There is an old quote famously attributed to Aristotle.
"Give me a child until he is seven and I will show you the adult."
Now whether he actually said this is impossible to determine. I suspect the ancient Greeks have suffered the same fate as Buffett. Every vaguely profound observation eventually gets attributed to them. Nevertheless, the idea has endured for more than 2,000 years.
The premise is really quite simple. Long before we develop our own beliefs, habits or ambitions, we're absorbing the values of the people and institutions around us. Spend enough time with someone's family and eventually certain mysteries begin solving themselves. The answers are always upstream.
Aristotle may have been making a point about parenting, but I've increasingly come to think the idea applies to institutions too. Historians often discuss institutions as though they're living organisms. Universities, churches and governments all possess peculiar habits that survive the people inside them.
The Catholic Church has weathered divisions, reformations and revolutions while mostly retaining the customs that have defined it for centuries. The faces may change but the institution persists.
Institutions, much like families, have a habit of reproducing themselves. Which brings me to funds.
Investors spend a considerable amount of time examining the child. We pore over fees, performance tables and portfolio holdings. We watch interviews of portfolio managers with a reverence usually reserved for star athletes. We debate whether a strategy will outperform, underperform or justify its existence altogether. Yet we can neglect a far more important question. Who raised the fund?
As a young person who spends an unhealthy amount of time online, I'm exposed to no shortage of fund marketing. Every turn of the market seems to arrive with a fresh basket of products offering exposure to whatever narrative currently dominates financial conversations.
Some fund providers remind me of ambitious parents who enrol their children in every extracurricular activity imaginable, desperately hoping to discover a hidden talent.
The child doesn't merely play piano, they also speak Mandarin, compete in robotics and are captain of the debate team.
The funds management industry has its own version of this behaviour.
We all know markets have become increasingly narrative driven. Whatever investors happen to be talking about today can usually be packaged into a product by tomorrow. But then (and with considerably less fanfare) many of these products disappear.
And indeed, I can acknowledge that funds management is not a charity. Asset managers are businesses and businesses are supposed to make money. There is nothing inherently wrong with launching products that investors want.
But at the risk of sounding overly puritan, I've come to appreciate the frustratingly dull parents. They are not the ones making grand declarations about the future and their shelves are not littered with the remnants of last year's excitement.
As a child absorbs the values of a household, a fund will inevitably absorb the incentives of the organisation behind it. Over time, those incentives reveal themselves in things like product design, stewardship and most importantly, investor outcomes.
We spend a great deal of time asking which fund we should own. The better question may be who owns the fund. As Aristotle might have observed, the child rarely escapes the influence of its parent.
Simonelle Mody
Weekend Market Update
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From Shane Oliver, AMP
Global share markets were mixed over the last week not helped by worries about rising oil prices and rising bond yields. US shares managed a small rise though as relatively dovish comments by Fed officials Williams and Waller implied that a September rate hike is not a dead cert. August inflation data in the week ahead will be key. But Eurozone, Japanese and Chinese shares fell. The Australian share market also fell around 0.9% with the hit from rising oil prices and bond yields compounded by falling home prices adding to concerns about the economic outlook at the same time that GDP growth was still strong enough to reinforce expectations that the RBA is on track to raise rates again with some now talking of two more rate hikes (versus none two weeks ago). Banks and financials rose on the ASX but were offset by falls in IT, mining and retail shares.
Bitcoin and gold both got a boost from the more dovish Fed comments which saw the $US fall, with both up for the week. Metal and iron ore prices also rose and the $A rose above $US0.72 for the first time since May.
Oil prices rose again with renewed military activity between the US and Iran. The renewed focus on sanctions by the US to pressure Iran had seen oil prices dip but the past week saw a return to US strikes after Iranian attacks on ships with Iran retaliating. Naturally Trump said the strikes would be short lived and he will no doubt soon proclaim something like “Iran wants to talk” or that the “war is over”. But the conflict remains as messy as ever with only bad options – return to full on war (which will go down very badly in the US and in any case its running low on key munitions) or agree a bad deal/just walk away (giving Iran what it wants). The bottom line is that nothing has been achieved by the War except the Iranian government is now more hardline and the Strait of Hormuz remains effectively closed with ships only getting through if they pay Iran or get military support from the US. Our base case remains that oil prices will stay in a $US70-100/barrel range with Iran preventing it going lower and the US moving to try and calm things down whenever it gets above $US100….but the risk is high that with no resolution the world will face much higher oil prices as reserves run down.
