ranks top funds over one year. The fund that is an impressive 2nd (out of 146) over one year and 5th (out of 128) over three years is 144th (out of 155) over three months. A fund can go from a distant 92nd over three years to a strong 5th over one year. 

Source: Mercer Investment Surveys, December 2018.

At the other end of the scale, Tribeca Alpha Plus was a lowly 138th over one year but a commendable 8th over five years. It shows the problems selecting the 10 Best In Show. It's highly unlikely this Productivity Commission recommendation will be adopted, replaced by a hit list on poor funds. 

Lots of great insights to kick off the year ... 

Many people are increasingly confident that Labor will be forced to amend its franking credits policy, but the Shadow Treasurer Chris Bowen is still making strident statements. Labor will choose "schools and hospitals over tax concessions that overwhelmingly benefit the wealthy". Deborah Ralston argues the Labor view underestimates behaviour changes by investors, and large SMSFs with taxable income from accumulation assets will still use tax credits under the Labor proposal.

The coming Federal election offers a diverse range of policy choices, and Adam Shultz summarises the superannuation alternatives. 

Robin Bowerman shared a stage with the legendary Jack Bogle when he toured Australia, and following the death of the 'father of indexing', Robin has written a brief tribute to the founder of Vanguard.

Roger Montgomery warns that the well-known relationship between interest rates and bond prices should extend to other asset classes, while Chris McGoldrick explains risk in his portfolios and why capital preservation is paramount. Rob Prugue suggests rules which market professionals should adopt in a client-focussed manifesto, worth reading in the week before the Royal Commission final release.

This week's White Paper from SuperConcepts surveys the holdings of its SMSF clients and shows the Top 10 exotic assets held and how they can be justified in a retirement portfolio.

Graham Hand, Managing Editor


For a PDF version of this week’s newsletter articles, click here.




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