Why do industry vets in multi-asset not form boutique fund companies as often as managers in asset-specific categories? Australia has hundreds of single asset fund managers with their own boutiques and backers, but none are multi-asset ones. There are no good asset allocators? More on that in a bit, because the responses are instructive when it comes to investing.
In the meantime, another Federal Budget has been and gone, and while it confirmed changes already happening, there wasn't a lot of new news on superannuation and retirement. I know I’ve never seen a Federal Budget with less to say about superannuation in my 20+ year career, as Meg Heffron said in her reply to this. The inflation forecast, given nascent energy cost and wage momentum, also seems optimistic, with the Treasury projecting a decline to 5.75% a year in 2022/2023 and then 3.5% in 2023/2024.
The largest was blocking the off-market share buybacks under which franked dividends are "streamed" out of the company to shareholders, an idea recently utilised by BHP and the big banks. The approach has enabled a return of capital that is largely based on a franked dividend, as this week’s article by Kevin Davis and Christine Brown takes up.
Then yesterday’s Australian inflation number came out and confirmed what we knew. Prices are flying higher at the fastest pace in three decades at 7.3 per cent over the year to the end of the September quarter. It is subsuming all investing decisions and this week CBA’s Gareth Aird revisited his 3.1% peak cash rate forecast:
“The bottom line is that inflation in Australia is running red hot at the moment it is in many parts of the world and we expect the RBA to respond with another hike in the cash rate at next week’s Board meeting.” Our call has in fact been that the RBA will hike in full one or two further 25bp and then remain on hold for an extended period (base case was one further 25bp hike in November taking the cash rate to 2.85%). Today we price in a second 25bp rate hike in our central scenario for the cash rate, i.e. the peak in the cash rate is 3.10%.
Evidence abounds that it is an unusually tough time to be investing, as Jonathan Ruffer, chairman of Ruffer Investment Company, a large UK hedge fund, noted the other day:
“In my 45 years in the business, I do not remember any time when so many risk factors were in plain view. There seems to us not one reason to own U.S. equities now. Markets remain too high, and protection is pricey in an increasingly weary world; good sense advises treading cautiously, and in safe places. In a world where people can’t afford to pay their commitments as they come due, forced selling sets prices. “But among risky assets such as equities, one of the counterintuitive things in a liquidity crisis is that the things that people think are safest and a bit more liquid go down like a ton of bricks, because people have to sell what they can, not what they want,” he added.
It has been balanced funds that have surprisingly disappointed in 2022, normally when the equity market falls it is accompanied by a fall in interest rates alongside it while the bond market goes up and hence it buys a 60 per cent growth/40 per cent defensive portfolio. But both bonds and equities have fallen this year, and returns in the US market are among the poorest in nearly 100 years.
When one first starts investing, every professional must seem smart. They’re so certain and sure of themselves. But as we grow older, we gradually discover that the ‘experts’ are also clueless about how markets function. Gerald Loeb, was a writer and founding partner of E.F. Hutton & Co., a prominent Wall Street trader and brokerage firm. He passed away back in 1974 but what was the conclusion of a 60-year career in share market investing?
‘The biggest thing I’ve learned over the past 40 years in Wall Street is how little I know and how little everybody else knows.’ And human nature being what it is, a person who bought a stock at the wrong time is most likely to compound his mistake by selling it at the wrong time.
“How little everyone knows …” So here’s a variation on the question. And why does it seem to be portfolio managers who have defected from their former motherships to start their own boutique funds constantly quoting from the same hymn sheet (whether it’s global equities, domestic bonds, property or Taronga Zoo) and never anyone who has ever operated across more than one asset class? Most of the return in a balanced portfolio is derived from asset allocation rather than stock selection, and yet no one leaves a large fund manager with their high-profile personal reputation to set up their own boutique multi-asset fund.