The past week saw the back up in bond yields continue taking the Australian 10-year bond yield to levels last seen in 2011. The rise reflects a combination of concerns about huge ongoing budget deficits in the US and elsewhere, increased corporate borrowing to fund data centre investment, worries about higher for longer inflation partly flowing from higher oil prices, a related need for central banks to run higher interest rates for longer and a rising trend in Japanese bond yields leading to a reversal of the so-called carry trade. US Treasury Secretary Bessent’s silly intervention was a sign of desperation and taken that way by bond investors as it had no fundamental backing – like concrete moves to cut the massive US budget deficit which is running around 6-7% of US GDP versus 1% of GDP in Australia.
It seems like the “bond vigilantes” are back after years of hiding in their caves. But it’s the sort of thing you would expect to see in a world of higher inflation and higher public debt. Since US bond yields are the base for global yields their rise has flown through to Australian bond yields with the add on of increased expectations for the RBA’s cash rate on the back of high inflation data. The risk is high that yields will rise further as its hard to see the key drivers going away any time soon. It wouldn’t be surprising to see the Australian 10 year bond yield push up to around 5.5%.
The rise in bond yields has a number of implications for in Australia. First its bad news for the Federal and state governments as it means public debt interest costs will rise even faster at a time for the states when their stamp duty revenue is going the other way. Public debt interest is the fastest growing major spending item in the Federal Budget currently accounting for around 5% of tax revenue but set to rise further. The more bond yields rise the faster the public debt interest bill will rise and the more tax revenue it will take up leaving less left over for welfare payments and other government spending. Second it means higher corporate borrowing costs which can act as a dampener on company profit growth. Thirdly, it means that banks are likely to raise their fixed mortgage rates which will reduce the attractiveness of fixed rate mortgages as an alternative to variable rate mortgages at a time when the latter are likely to rise further with RBA rate hikes. Finally, it could pressure the share market as the risk premium offered by shares over bonds was already very low.
In Australia falling home prices and cooling growth, but materialising upside inflation risks are providing a difficult choice for the RBA - but we expect it will prioritise dealing with inflation and hike rates again. Data over the last week showed a slowing in economic growth and an accelerating slump in property prices which - via wealth effects, a flow on to home building and housing related retail sales - will further weaken economic growth. Against this though growth is still running a little bit stronger than the RBA was expecting and wants to see to reduce excess demand and so far, property prices have just had a flick of the top with a fall of 3.6% nationally after a 50% rise since the pandemic. And in the meantime, July inflation data suggests that upside risks to the RBA’s inflation forecasts are materialising.
This presents a real dilemma for the RBA but given that inflation is the more pressing problem and if left unchecked risks a bout of stagflation, which will come with more costs to the economy and all Australians than a recession, the RBA is likely to focus on inflation and hike rates again. This is also necessary to reinforce the credibility of its inflation target which at present is weakening.
We have been of the view that the RBA will wait till the November meeting just to make sure that the high July inflation data is not an aberration, but a further delay risks damaging their credibility so there is a strong argument to move in September. At this stage we think its 50/50 as to whether its September or November, but either way we expect another hike. This is likely to be the top as two hikes risk tipping many households with a mortgage over the edge risking in turn a crash in property prices, much higher unemployment and a deep recession. That said, the money market sees a 63% chance of a hike this month, has fully priced a hike by November and puts about a 50% probability on a second hike.
Public spending remains too high. Sure, its slowed to 0.2% qoq or 2.1% yoy but it remains around 28% of GDP compared to a pre covid norm of 22-23%. This high level of public spending is using up spare capacity in the economy, depressing productivity and contributing to the inflation problem! Note that the May Federal Budget still had real Federal spending running at 4.3% through the last financial year – so not much slowdown there!
The risk of a correction in shares remains high. Strong gains year to date have left US and global shares vulnerable as we enter September which has on average been the weakest month of the year for US and Australian shares over the last 40 years. A correction in the US would likely drag Australian shares down. There are plenty of triggers for a correction including rising bond yields at a time when equity risk premiums over bonds are low, potential Fed and RBA rate hikes this month, rising oil prices, worries about an AI bubble and political uncertainty ahead of the US midterms. But with strong earnings growth we would see any pullback as a correction rather than the start of a new bear market.
Also in this week's edition...
Conventional wisdom encourages retirees to preserve superannuation but David Knox believes spending more can improve lifetime income.
Dr Ruchith Dissanayake and Dr Ama Samarasinghe explain why the SMSF borrowing ban targets the wrong group.
Shani Jayamanne looks at a principle borrowed from game theory that will explain the next market crash.
David Tuckwell discusses why gold is back in the headlines but investors may be asking the wrong question.
A bond market reckoning may be beginning and Michael Collins thinks the consequences could reach into everyday life.
Steve Bennett and Sasanka Liyanage explore a little-known corner of the property market that is quietly benefiting from powerful trends.
Joanne Earl is back to share insights from her six months in retirement.
Curated by Simonelle Mody and Leisa Bell
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