NEWS
13 Sep 2021 - To invest or not to invest in China?
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To invest or not to invest in China? Robert Swift, Delft Partners September 2021 |
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Investing in China remains a moral question, but to not invest now because of more government intervention and capricious legislation is illogical, since that would be to ignore the fact that these trends are clearly evident in other countries. More government, capricious and unexpected legislation to the apparent detriment of companies and shareholders, is now omnipresent as a global systemic risk to equity returns. Consequently, prepare for lower rates of profit growth and 'fatter' tails in your investment outcomes, even if you decide to never invest in China again. There are similarities between Xi Jinping's increasing intervention in the Chinese corporate sector and those by Western governments 1. Policy with social objectives (with a lack of awareness that the years of free money created the wealth inequality in the first place) 2. More taxation and worryingly more centrally directed capital allocation and subsidies (Tesla anyone?) 3. Penalising 'rentier capital' aka private savings 4. Population coercion to behave by scare tactics/messaging, and surveillance; China uses facial recognition software and 'social scores' (but you may care to read this: Amnesty - New York Police Facial Recognition Revealed) At least China has finally done something about moral hazard which would still seem to be prevalent in 'the West'. China Evergrande is 95% certain to default on over $80bn of bonds and we'll have to see how that pain gets allocated between locals and foreigners before making more judgements, but bankruptcy is part of capitalism, or it used to be. In this respect China is ahead of the US perhaps and certainly the Europeans in letting a failed enterprise actually fail. For those of you who think that China's decision making comes without due warning and therefore makes it too risky in which to invest, the second part of the US 'Infrastructure' bill, equal to a 3.5tln $ spend, will take 17 days (!) to debate. Obamacare took 9 months even with a significant Democrat majority, (which is not the case now) and FDR's programmes were spread over his first 2 terms - 8 years. The UK government recently announced hikes on national insurance and dividend tax increases in essentially a unilateral decision by the prime minister. The unelected European Central Bank has essentially decided both monetary and fiscal policy for Europe and the result has been less than stellar growth. The Euro remains a political construct not a valid economic one but it's an ideology akin to 'Mao thought' and so on we go regardless.
In short, governments everywhere are consulting less and intervening more quickly. Government exist to provide essential services but to also redress other imbalances dangerous to national cohesion - or they should. Currently imbalances are very evident in wealth inequality and the share of profits in the economy relative to wages. Using the US data (the best around) we can see from the chart below that corporate profits have been on a rising trend relative to wages. Since the consumers of the companies' products need money with which to buy them, this % allocation tends to oscillate around an average. If wages rise too quickly then companies become less profitable, can't invest and won't hire which the reduces wage growth. Vice versa. Sometimes a nudge is needed - the General Strikes in the 1920s, the Reagan, Thatcher, Laffer curve revolution of the late 1970s and the Schroeder reforms in Germany in the 1990s serve as examples.
Source: BEA, BLS This swing back to wages is needed and will come with the attendant ever bigger government. Don't blame government - blame companies that have indulged in such anti-social behaviour as zero contract hours, and paying no taxes while enjoying the legal protection, trained workforce, and infrastructure that other people's taxes have provided. Could this have been prevented in the last few years had companies perhaps not bought back stock to the tune of c$900bn p.a., significantly benefitting corporate executive share option schemes, and instead raised wages, increased re-investment and improved job security? This imbalance got a big tailwind from ZIRP aka "monetary policy for rich people", and so we would actually view this shift as much need rebalance because without the rebalance...economic distress causes revolutions and if you want examples checkout Wikipedia -The_Great_Wave Two final thoughts. Trickle-down economics is dead and as investors you should prepare for more government, National Industrial Polices, thus more inflation and taxation and lower returns from equities. Our advice is to focus on smaller companies since they are seldom directly in the firing line of legislation, find companies that do 'useful things' such as building a country's capital stock, look very closely at Japan which we think is both cheap and showing change for the good, and increase the volatility of returns if you do such things as portfolio optimisations. |
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Funds operated by this manager: Delft Partners Global High Conviction Strategy, Delft Partners Asia Small Companies Strategy, Delft Partners Global Infrastructure Strategy |
13 Sep 2021 - The Outlook for China
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One way or another China is always in the news. The current nervousness by some fund managers surrounding China is a reflection of the risks involved, while others see resulting lower prices as an opportunity. In this video Chris Gosselin explores both sides of the argument with Rob Swift from Delft Partners, Jack Dwyer from Conduit Capital, and Alex Pollak from Loftus Peak.
