Investment Perspectives: Thinking about the cycle

Quay Global Investors

August 2023

Being an investor in listed global real estate has been tough of late. With expectations of a global recession caused by unprecedented interest rate increases, sentiment towards listed global real estate has soured. 

Funds operated by this manager:

Quay Global Real Estate Fund (AUD Hedged), Quay Global Real Estate Fund (Unhedged)

For more insights from Quay Global Investors, visit quaygi.com

The content contained in this audio represents the opinions of the speakers. The speakers may hold either long or short positions in securities of various companies discussed in the audio. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the speakers to express their personal views on investing and for the entertainment of the listener.

ESG in 10: Episode 9 -

The Australian Green Bond Program, with Ardea

Fidante Partners

July 2023

Funds operated by this manager:

Are You a Trader, an Investor, or a Hybrid of Both?

Marcus Today

July 2023

Ask the average investor how they invest and you will get one of two answers. 'Fundamental Analysis' or 'Technical Analysis', and never the two shall meet. It all goes back to Benjamin Graham, who wrote 'The Intelligent Investor' in 1949, the Bible of Fundamental Analysis. In there was the line: "We do not hesitate to declare that (Technical Analysis) is as fallacious as it is popular". In that one sentence he erected a wall between Fundamental and Technical Analysis, or to put it another way, between investors and traders, and it has stood for 62 years, with the proponents of both seemingly hell bent on putting each other down, and they both have their points.

The Bad Bits

• Are embarrassingly useless at 'timing the market'. They declare that it can't be done. How ridiculous. They are going to wear the next GFC right on the nose.
• Can't sell. They don't. They don't know how.
• Aren't disciplined. They don't have any discipline. They'll watch stocks get destroyed without doing anything about it, and the bigger the loss, the more likely they are to persist with it.
• Aren't vigilant. They 'set and forget'. Forget! About their money! What planet are they on?
• Don't have a Trading Plan. They don't have one. Incredible. Net result, they let their losses run and cut their profits. The complete opposite of what they should be doing.
• Are emotional. They believe the things that make them feel good, and disregard the things that make them feel bad. They listen to stock tips. They invest on the thinnest of evidence. It's not rational.
• Are 'lemmings'. They get in when it's obvious, and get out when it's obvious. Put another way, they buy at the top and sell at the bottom.
• Are often wrong. Do you know how many flawed assumptions go into Fundamental Analysis, into those highbrow calculations of intrinsic value? Rubbish in, rubbish out, no matter how smart the calculation.

• Rely on past prices as a predictor of future prices, which is ridiculous.
• Know nothing about a company. They might as well trade cabbages.
• Are short-term, which means they'll never see the magic of compounding returns.
• Don't care about dividends and miss out on franking.
• Will never get hold of a great stock and keep it forever because they fidget.
• Can't actually time the market anyway, despite professing to do so.
• Are 'lemmings'. They just look at what everyone else is doing and follows them.
• Have to spend all day doing it, so don't have a life.
• Are out of touch. Many technical devotees use their reliance on charts as an excuse to never read or watch stock announcements, the news, politics.
• "Have you ever met a rich technical analyst?"

But the truth is that they both have a lot to learn from each other, and if we look at the positives instead of the negatives, you'll see why.

The Good Bits

• Are not just technical analysts, they are traders(there's a difference), which means they have trading skills. These skills are universal, and are as useful for investors as they are for traders.
• Are not short-term. Trading techniques can be applied over any time frame. Apply them over minutes and hours, and yes, it is gambling. Apply them over days, and it is trading. Apply them over weeks and months, and it is investing. You can easily adapt trading skills to any investor.
• Have exactly the same ambition as a long-term investor, as Warren Buffett even, the ambition to buy a stock that goes up forever. They are doing exactly the same thing.
• Have a Trading Plan, and because of that, they never miss a night's sleep.
• Are unemotional. They know what they are going to do at all times, because from the moment they buy a stock, they have a system.
• Are decisive. Traders never prevaricate, they never agonise, they know what to do, they decided way before the trade was even opened.
• They are honest. They know that making money in the stock market is about buying stocks with a high probability of going up. It's not about predicting the future. No-one can do that.
• Are not proud. They know that things will change, that they will get themselves into a pickle. The difference is that when they do they act, they don't stand by some grand but flawed declaration about the future through thick and thin.
• Are not 'lemmings'. On the contrary, they see the market as a battlefield, as combat, one on one. They know they are in a war with the herd, and because of that, they retain an independence of mind and action.
• See trading as a business, and they analyse their success and failure like a business. They constantly adapt, educate, and improve.