I asked Chris Cuffe, one of the fund industry’s most successful talent pickers and asset allocators during a long career. Chris had a rapid four-word response for me: “Nobody can do it.” But it does over long enough time span” and he referenced an article he wrote back in Firstlinks entitled “Why we can’t resist tactical asset allocation” and quoted Nobel Laureate Daniel Kahneman who said:
“We have a hard time suppressing that very strong instinct that what now makes sense in retrospect must have been predictable in foresight back then. The myth that we know the past shields us from the discomfort of acknowledging our ignorance of the present, and of the future.”
He added that multi-asset funds received strong flows in the early times of the managed fund sector, only to be replaced in their asset-allocation services by financial advisers. He had initially structured his charitable Third Link Fund in 2008 as a multi-asset fund which he believed would gather the most support, but switched it in 2012 to all Australian equities because of the significantly higher levels of sector-specific demand.
I also asked the team at Pinnacle Investment Management why asset allocators don’t establish boutiques. Pinnacle has relationships with 15 boutiques, and more than $80 billion in assets under management, and is always searching for investment talent. Responding, managing director Ian Macoun said:
“From our point of view, we don’t believe there is a large market for that service among the ‘mainstream’ retail or institutional segments. Institutions, financial advice groups and retail platforms have their own in-house professionals to make the asset allocation decisions, and no shortage of existing outfits that can provide advice to them if they wish to seek external specialised advice. It would be a different situation in the ‘direct to retail’ market but that is a very tough market to break into.”
Plus Chris Meyer, the Director of Listed Products at Pinnacle who has steered several boutique funds onto ASX listings, chimed in too:
"1. Our clients are generally looking to boutiques for best-of-breed within each individual asset class rather than to outsource the asset allocation.
2. Multi-asset funds haven’t (at least historically) done all that well in the Australian market either beyond say more captive retail distribution but where it has worked, it has worked very well in the default super channel where firms like say AMP or Australian Super build out those multi-asset funds themselves (sometimes platforms using external managers, sometimes in-house capabilities). Advisers simply aren’t looking for multi-asset boutiques/allocators unless the IAC (independent advice channel) takes up Multi-asset funds more."
So nobody really has market-leading skill at asset allocation, anyway, which is anyway done within the larger super funds on the advice of asset consultants and through in-house staff. Even then, asset allocations are ‘range bound’ in very narrow ranges. It’s too much business risk to be working outside the band, especially considering APRA’s performance test.
Think about the market right now where the US market Total Return Index (in AUD terms) is down 10% since the start of the year. It has recently surged in anticipation that despite a further 0.75% Fed funds hike in November 2022, the December hike will be a mere 0.5%. Is this a market bottom or a ‘bear market rally’? We all ask the question, but the answer can only be known in the rear view mirror.
With the market in limbo, not doing a lot, many investors have retreated from equity exposure and we explore alternative spots for cash instead of getting crummy returns on money in transaction accounts of the big banks with six rules you've gotta follow.
Oh, And just in case anyone thought that my teaching about cba last week was evidence of lack of technical knowledge on my part, I finally heard back from cba. The answer to how to open a TD account online is to go in branch.
“As per the website we should be able to open a TD online in personal or SMSF name.I guess, it's time to bring the details about this feature and release to the transactional channel as advertised on the website.” We understand this process is not working successfully in NetBank at the moment and is giving an error message when attempted (and perhaps on subsequent attempts). As far as this investigation is concerned I cannot at this stage at this time give any possible date the investigation might be resolved. I'm sorry and thanks for understanding. I can confirm that you can continue to open Term Deposits in the branch as you normally would though.
Man, opening a TD with an existing customer should be a walk in the park. But what happened next was even worse for my CBA cash account. As I investigate my story of this week, and wrote last week, I found out the account that my CommSec Trading Account is linked to (and CommSec doesn't want to answer questions about as it's a CBA account), is earning interest on a scale lower than the proper SMSF interest rates as per the below. CBA/CommSec has always been aware that this was an SMSF account, and the name of the account is quite explicitly my super fund. CBA has the gall to say it’s up to me to request it be reversed.” You'd think the recent $20m fine to CommSec for 'systemic compliance failures' would be enough of an incentive to stamp these out? I have requested CBA to recompute my interest at the higher rates.