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13 Sep 2021 - Managers Insights | Premium China Funds Management
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Damen Purcell, COO of Australian Fund Monitors, speaks with Jonathan Wu, Executive Director at Premium China Funds Management. The Premium Asia Income Fund began in August 2011 and has achieved an annualised return since then of 9.63% with an annualised volatility of 5.52%. The Fund's up-capture and down-capture ratios (since inception), 132% and -60% respectively, highlight its capacity to significantly outperform over the long-term regardless of market direction.
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10 Sep 2021 - Hedge Clippings | 10 September 2021
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10 Sep 2021 - Performance Report: Bennelong Kardinia Absolute Return Fund
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| Fund Overview | The Fund's discretionary investment strategy commences with a macro view of the economy and direction to establish the portfolio's desired market exposure. Following this detailed sector and company research is gathered from knowledge of the individual stocks in the Fund's universe, with widespread use of broker research. Company visits, presentations and discussions with management at CEO and CFO level are used wherever possible to assess management quality across a range of criteria. Detailed analysis of company valuations using financial statements and forecasts, particularly focusing on free cash flow, is conducted. Technical analysis is used to validate the Manager's fundamental research and valuations and to manage market timing. A significant portion of the Fund's overall performance can be attributed to the attention and importance given to the macro economic outlook and the ability and willingness to adjust the Fund's market risk. |
| Manager Comments | The annualised volatility of the fund's returns since inception in May 2006 is 7.61% vs the index's 14.21% and over all other periods, the fund's returns have been consistently less volatile than the index. The fund's Sortino ratio (which excludes volatility in positive months) has ranged from a high of 1.13 for performance over the most recent 12 months to a low of 0.23 over the latest 36 months, and is 1.26 for performance since inception. By contrast, the ASX 200 Total Return Index's Sortino for performance since May 2006 is 0.34. The fund's down-capture ratio for returns since inception is 48.66%. A down-capture ratio less than 100% indicates that, on average, the fund has outperformed in the market's negative months over the specified period. |
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10 Sep 2021 - Performance Report: AIM Global High Conviction Fund
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| Fund Overview | AIM are 'business-first' rather than 'security-first' investors, and see themselves as part owners of the businesses they invest in. AIM look for the following characteristics in the businesses they want to own: - Strong competitive advantages that enable consistently high returns on capital throughout an economic cycle, combined with the ability to reinvest surplus capital at high marginal returns. - A proven ability to generate and grow cash flows, rather than accounting based earnings. - A strong balance sheet and sensible capital structure to reduce the risk of failure when the economic cycle ends or an unexpected crisis occurs. - Honest and shareholder-aligned management teams that understand the principles behind value creation and have a proven track record of capital allocation. They look to buy businesses that meet these criteria at attractive valuations, and then intend to hold them for long periods of time. AIM intend to own between 15 and 25 businesses at any given point. They do not seek to generate returns by constantly having to trade in and out of businesses. Instead, they believe the Fund's long-term return will approximate the underlying economics of the businesses they own. They are bottom-up, fundamental investors. They are cognizant of macro-economic conditions and geo-political risks, however, they do not construct the Fund to take advantage of such events. AIM intend for the portfolio to be between 90% and 100% invested in equities. AIM do not engage in shorting, nor do they use leverage to enhance returns. The Fund's investable universe is global, and AIM look for businesses that have a market capitalisation of at least $7.5bn to guarantee sufficient liquidity to investors. |
| Manager Comments | The fund's Sharpe ratio is 2.55 for performance over the past 12 months, and over the past 24 months is 1.87. Since inception, the fund's Sharpe ratio is 1.78 vs the Global Equity Index's Sharpe of 1.5. Since inception in July 2019 in the months where the market was positive, the fund has provided positive returns 89% of the time, contributing to an up-capture ratio since inception of 102.88%. For performance over the past 12 month, the fund's up-capture ratio is 97.76%, and is 106.38% over the past 24 months. An up-capture ratio greater than 100% indicates that, on average, the fund has outperformed in the market's positive months over the specified period. The fund's down-capture ratio since inception of 74.34% indicates that, on average, it has fallen less than the market during the market's negative months. |
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10 Sep 2021 - Best and Less Group Case Study: How Do Private Equity Managers Make Money?
