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Welcome to Firstlinks Edition 325

  •   25 September 2019

A few days ago, Bloomberg Markets reported the 'end of an era' and an 'epic shift' which has not been widely reported in Australia. Bloomberg called it a major turning point in history.

"In August, the investment industry reached one of the biggest milestones in its modern history."

For the first time ever in the US, index-based equity funds (including ETFs) exceeded actively-managed equity funds. The threshold was that, according to Morningstar estimates, inflows into passive US equity funds in the year to August 2019 were US$89 billion (to US$4.27 trillion) versus active outflows of US$124 billion (to US$4.26 trillion).

The momentum is irreversible. Although ETFs in Australia are growing strongly, they still account for only 2.5% of assets under management here, where managed funds dominate. There's a lot of contestable space. Research issued by Investment Trends this week reveals:

"When asked what proportion of total client investments they would prefer to allocate to passive investments over actively-managed investments, the average planner now prefers to allocate 33% of client portfolios into index-tracking investments, up significantly from 19% in 2018." 

The man who started index investing was Vanguard's Jack Bogle, who died in January 2019 at the age of 89. As Warren Buffett said in his Berkshire Hathaway letter of 2016:

"If a statue is ever erected to honor the person who has done the most for American investors, the handsdown choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing of added value.

In his early years, Jack was frequently mocked by the investment management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me."

At this historical moment, it's timely to interview the Managing Director of Vanguard Australia, Frank Kolimago, who previously ran Vanguard's Personal Advisor Services (PAS). He explains Bogle's philosophies and shows how personal advice can be delivered to the masses.

Treading a fine line on China 

Our 'Man of Titanium', Scott Morrison, must maintain good relationships with both Australia's major trading alliance, China, and major strategic defense alliance, the US. The Prime Minister supported Donald Trump's push for concessions from China on trade, even after the President said it would take more than a year to resolve the trade war. The framing is a delicate balance.

"It's got to be a sustainable outcome ... You need to understand Australia's economic relationship with China is very different from the United States' economic relationship with China ... We have a surplus with China, they have a deficit ... It has been an absolute boon for Australia and that is why I have always made it clear we have always welcomed China's economic growth."

So while Morrison backs Trump's hardline on trade, he needs to avoid irritating China. Treasurer Josh Frydenberg boasted of a Budget close-to-balanced, but it would be a bleak picture without Asia. As shown below, two-way trade with China is over three times larger than with the US.

Source: Deloitte Access Economics for 2017/2018

Bill Evans gives his latest predictions

The Australian Financial Review recently said of Westpac's Bill Evans' ability to predict the trajectory of official interest rates:

"This reputation means there is nobody outside the Reserve Bank who can move markets the way Westpac's veteran Chief Economist can."

Many moons ago, Bill and I worked at adjacent desks at CBA, long before it was a listed company, and Bill was as competitive on the squash court as he is today on correctly predicting markets. It's great to share his latest views on financial markets and interest rates.

Other investment articles ...

Also in this bumper edition, Vihari Ross explains the search for the best quality companies, eskewing any concept of chasing 'turnaround' or 'recovery' stories. Ben Inker reinforces similar ideas by showing how the biggest and best giant companies have prospered in recent years. The investment question is whether their success will continue.

Two articles take a look at mining and other commodities vital to Australia's success. Michael Salvatico offers a counterintuitive view that most mining is good for climate change, while David Bassanese shows how to invest in commodities and their role in a balance portfolio. With climate change headlining the news this week, it's worth noting Australia is installing renewable energy faster (in watts per person per year) than any other country in the world.

Jonathan Rochford's monthly look at Media Worth Consuming unveils dozens of links to sources outside mainstream coverage, often sceptical, quirky and challenging consensus.

The White Paper from Shane Oliver of AMP Capital is an excellent summary of recent market performance, but more important, gives his forecasts for medium-term returns by asset class. He describes five implications for investors relevant to portfolio construction.

Next week, we will take a break from preparing new material to allow our team to recharge their batteries after a non-stop 2019, including copying thousands of articles to our new website. To showcase this content, we will select some all-time favourites you may have missed.


Graham Hand, Managing Editor

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



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