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Welcome to Firstlinks Edition 475 with weekend update

  •   12 May 2022
  • 13

The Weekend Edition includes a market update plus highlights from Morningstar.

With some share prices down 80% and funds off 30% from their peak, there are plenty of investment professionals looking for ways to explain performance. All fund managers have their marketing patter, much of it similar to others. They describe their unique process of whittling down the investable universe by applying magic potions, they show their genius when selecting stock winners in their portfolio (what, no losers?) and then present the performance numbers of the best fund in their stable.

Then comes the part that every manager, for some misguided reason, considers mandatory. "We have skin in the game" and "We are coinvested with you". In some cases, the earnest vow is even stronger, with statements such as these taken from pitch documents in the last week: 

"It is never pleasant to experience market falls or underperformance. We and the rest of the investment staff have 100% of our investable wealth in our funds. To fellow investors we say: we feel your pain."

"I am frankly dumbfounded by the events of the past 6 months; it feels like the rules of investing I have applied successfully for the past twenty years have been thrown out the window. Nonetheless, with my entire investable asset base in the fund and a substantial portion of the asset base of most friends and family also invested alongside us, I will continue to work hard to turn around the poor performance of the past half year." (my bolding)

Is that what we want from our fund managers? I prefer them to lead a balanced life with good relationships with family and friends, and to wake up refreshed and ready for another day of calm and rational analysis. Not sweating because their net worth is buried in their fund, mum and dad have mortgaged their family home and friends avoid the elephant in the room.

How does this complete lack of diversification accord with Investing 101? What if they are a bond manager, shouldn't they hold some equities? Every financial planner advises clients to run a diversified portfolio based on their future goals, yet here are the genius fund managers telling everyone that 100% of their investable assets sit in one fund. Why is that smart or desirable?

How does the conversation go at home with the spouse when the one-and-only investment is down 30%?

"Darling, you know how we're saving for a bigger house because we just had our third child and the first two are already sharing a room? How you want a decent garden? I'm sorry, I put all the money in one fund and it's collapsed, and we no longer have enough deposit. Oh, and since it's my own fund, my salary and bonus will also be hit."

Every fund manager has a professional and personal interest in their fund doing well. It determines their remuneration, their career progress and maybe the value of their business. They don't need to bet their house. The argument that 'alignment of interest' needs the fund manager to invest all their money in the fund is overdone. There is already a full alignment if a manager is trusted with the retirement savings of an investor. The "we're in this together" is redundant. Why should an investor care if the manager shares the pain? Does anyone think, "Oh, that's fine, thank goodness you're losing money as well as me"? Is it supposed to show greater commitment? Working 16 hours a day instead of 12 will not produce better results. Better to spend an afternoon with the family.

And with this 'all my investable wealth" claim, nobody reveals how much of their total wealth is so-called investable and the definition. If like many (younger) Australians, most of the wealth is tied up in the Great Australian Dream, then maybe "investable assets" makes up 10% of their wealth.

Cut it out, fund managers, it's meaningless. We know you want to win. Who doesn't? You're giving me enough pain without sharing yours.

Which takes us to performance fees. Are they part of this alignment of interest argument or just another way to charge a fee? Love them or hate them, there is no market standard but they should be designed to be fair to investors. Check these features and decide if the fee on your fund is fair, and surprisingly, there may be a fee holiday coming up.

Among the many messages investors receive when markets fall is this useful reminder from Shane Oliver of AMP:

"If you look at the daily movements in the share market, they are down almost as much as they are up, with only just over 50% of days seeing positive gains. But if you only look monthly and allow for dividends, the historical experience tells us you will only get bad news around a third of the time. Looking only on a calendar year basis, data back to 1900 indicates the probability of a loss slides to just 20% in Australian shares and 26% for US shares. And if you go all the way out to once a decade, since 1900 positive returns have been seen 100% of the time for Australian shares and 82% for US shares."