• Are good at identifying companies that make money, and that's the root of it all in the long-term.
• Are good at identifying rubbish companies.
• Can identify good management.
• Can identify sector trends.
• Are well read.

The Bottom Line

As any experienced trader will tell you, there is no Holy Grail for success, no one approach that works. Amidst so much grey and so little black and white, the game is simply about trying to get an edge on random outcomes and to do that you would be a fool not to use every tool in the shed, and that's the point, every tool. Not one or the other, but every. You dismiss nothing and learn everything, and this is where so many people go wrong. They decide they are in one camp or the other when it would be far more effective to be in both. The bottom line is that you make a big mistake writing off traders as an investor, or investors as a trader. They both have some good bits and some great bits. You would do well to explore both.

Author: Marcus Padley, Founder of Marcus Today

Funds operated by this manager:

Marcus Today Equity Income SMA, Marcus Today Growth SMA

Political lobbying risks in the US

4D Infrastructure

July 2023

In recent years, political controversies involving US utility companies have caused significant concern for investors.

There have been instances where lobbying activities have contravened the law and resulted in companies and individuals being criminally investigated and punished. Other instances, though not necessarily criminal, have also resulted in negative market reactions. In both scenarios, political lobbying controversies have been difficult for investors to foresee and, therefore, difficult to avoid.

Utilities' role in US politics

Utilities are responsible for the delivery of power and gas from source to end-customers, and are considered key players in the energy supply chain. As a result of the importance of both energy prices and reliability to businesses and consumers alike, utilities are central to economic growth, efficiency and quality of life in their operating jurisdictions.

For these reasons, utility operators believe their corporate responsibility dictates that they should have a voice in the development of energy legislation. With energy legislation and regulation established at both federal and state levels in the US, lobbying is considered important in ensuring that legislation is in the best interest of all stakeholders, including shareholders.

Risk to investors of inappropriate lobbying

Lobbying undertaken by utilities in an open and ethical manner supports a more thorough understanding of energy markets for legislators and a better outcome for both customers and shareholders. The obvious concern is that utilities and/or management teams lobby for their own self-interest or solely that of their shareholders, with little consideration to other stakeholders such as customers. Problems eventuate when lobbying contravenes the law and/or ethical expectations.

Companies should have ethical charters outlining the values that guide how they operate, including how they interact in the political sphere. The old saying, "would you feel comfortable with your behaviour being published on the front page of the newspaper" is also a good guide for what constitutes ethical political lobbying.

Potential violations of the law are often difficult to identify until it's too late and enforcement agencies are involved. Regardless of guilt, once a review is underway, the utility in question will feel pressure as the process evolves. This potentially includes:

1. a lengthy process in which share prices remain deflated;
2.  significant financial penalties if found liable;
3. management disruption as changes are made and teams focus on remedial actions;
4. disruption to regulatory/legislative relationships held by the company; and/or
5. reputational harm which is difficult to quantify and doesn't go away for an extended period of time.

Utilities across the world are bound by a social license to operate. Regardless of strict legality, that social license may be tarnished based on the public's perception that the company has received special treatment from legislators/regulators based on aggressive/unethical lobbying activities. This scenario could result in public backlash, and regulators/legislators taking detrimental action against the utility to reinforce their independence. This can take the form of fines, difficult regulatory decisions, out-of-cycle regulatory reviews and irrational oversight. Negative financial ramifications and poor market sentiment are the result, and re-establishing customer faith in regulators and utilities takes a long time.

4D's approach to political lobbying risk

Due to the high legal, financial and reputational risk associated with lobbying activities, 4D undertakes significant due diligence to identify utilities that are at higher risk and steps being taken to mitigate this risk.

Internal controls

Political lobbying should be guided by a political engagement policy or a similar document recognised by the company board. It should be easily publicly available and outline a set of criteria guiding lobbying efforts and political contributions, and provide authority for contributions and oversight.

Best practice for authority of contributions is for the annual political contributions budget to be developed by the corporate affairs team (or equivalent). The individual contributions should be reviewed by a legal professional and signed off by the most senior executive in the team. It's often a good idea to include an executive or leadership committee review it to ensure widespread knowledge and acceptance of contributions. In our view, large contributions should be reviewed and signed off by the CEO (~>$1 million).