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Best and Less Group Case Study: How Do Private Equity Managers Make Money? Vantage Asset Management 03 September, 2021 |
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In the third of our case studies on how Private Equity managers make money and the importance of exits (Part 1, Part 2) we will examine a recent transaction that highlights opportunities that exist to transform assets that do not form part of a larger organisation's core strategy. Turnaround opportunities often represent the higher risk/return opportunities in the Private Equity universe, however a distressed business can present a great buying opportunity to a Private Equity manager where they have a unique insight into what the problems plaguing a business are and have a clear thesis on how those problems can be rectified. In a 2016 study by McKinsey "How private-equity owners lean into turnarounds", a comparison of the performance of 659 Private Equity backed and publicly owned businesses recovering from a distressed situation showed that the Private Equity backed firms recovered significantly faster than public counterparts. Their study showed that Private Equity backed firms on average recovered their EBITDA margin within 18 months of a negative quarter, much faster than public firms. McKinsey attributed this to Private Equity owners holding management teams accountable for driving a turnaround and the speed at which Private Equity backed firms decide upon and in turn, implement turnaround strategies. But not all turnaround opportunities come in the form of distressed businesses. Sometimes opportunity comes in the form of an "unloved" or non-core asset within a larger business that is undertaking a strategic change in direction. CASE STUDY: BEST AND LESS GROUP The Best & Less business was founded by Berel Ginges and opened its first store in Parramatta in 1965. Best & Less predominately sold basic products (socks, underpants, tea towels, t-shirts, etc.) and was known for its frugal in-store appearance, with minimal fixtures, and an advertising slogan of "You don't pay for any fancy overheads". Like most successful Australian retailers at that time, Best & Less opened new stores and transitioned into a national retailer. In 2012 Best & Less' ("BLG") new owner Pepkor put in place a new management team to reposition BLG and improve financial performance. As part of a renewed focus on product, BLG's strategy evolved, with the aim to be "famous for the baby and kids' categories" as well as for underwear. New design, buying and planning capability was added into these functional areas and purchasing directly from manufacturers increased. Further transformation of the business progressed from 2016 when the current CEO Rodney Orrock joined the business however after the acquisition of Pepkor by Steinhoff International, Best & Less was integrated into Steinhoff International's Australian furniture division which included the Freedom Group. During this period, BLG operated within a group that had a different focus in respect to strategic, operational and financial outcomes as well as capital allocation. Important elements of the BLG transformation program were put on hold, trading and inventory decisions were affected and sales and profits were adversely impacted, especially in FY19. Steinhoff International, through its Australian subsidiary Greenlit Brands, divested BLG to Allegro Funds in December 2019 after a strategic review of its holdings. Allegro Funds then put in place an experienced Chair to oversee the delivery of three significant outcomes:
During the period following Allegro Funds' acquisition, BLG successfully established itself as a standalone business, accelerated its business transformation and traded through COVID-19, during which BLG experienced continued sales growth. This occurred by bringing focus on the following key areas:
Under Allegro's turnaround program BLG has repositioned from a discount retailer to a value apparel specialty retailer with a 245-physical store network in Australia and New Zealand and an online platform across its two brands:
With approximately 50% of product sales being in the baby and kids' categories, BLG aims to be the "Number One" choice for mothers buying baby and kids' value apparel in Australia and New Zealand. Revenues have increased from $608.7m in FY19 to $663.2m in FY21, which includes a remarkable doubling of online sales in the last two years. More impressively, EBITDA was reported at $71.6m for FY21 up from $24.5m in FY19 and an increase of 165.2% for the year. This validates the effectiveness of the changes that Allegro and the management team put in place. During July 2021, Allegro completed the successful exit of BLG via an IPO. Best & Less Group (ASX: BST) listed on 26 July 2021 at a share price of $2.16, giving it a market capitalisation of $271m. Pleasingly BST has continued to perform since listing up 63c from its listing price at the end of August off the back of recent results well in excess of prospectus forecasts. Once fully completed the exit will deliver Allegro fund investors, including VPEG3, with top tier performing returns across a 1.7-year investment period. If you would like to share in the growth and ultimate returns derived from similar small to mid-market company investments, Vantage Private Equity Growth Fund 4 ("VPEG4") remains open until 30 September 2021. |