Markets experiencing rapid rises and falls often trigger algorithmic, computerised responses and stop-loss orders, rather than a reflection of general market sentiment. For example, this week, City Index analyst Tony Sycamore said that 10,000 ASX200 futures contracts were sold close to the open of our trading day, possibly by an overseas hedge fund, quickly sending the market down. He said:

"About $1.75 billion worth of selling went through in a very short period of time. Typically that is representative of a get-me-out type order, I've seen it firsthand on trading desks. Just get the heck out, I can't take the pain anymore."

Other investors may panic and join the sale, especially when analysts start to justify the fall with all the usual excuses, and a bearish tone can take hold. Although there is a fear of catching a falling knife, it's at times of drawdowns that subsequent rewards are the best, but who knows where the bottom is.

And so to the election.

Today, let's visit a factory and wear a high viz vest and operate the equipment. Then a trip to my old school to announce funding for a swimming pool. A marginal electorate needs an updated road. How about $4.5 million to build a new distillery for a profitable, listed company? Hold a media conference where journalists scream gotcha quiz questions and concoct headlines of outrage.

The second leader debate was a feisty yelling match, and Nine's graphics and inadequate technology compromised the polling system:

It would be easy to dismiss the United Australia Party as a distraction, with their policies to cap home loan rates at 3% for five years (and watch the banks withdraw from home loans) and bringing back $1 trillion of super from overseas (and deny access to 98% of companies). But money buys influence and votes, and the party has dealt itself into the outcome by directing preferences to the Liberal Party. Clive Palmer told The Saturday Paper:

“I write all the ads personally. Because I originally started in campaigning with the National Party years ago, I ended up becoming [campaign] director and state spokesman, so it’s easier for me to write the ads than it is for me to instruct someone to do it."

Clive, among the $50 million you're spending on ads, find a few thousand dollars for an editor. The grammar mistakes and style inconsistencies in your ads are doing my head in.

From AAP Netdesk: Australia's share market just suffered its fourth straight losing week, with tech stocks collectively erasing all their gains from the past two years. It's a selloff that's played out even more severely in other markets around the world - the NASDAQ is down 27 per cent so far this year - and some market watchers say there could be much more pain ahead.

"Essentially, the issue for markets is that all of the safeguards, all of the potential white knights for markets, have disappeared," said Michael McCarthy, chief strategy officer for Tiger Brokers Australia. "High inflation means that central banks are no longer in a position to support markets. The COVID expenditure and the expansion of government balance sheets means that governments are in no position to support markets."

Mr McCarthy said as central banks pull back on stimulus measures, there could be a major readjustment. "As a share market, we've been through the greatest boom ever recorded in modern times," Mr McCarthy said. "Unfortunately, what that could mean is that we're about to see the greatest bear market."

On Friday, Australian shares have clawed back Thursday's losses with across the board gains, closing out a volatile week with the local bourse's best single-day performance in 15 weeks. The benchmark S&P/ASX200 index finished Friday up 134.1 points, or 1.9 per cent, to 7,075.1. The broader All Ordinaries gained 141.1 points, or 1.97 per cent, to 7,307.7. The ASX200 still finished the week down 1.8 per cent, in its fourth straight of declines, and hit a three-month low on Thursday.

All 11 of the ASX's official sectors gained ground on Friday, with tech rising by 7.0 per cent after Thursday's 8.7 per cent selloff -- the sector's worst day since March 2020. Square - the worst performer on Thursday - was the best performer on Friday, rising , up 15 per cent to $114.88. Jack Dorsey's company is still down 19.6 per cent on the week, however. Xero rose 9.4 per cent, Wisetech Global gained 7.3 per cent and Altium rose 7.1 per cent.

The heavyweight mining sector was up 1.6 per cent, not quite recovering from Thursday's losses. BHP advanced 2.0 per cent to $45.84, Rio Tinto climbed 2.1 per cent to $105.59 and Fortescue Metals was up 2.0 per cent to $19.39. Goldminers Newcrest and Evolution both were down about half a per cent while Northern Star rose 0.4 per cent.