The board audit subcommittee should also review contributions on behalf of the board. A recommendation should then be provided to the board as part of that oversight. Any newly planned contributions should also be reviewed by an audit committee.

This ensures that senior leadership approve all contributions, approvals involve multiple parties, and the board has ultimate oversight.

Transparency

Ensure public transparency of all contributions to individual political figures and parties, political action committees (PAC), other tax-exempt structures (such as 501(c)4 structures), trade associations and political consultancy/advisory groups.

Stakeholders should have access to all internal control and governance documents relating to political engagement.

Appropriate size of contributions

The size of political contributions should be moderated so that they don't give the impression that a political favour is expected in exchange for the contribution. Many utilities have outlined that any individual contribution over $1 million requires CEO sign-off, suggesting that this size of contribution is rare.

Overall contributions need to be moderated as no financial return should be expected on these funds - it should be perceived more as a cost, rather than an investment with the expectation of receiving something in return.

Focus on the utilisation of structures for contributions

Some tax-exempt structures provide anonymity to contributors. Companies should seriously question why they need/prefer anonymity when making a contribution. Generally speaking, such structures have attracted scepticism from the media and stakeholders, and should be avoided unless there is a specific reason for their use.

Some utilities in the past have engaged political consultancy groups. These groups have historically provided anonymity in political lobbying. Interactions with these groups should be transparent internally and externally, including taking meeting minutes for all interactions. Companies should be very clear on their motivations for engaging such groups, and they shouldn't be considered as vehicles to undertake clandestine political manoeuvres.

US federal election laws prohibit corporations and labour unions from making political contributions to federal candidates and national political parties. As a result, companies often use their own, or third party, PACs to make contributions to individuals and parties.

'Pay for play' legislation

Some utility management teams suggest that when a company makes significant contributions to support or oppose a particular ballot measure, it can be interpreted as a 'pay for play' situation. Rightfully or wrongfully, this could be perceived as bribery or a quid-pro-quo arrangement. Best practice would be to lobby through trade associations or PACs with correct governance practices in place to avoid any direct link between the company and an individual ballot measure or proposal.

Third party verification of lobbying controls and practices

Third party verification of companies' political disclosures and practices can support investors' due diligence efforts. One of the more well-known verification groups is the Center for Political Accountability (CPA), which releases the CPA-Zicklin Index annually. Using 24 metrics, or "indicators", the CPA-Zicklin Index assesses companies' disclosure practices, spending and accountability policies for utilisation of corporate funds to influence elections. It does not address company spending on lobbying or PACs.

4D's actions post lobbying controversies

Recent lobbying controversies have influenced our decision to divest companies from our funds. We have exited positions based on the likelihood that a controversy violated the law, disrupted relationships with regulators and stakeholders, and/or there was a lack of definitive action from boards in identifying and rectifying flaws in lobbying controls, processes and disclosures. By contrast, we have also retained positions where our due diligence suggested the above negative thresholds were not violated. Every situation is considered on a case-by-case basis involving internal due diligence as well as engagement with the company in question.

As part of our research into political lobbying best practice, we reached out to companies who rate highly on the CPA-Zicklin Index for comment on this paper and their approach to lobbying. Two such companies in Southern Company and CMS Energy provided their feedback below.

"CMS Energy is ranked First Tier in the CPA-Zicklin Index. We are engaged in the political process, supporting pragmatic policies that are focused on safe, reliable, and affordable energy for Michigan. Our code of conduct and other policies strictly prohibit impermissible political activity, and we have strong controls and oversight established to ensure ethical compliance with all relevant laws. We include more information regarding our political engagement on our website." - CMS Energy.

"This paper highlights the tangible benefits of a clear and comprehensive approach to political disclosure and accountability. Southern Company takes pride in our status as a Trendsetter in the CPA-Zicklin Index of Corporate Political Disclosure and Accountability as we seek to achieve optimal outcomes for our customers." - Southern Company.

Funds operated by this manager:

4D Global Infrastructure Fund (Unhedged), 4D Global Infrastructure Fund (AUD Hedged), 4D Emerging Markets Infrastructure Fund

For more information about 4D Infrastructure, visit https://www.4dinfra.com/

^{The content contained in this article represents the opinions of the authors. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader.}

Webinar Podcast | Infrastructure Funds -

Analysing the Opportunities and Risks

FundMonitors.com

01 August 2023

Listen to the podcast to discover the key insights and opportunities in this dynamic investment landscape. In this informative 45-minute session, we explored the potential benefits and risks of investing in infrastructure funds and uncovered the various types of infrastructure assets, including transportation, energy, and social infrastructure.