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Funds operated by this manager: Vantage Private Equity Growth 4 |
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10 Sep 2021 - A very good business
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A very good business Aitken Investment Management September 2021 |
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Testifying before the US Congress in 2010, Warren Buffett made the following comment:
Microsoft has been a top three holding of the AIM Global High Conviction Fund for several years now, and remains firmly entrenched there. There are numerous reasons for us having such high levels of conviction in the business, but among the highest was our belief that Microsoft possessed significant latent pricing power. Looking across Microsoft's suite of offerings, it has been clear to us for some time that the value their products and services provide their commercial clients has been increasing, while their prices have not kept pace. To our thinking, this was strategically shrewd, as adding new features and applications to the existing Office 365 and Microsoft 365 bundles meant that clients were continuously receiving greater functionality (and integrating it into their workflow) without being asked to dip into their pockets for the privilege. The fact that Microsoft held off on increasing their prices for nearly a decade provided it with - in our opinion - a 'hidden-in-plain-sight' asset that would create value for its owners at some point in future. (It also revealed to us that management has its priorities straight: first, look after your customers and make sure you indisputably create a consumer surplus for them; if you are successful at that, the returns to equity owners should take care of itself over time!) During August, Microsoft announced its first meaningful price increase for these bundles in many years:
Beyond the strength inherent to its own businesses, Microsoft remains exposed to several secular trends that we see as playing out over the next several years, of which higher incidences of remote working is but one.
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Funds operated by this manager: AIM Global High Conviction Fund |
9 Sep 2021 - Performance Report: Bennelong Long Short Equity Fund
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| Fund Overview | In a typical environment the Fund will hold around 70 stocks comprising 35 pairs. Each pair contains one long and one short position each of which will have been thoroughly researched and are selected from the same market sector. Whilst in an ideal environment each stock's position will make a positive return, it is the relative performance of the pair that is important. As a result the Fund can make positive returns when each stock moves in the same direction provided the long position outperforms the short one in relative terms. However, if neither side of the trade is profitable, strict controls are required to ensure losses are limited. The Fund uses no derivatives and has no currency exposure. The Fund has no hard stop loss limits, instead relying on the small average position size per stock (1.5%) and per pair (3%) to limit exposure. Where practical pairs are always held within the same sector to limit cross sector risk, and positions can be held for months or years. The Bennelong Market Neutral Fund, with same strategy and liquidity is available for retail investors as a Listed Investment Company (LIC) on the ASX. |
| Manager Comments | The fund's Sortino ratio (which excludes volatility in positive months) has ranged from a high of 1.29 for performance over the most recent 24 months to a low of -0.77 over the latest 12 months, and is 1.42 for performance since February 2002. By contrast, the ASX 200 Total Return Index's Sortino for performance since February 2002 is 0.49. Since February 2002 in the months where the market was negative, the fund has provided positive returns 64% of the time, contributing to a down-capture ratio for returns since February 2002 of -162%. Over all other periods, the fund's down-capture ratio has ranged from a high of 88.83% over the most recent 12 months to a low of -12.6% over the latest 24 months. A down-capture ratio less than 100% indicates that, on average, the fund has outperformed in the market's negative months, and negative down-capture ratio indicates that, on average, the fund delivered positive returns in the months the market fell. |