The big four banks lagged the rest of the financial sector, which was up 1.4 per cent as Macquire climbed 4.5 per cent. NAB rose 1.0 per cent to $31.14 while Westpac and ANZ both rose by 0.9 per cent, to $24 and $25.39, respectively. CBA was up 0.1 per cent to $102.28.

From Shane Oliver, AMP Capital: Share markets had another rough week with ongoing worries about monetary tightening to combat high inflation driving a possible recession, before a bounce from oversold levels at the end of the week. This left US shares down 2.4% for the week, Eurozone shares up 1.4%, Japanese shares down 2.1%, Chinese shares up 2% and Australian shares down 1.8%. Bond yields pulled back from their highs and metal and iron ore prices fell but oil prices rose. Worries about global growth also dragged the $A down as the $US rose.

Shares could have a further near-term bounce from oversold levels. But risks around inflation, monetary tightening, the war in Ukraine and Chinese growth remain high and still point to more downside in share markets before they bottom. The risks around inflation and rising bond yields are the main threat at present – but Chinese Covid lockdowns and the war in Ukraine are adding to supply disruptions.

US inflation came in stronger than expected again for April. While annual inflation fell slightly (from 8.5%yoy to 8.3% for the CPI and from 6.5%yoy to 6.2% for core inflation) as higher monthly inflation readings a year ago dropped out it was still higher than expected. While US inflation is still too high for comfort and may remain so for some months signs of peaking remain evident in our Pipeline Inflation Indicator reflecting lower freight costs and a slowing in commodity prices including oil and gas. This could enable central banks to slow the pace of tightening later this year – in time to avoid recession.

Graham Hand

In this week's articles ...

Ned Bell has been managing global equity portfolios for about 20 years, but he sees a generational step change underway. It feels like a moment in investing history when the rules are rewritten, with rising rates, an inflation spiral, record debts, wars and geopolitical conflicts. Is Ned correct when he says it's the best time in his career for active stock pickers?

In Meg Heffron's latest monthly column, she continues her deep dive into future-proofing your self-managed super fund, this time looking at the importance of preparing a power of attorney.

May's bank reporting season has wrapped up, and Hugh Dive delivers his take on the sector, awarding his gold stars to the top performers.

It is widely accepted that equal representation is the right thing to do. Dr Joanna Nash and Dr Ron Guido dig through the data on 2,500 large cap companies in 30 countries and find that more gender diverse leadership teams deliver better performance outcomes. We also feature Realindex's research report "Beyond lip service: tracking the impact of the gender diversity gap" as our white paper this week.

Andrew Canobi argues that the probability of central banks gently landing the plane looks to be shrinking by the day with global financialisation facing its biggest hurdle since the GFC. It is unlikely central banks will push rates up as far as markets are pricing in.

The pandemic has had profound implications for the way we use real estate. Steven Bennett and Sasanka Liyanage go beyond the headlines and explore the future of the office sector.

Two bonus articles from Morningstar for the weekend as selected by Editorial Manager Emma Rapaport

Things could finally be looking up for Magellan as the embattled fund manager reports steadying outflows across its funds and short-term outperformance at its flagship strategy, writes Lewis Jackson. And is it time to recession-proof your portfolio? Christine Benz joins Susan Dziubinski to discuss the 'R word' and how to protect your portfolio.

Latest updates

PDF version of Firstlinks Newsletter

IAM Capital Markets' Weekly Market Insight

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Indicative Listed Investment Company (LIC) NTA Report from Bell Potter

Monthly Investment Products update from ASX

Plus updates and announcements on the Sponsor Noticeboard on our website


May 15, 2022

Agree about fund managers stressing over personal financial losses making it worse, as Ben Carlson recently wrote: "Jason Zweig taught me in Your Money & Your Brain that losses and gains can have profound physical effects on both the body and the brain. Financial losses are processed in the same area of the brain that responds to mortal danger. Studies show we can actually relive our financial losses in our sleep. Losing money is painful. It can be worse if you don’t have a healthy lifestyle."