Our panel consisting of Sarah Shaw from 4D Infrastructure, Ben McVicar from Magellan, and Matt Lorback from Atlas Infrastructure also delved into the regulatory and policy considerations impacting infrastructure investments.

In Conversation with Airlie's Analysts

Airlie Funds Management

July 2023

Airlie Australian Share Fund Portfolio Manager, Emma Fisher, engages in a conversation with Airlie's senior analysts, Vinay Ranjan and Joe Wright. Emma discusses the performance of the Australian market during the past 12 months and asks Joe and Vinay to share insights on how some of their stocks have performed during the year within the Fund. This includes Mineral Resources, QBE Insurance and James Hardie.

Funds operated by this manager:

Airlie Australian Share Fund

Important Information: Units in the fund(s) referred to herein are issued by Magellan Asset Management Limited (ABN 31 120 593 946, AFS Licence No. 304 301) trading as Airlie Funds Management ('Airlie') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement ('PDS') and Target Market Determination ('TMD') and consider obtaining professional investment advice tailored to your specific circumstances before making a decision to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to an Airlie financial product or service may be obtained by calling +61 2 9235 4760 or by visiting www.airliefundsmanagement.com.au.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain 'forward-looking statements'. Actual events or results or the actual performance of an Airlie financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.

This material may include data, research and other information from third party sources. Airlie makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Airlie. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon.

Any third party trademarks contained herein are the property of their respective owners and Airlie claims no ownership in, nor any affiliation with, such trademarks. Any third party trademarks that appear in this material are used for information purposes and only to identify the company names or brands of their respective owners. No affiliation, sponsorship or endorsement should be inferred from the use of these trademarks.. This material and the information contained within it may not be reproduced, or disclosed, in whole or in part, without the prior written consent of Airlie.

Do they have your back or just your back pocket?

The fun, games, and fees of equity investing

Collins St Asset Management

July 2023

FY23 recap: ASX 200 defies the bears to end up +10% over last financial year 

It is often said that:

When someone with money meets someone with experience, the person with the experience gets the money and the person with the money gets an experience.

For equity investors, regardless of whether or not they choose their own investments or outsource some or all of that responsibility to an external manager/adviser, this remains a very real and important risk to be on top of.

Many Directors and Management teams do not run companies for the benefit of shareholders despite all of the claims and promises of future gold and glory laid out in glossy annual reports. 

Fat salaries for start up company Directors, gifted equity to management in large established businesses and all manner of perks and parties along the way are, all too sadly, par for course.

To that end, its important to understand the governance structure of a company and the way in which senior decision makers are remunerated before deciding whether or not to invest. 

Some key questions we at Collins St Asset Management seek to understand before deploying capital include:

1. Does the Board have a remuneration committee that is chaired by a non-executive Director with a majority of committee members also sourced from outside of the company's management team?

   As obvious as it may sound, you don't want Management to be voting on their own pay rises and setting their own performance targets each year or having the ability to unduly influence the outcome.

2. What metrics are remuneration linked to and what sort of behaviour does is being incentivised?

   Increasing revenue may, for example, sound like a worthy goal but if all it incentivises is excessive levels of new debt being taken to fund dubious bolt on acquisitions then it may (all things being equal) be a red flag to watch out for.

3. Do the timing of option exercise dates line up with the timeframe for key deliverables to be achieved?Are any shares subsequently purchased via the exercise of the option subject to some form of escrow?

Sadly, a rolling stone gathers no moss in much the same way as an upwardly mobile executive can suffer no financial pain by moving from one company to the next just before the next crisis is uncovered.

Of course, Directors and senior Management are not alone in their pursuit of cushy rent-seeking corporate opportunities.  Whilst many intermediaries in the funds management space are often no better, there are a variety of fee models on offer which invariably incentivise different behaviours.

The table below provides an overview of some of the different ways professional fund managers may seek to charge their clients:

Overview of fee structures

Author: Rob Hay, Head of Distribution & Investor Relations

For wholesale investors only

Funds operated by this manager:

Collins St Value Fund, Collins St Convertible Notes Fund