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9 Sep 2021 - 7 Easy Ways to Get Hurt
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7 Easy Ways to Get Hurt Yarra Capital Management August 2021 |
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In this latest Australian Equities Insight, Dion Hershan, Head of Australian Equities, looks at some of the easy ways for investors to get hurt in the current environment. With the market at ~7,600 (ASX 200) - up a stunning +67% (excluding dividends) from the nadir in March 2020 - it's pretty clear that complacency is creeping in. In fact, FY2021 the 'pandemic year' saw the ASX 200 up +24%, its strongest financial year on record. Complacency is observable in so many ways, and not just through SPACs, crypto, Robin Hood IPO'ing and becoming 'meme stock' etc. We are in a glass half full (arguably of Red Bull) environment where everything is perceived as 'good news'. Inflation is viewed one day as a sign of a strengthening economy, and the following day the lack of inflation is seen as a catalyst for more QE. In some respects, the lack of volatility in the market is unnerving. The VIX in the US is at 17, well below the 20-year average (19.7) and the 2020 crisis level (peak of 82). The S&P 500 is up +18% this year, with only two drawdowns of more than 4% (at -4.2% and -4.0%). With the economy and the consumer in good shape, it's difficult to make the case for a collapse or even a major correction. Clearly, though, there are headwinds emerging for markets. These include inflation, interest rates, stretched valuations and fading levels of government support. We are selective rather than bearish, we are mindful that there are some 'easy ways to get hurt' in the current environment:
With iron ore prices roughly three-times the 10-year average, mining companies are like ATMs at present. But as iron ore goes from US$200/tonne (vs
Valuation seemingly hasn't mattered for the last three years, evidenced by the top-quartile of the ASX 200 going from a P/E of 28 times to 44 times forward earnings. With momentum feeding upon itself, this period may well prove to be the exception to a long standing norm. If/when the wind changes, that top quartile of the market is likely the most vulnerable. Additionally, while almost everything looks cheap when interest rates are close to zero and investors are using 2-3% discount rates, it clearly won't always be this way. Valuations for a range of companies simply won't stack up when rates begin to move higher.
For so many reasons, 2020 wasn't a year that was in any way representative. Toll road traffic declines of up to 80% and supermarkets growing sales at >10% shouldn't be extrapolated.
As a command economy, China's government tends to follow through on policy. There were clear signs of overheating in China in 1H21, with recent directives to cut steel production, curtail property price growth, tighten credit, curtail speculation in commodities and cut emissions. These factors are an ominous lead indicator for commodity prices, which are largely being ignored.
While IPOs can represent compelling opportunities, they are one of the most asymmetric aspects of public markets. IPO candidates are invariably spruced up and over-hyped, with investors forced to make quick decisions based on limited information and rationed access to management. There are more than a few examples of high profile IPO duds which should be burnt into investor memories.
With the flurry of recent M&A activity (e.g. Spark Infrastructure, Sydney Airport, Afterpay etc.) it's tempting to speculate and invest on who might be next. That's like long-range weather forecasting: you might get one right but it's probably more luck than genius. You need to buy businesses on fundamentals; it's dangerous to assume there is a 'greater fool' who will buy out a weak business at a large premium.
The ASX 200 is narrow; at this point four banks and the three iron ore miners are 61% of aggregate earnings. Both groups rely very heavily on unsustainable factors, with iron ore prices three-times normal and bad debts at their lowest levels on record. It's critical to look beyond the majors and be able to tactically shift where required. Our strong advice is to enjoy the moment but don't extrapolate it. There is a graveyard full of commentators that have tried to call turning points - I won't attempt to! - but we would encourage investors to take a more balanced view. At Yarra we aren't getting caught up in the hype of a bull market driven by a narrow group of factors. The coming years might well be defined by what you chose to avoid owning. We continue to be excited about long term holdings in the portfolio with great medium to long-term potential such as TPG, Link and Worley. [1] Source: GS Investment Research, Jul 2021. |
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Funds operated by this manager: Yarra Australian Equities Fund, Yarra Emerging Leaders Fund, Yarra Enhanced Income Fund, Yarra Income Plus Fund |