May 15, 2022

Jackson says: "[...] Losing money is painful. It can be worse if you don't have a healthy lifestyle."

I'm now making money hand over fit...and never been fitter, especially since I followed the advice of he who told me that instead of my running behind the polluting bus every morning on my way to work to save myself a measly $14.85 each week, I should instead run behind a new electric taxi taking a circuitous/$cenic route which'll not only make me heaps fitter (given it doesn't stop at busstops) and save ~$250.00! When talking of accruing wealth/health, sometimes the longest way round is the quickest way there...provided of course one can keep up with the taxi sans letting its driver know what one is up to.

Graham Wright
May 12, 2022

For fund investors, the starting point is the fund PDS. What are the parameters surrounding investment products and strategies available to the investment managers? When they are tied to an index, there is an immediate limitation. When they are directed in their strategies, often they have to be highly or fully invested despite the market and similarly, hold stocks that are in an index despite their poor investment value at the time. So know we need to know their limitations. And a significant issue of concern for retirees arises when they cannot redeem their units because the manager has closed the fund to withdrawals. They are locked into a downward spiral no escape, and no funds available to fund daily living.
Absolute funds have the broadest range of investment options and strategies and claim to protect your investment downside and even make money in a downturn. Does history show these claims to be true in fact, not ambition?

Greg W
May 12, 2022

Speaking of characters and sage commentary, among the responses to last week's passing of Dennis Waterman (first Warnie, now Waterman!) were the inevitable classic lines from his characters, as well as George Cole's as Arthur Daley, including [apparently - I can't locate the episode] this from Arfur talking about Thatcher -

"That woman is a financial genius. She sold to the people what they already owned.”

And, for the younger players out there in Firstlinks-land seeking 'nice little earners', to quote Arfur again -

"Terry, Terry, you're still young ... the world is your lobster.”

(Cole's 2013 autobiography was titled The World Was My Lobster; after being given up at 10 days old by his 16 year old mother, he did awright for himself.)

Graham Hand
May 12, 2022

Hi Greg, thanks for the reminder of the genius of Terry and Arfur. They taught many of us how the world of finance and commerce really works.

May 12, 2022

Along the lines of "buyer beware" there was an episode of a consumer rights show quite a number of years ago where they mentioned a dodgy second hand car dealership In Adelaide. Even the hosts had a chuckle and said you had a hint of their business ethics - it was named "Arthur Daley Motors"! It gets better, they shut up shop and re-opened under a new name with the same complaints as often happens. This time it was "Terry McCann Motors"! To quote Monty Python these guys were cruel but fair!

May 18, 2022

I recall when the TV show "The Investigators" revealed how this guy (who'd always been a staunch Ford man and bought brand-new ones quite often) was kept being given the runaround by both the dealership and Ford with his new Ford which had a fault. So he parked it just across the road from the dealer each day with adequate signage on it stating that it was a right ol' 'lemon' etc.. Still no joy, so Holden having heard about it came to the party offering him a clean swap of a brand new Holden equivalent to his Ford which he accepted and said he'd never have another Ford again. The best Arfur ever did was to sell Terry a 2nd-hand Cortina? which was seen at the start of every show when Terry, with a doubtful look on his face, held its bonnet up with his hand and then the video had Terry's hand suddenly segued to one wearing a boxing glove being held aloft by the referee in the ring. In buying the Cortina or anyfing at all from Arfur, Terry, just like his gloves, would always be stitched-up when fings came apart.

May 12, 2022

I fondly recall a scene in Arfur's lockup where a prospective customer well-known to Arfur has just arrived wanting to know if Arfur has anything for sale, so Arfur says: There's several boxes of new woollen jumpers just over there!", so after inspecting the quality of the jumpers and looking closely at their labels, this guy suddenly says to Arfur: "But Arfur, it says here, *Italian Navy*!", and Arfur glibly fobs-off with: "That's just two shades off Royal Blue!"

