Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 277

Cuffelinks Newsletter Edition 277

  •   26 October 2018
  •      
  •   

The Future Fund's Annual Report 2018 shows it has increased allocations to index funds, but some active managers are justifying their fees. It says:

"We remain willing to support active management where we are confident that a manager can reliably add value net of fees. The commitment to genuine diversification is an important facet of our investment strategy and has been beneficial to the Fund's overall performance delivering strong returns net of costs while reducing volatility.

We are therefore more willing to pay higher fees to our investment managers or areas where significant value is added over broad market exposure (such as private equity) or for exposures which are truly diversifying (such as hedge funds)."

Question: When is a hedge fund not a hedge fund? Answer: When it has almost as much exposure to equity markets as a traditional long-only fund manager. It does little to diversify risk.

A few weeks ago, I attended the Alternative Investment Management Association (AIMA) Annual Conference. They are not overly fond of the term 'hedge fund'. 
 
An example at the conference of a hedge fund seeking genuine diversification was Two Sigma and its search for 'uncorrelated alpha'. They combine over 10,000 data sets with industry-leading computing power, believing "the tiny data within the noise matters". One data set uses satellites to count cars parking at Walmarts to monitor store turnover. They proudly boast 72% of new recruits have no finance background, as the best way to find uncorrelated returns is to be different.

There is no way investors in such funds will know what the traders are doing. It's a matter of trusting the manager's reputation and the genuine attempt to avoid correlation.

With more retail investors looking at so-called hedge funds to diversify away from equity exposure, the chart below is a worry. It shows that just prior to the recent sell-off in the US, managers of long-short strategies (that is, 'long' some shares and 'short' others) had a record exposure to the S&P500 index of about 72%. In a rising market, they could not resist joining the party.

In Australia, long-short funds are becoming more common, and it's worth checking whether returns are uncorrelated to overall markets, as a fund which is 130% long and 30% short is still 100% exposed to shares.



Factfulness survey and the value of reading

Thanks to the thousands of you who participated in the Factfulness survey. Perhaps it was a timely reminder to step aside occasionally from the hustle of the week for brain battery recharging. Reading, especially out of your comfort zone, is a way to sharpen the mind. In one interview, Warren Buffett estimated that he spent 80% of his working day reading and thinking. Bill Gates told the New York Times that he read 50 books a year. Perhaps surprisingly, Australians on average spend an hour a day reading books, 70% of that is for pleasure. Two-thirds of frequent readers are female. 

As guides for more reading, here’s the World Economic Forum’s list of the 20 most influential books in history, and Business Insider’s list of the 25 most influential books on business. Use our Have Your Say section if you want to add more titles.

This week, Leisa Bell summarises the results of the Factfulness survey. Overall, Cuffelinks readers did better than other Australians, but still only scored 37% from almost 5,000 participants.

Investing insights

Banks ... we love to hate them except when we collect healthy dividends. To give context to the Royal Commission, Ashley Owen shows the historical mistakes of the Big Four banks. The recent debacles are only the latest clumsy steps. 

In a twist on sustainable investing, Stephane Andre and Bruce Smith make the case for actively selecting better companies with a positive impact, as against screening out the negatives. Back on the merits of indexes, John Peterson argues that the SPIVA scorecard for Australia is flawed.

Excessive product customisation can lead to an overload of choice and business failure, say Jessica Pallant and Sean Sands. They outline a middle way toward optimal customisation.

SMSFs have six key advantages as investment vehicles, says Graeme Colley, while Carlo Bongarzoni bemoans how changing legislation has adversely affected self-funded retirees and their SMSFs. It's another example of an individual personally taking his case directly to Chris Bowen.

Over 5,000 submissions have now been received for an intended Royal Commission into Aged Care Quality and Safety. This week’s White Paper from Challenger is a timely look on how to get the best out of aged care, including many specific examples.

Graham Hand, Managing Editor

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

 

  •   26 October 2018
  •      
  •   

 

Leave a Comment:

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Latest Updates

Fixed interest

Higher yields are creating opportunities in global bonds

Bond markets are adjusting to a new reality, but not in the ways investors expect. With markets repricing and capital competing for attention, investors may need to rethink where resilience and opportunity lie. 

Economy

Are we in a recession?

What if the warning signs are already everywhere? From supermarket aisles to company failures, investors are being bombarded with recession signals. But most face a different risk that can be just as dangerous for portfolios. 

SMSF strategies

Meg on SMSFs - Division 296 actuarial certificates

The tax bill might be yours, but the event that caused it may not be. A key Division 296 calculation can sometimes attribute earnings in ways that many SMSF trustees won't instinctively expect or fully appreciate.

Property

The first impact of negative gearing reform is not the tax bill

Negative gearing changes formally begin in 2027, but the first consequences may already be here. A subtle shift is quietly influencing who can borrow, how much they can access and which property strategies still stack up.

Economy

The oil market is running out of easy answers

The biggest threat to markets may not be what investors are watching. The numbers have stopped adding up and supply is harder to measure, with forecasts becoming simple guesses. A more fragile reality is being masked.

Investment strategies

The state of investor knowledge in Australia

Australians are investing more than ever, yet a surprising divide is emerging between those building wealth effectively and those making costly mistakes. Surprisingly, the gap has little to do with income, age or starting capital.

Taxation

Complexity and capital gains

A case study shows that the ‘30% minimum CGT’ is a poorly conceived tax that adds significant complexity to an already over-complex system. A less complicated model would create a much fairer progressive tax scale.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.