As far as Arfur telling Terry that the world is Terry's's darned good advice to one's always-underpaid minder when (quite apart from Arfur's reluctance to readily 'shell out' to Terry what's really owed him in full), to make a good 'fist' of fings, Terry needs all the help he can get when he has to make himself a crust_acean.

I'm starting to see a parallel between the comments section in Graham's articles (and the articles!...whew) and that of what Garrison Keillor repeatedly said in his radio show about 'Ralph's Hardware Store' in Minnesota, which was: "If you can't find what you're looking for at Ralph's then you can probably get along pretty well without it!"

May 15, 2022

A favourite quote from Minder epitomises the 10,000 foot view, the cut to the chase, the stripping of detail slogan which which mediocre managers justify their wilful ignorance.
Arthur decides there is a quid in the exercise business so he sets up a fitness studio using the croupiers from an illegal casino that has been raided and shut down.
“But Arfur,” one of the young women remonstrates,”We don’t know nuffink about aerobics”
Arfur: “Aah..just get the punters to jump up and down till they’re knackered!”

May 12, 2022

Good article Graham
You missed the real action for the election.
Radio on,out on the bike.Middle of an interview,I missed the start but recognised the voice.Couldn't place the name.

The action heats up next week,he's doing a vasectomy ( what is this guy talking about?).To make it a bit more interesting the operation will be carried out without using anaesthetic.After the magnificent achievement of welding,what a high point that was.Carrying out a vasectomy ,what can I say.
Recognised the voice,Good old H G Nelson.We need more commentary from Rampaging Roy and HG.Elections might be fun then.
Looking on the bright side depending on how far things go down this could be very good ( says he drumming fingers on table asking will I get MQG at $140).
The rules of investing for 20 years have been thrown out of the window.Fortunately with a bit of intestinal fortitude and a nil desperandum carborundum attitude ( or stupidity,I'll never work out which) somebody will usually throw the " rules" back in through the broken window .
Compounding will once again return,the window will be repaired and things will be back to normal .Until the next time the rules go out of the window and we start all over again.

May 12, 2022

If my memory is correct, the goodly lads of HG Nelson and Rampaging Roy Slavin hosted the call of the 2004 Federal Election for the 7 Network. It was in the days of the Central Tally Room. One of the highlights was them launching a remote controlled airship model with the network label emblazoned upon it and they drove it around the Tally Room making sure it was being viewed and broadcast by the competing networks. One of the competition eventually "shot it down" with a cigarette attached to a long stick.

On the serious front, it was one of the most informative election specials ever broadcast. They didn't try to call the election within 10 minutes of the booths closing on Lord Howe Island, but spent the first part of the evening going through the election process, right from when somebody fills out the MP application form, to how the order on the ballot is determined, and finally how the preference system works. All with their wit and commentary.

Bring them back for the call!!!!

May 12, 2022

Graham, well may you - in your Morningstar piece: 'Fund managers, please stop trying to share your pain: Firstlinks Newsletter' - bag Clivey Palmer for the grotty grammar and style inconsistencies in his ads, but where you have, 'therein parenthesis', said; "my bolding", if I may make so bold, I only see some italicising. Style inconsistencies? Hmmm.

Telling Clivey to engage the services of an editor when he has so-succinctly, said: "I write all the ads personally. [...] so it's easier for me to write the ads than it is for me to instruct someone to do it.", is a manifest exercise in futility on your part, not unlike that of W.A.'s former chief justice, Wayne Martin (when he was still on the bench) so-temerariously and risibly sought political-permission for him to be allowed to sit-in with juries in the jury room when they have retired from the courtroom to deliberate on guilt or innocence. He didn't get a guernsey but post his retiring from the bench then went on to chair the W.A. Football Commission, only to then find himself being banned from Swan Districts grand final clubrooms in 2021. Some pushy folks 'is/are' unable to see the writing on the wall. Tsk.

Graham Hand
May 12, 2022

Thanks Allan but the 'bolding' is in the original piece in Firstlinks, but not reproduced in Morningstar where you must have read this.


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