I have been grappling with the question ever since. My first reaction was to quote the data point that over a long time period like 10 years, ~80% of large equity managers underperform their benchmarks and even the 20% in the so-called winning bucket have a 1-year period where they are underperforming, and 85% over a 3-year period. My first point was that a fund manager must be resilient and be a consistent performer and someone who can absorb and explain quarter after quarter of not delivering.
An investor who comes into the fund at the wrong time can have many bad years and decide to give up before the fund manager has a chance to turn it around. Andrew Mitchell of Ophir actually explained this much more clearly almost a year ago and over some 12-month period in the 10 years, more than half of this elite of fund managers underperform by a staggering 10%+! Choosing a fund manager is a long-term call.
Fraction of leading funds over 10 years that lagged over any 12-month interval and by what amount
There’s a second shared characteristic in fund managers I really rate. They identify an early theme or trend and invest behind it. My first realisation of this was from Greg Perry when both in service to Colonial First State and his early foray into infrastructure and more specifically toll roads that paid him handsomely. Good fund managers read ebook restraints, pay attention to new thoughts, they are certainly inquisitive, do the science and discover businesses that can succeed from these tendencies.
Writing on Warren Buffett about Buffett notes:
“Buffett is said to read anywhere from four to six hours a day. For many busy people, it can feel like an insurmountable task to read all of those pages, but if you've got the time, the Oracle of Omaha says we 'read 500 pages a day.' That’s how knowledge works, he says it compounds like interest.”
It is not that easy to pick successful long-term active managers who justify their fees, rather than listening for the nice stock tips based on short-term valuation, we find the fund managers who are a decade ahead and can provide a solid case as to how they down the curve and why. It is not an "argument" for active over passive, but a core hedge fund/satellite portfolio, index as the core with talented managers to provide the extra kick and diversification.
Despite this, at the same Investor Conference two very successful funds management businesses debated the merits of Listed Investment Companies (LICs). We were reminded by Geoff Wilson of WAM how much he likes LIC discounts, but it was good to hear Chris Meyer of Pinnacle put the Antipodes experience another way (and Ellerston and Monash have made the same arguments). The 'Holy Grail' of LICs defined by both Wilson and Meyer were not one and the same. Can they both be right?
In a market threatened by the certainty of higher interest rates, it is natural to want to sell instead of ride it out. In 40 years of writing memos to clients, Howard Marks has never addressed the sell decision. It’s far more than the timing on the sale, but when do you get back in for the recovery out here?
Geoff Warren pursues that theme by questioning the role of cash. Cash suddenly looks really good when the market drops 10% and in 2022, it’s not unreasonable to think other assets won’t provide returns.
As our foremost economists shift their estimates of when the next cash rate rise will come (now as early as June in just a few months) Reserve Bank, is looking like it got a call on this wrong, pushing the horizon for rate increases out to 2024. Chris Bedingfield takes a fresh look at house prices focusing on the laws of supply and demand.
ANZ Bank put out its forecasts yesterday and they on the softer landing for house prices against high rates. The projection is up 8% in 2022 and down a reasonable 6% in 2023.
Still on property, I have to confess that I can be a real pain in the rear end when friends and family ask my advice on investments. A friend told me last week he was looking to purchase a flat in a holiday resort. One of its appeals is that you have access to the apartment when it’s not rented for short-term holidays. It made no sense to have the money on deposit earning nothing and shares were ‘too risky’, he said. This sounds like a situation many viewers seeking income in new places are pondering.
I’m sure he expected me to smile pleasantly and he would be off to purchase his fantasy with a view. Instead, I forwarded him this 2015 article. The numbers are not fresh so be aware of reading it as seven years old but the arguments stand. These resorts are a crapshoot.
As if that wasn’t enough potential headwinds for property, here is Gareth Aird of CBA Economics had to say this week:
“We bring forward our central scenario for the timing of the first hike in the cash rate target to June 2022 (from August 2022). We now forecast the cash rate to be 1.0% at the end of 2022 (after the June meeting, we have a 15bp hike (with two 25 bps in Q322 and another 25bp in Q422). We expect one more 25bp rate hike in Q1 23 taking the cash rate to 1.25% - our estimate of the neutral cash rate.
Market volatility also throws up opportunities, so Gemma Dale has checked on stocks that were at or near their 52-week lows at the time of writing. These stocks were firing hard as the market pulled out of COVID but then gave back much of their upside, and Gemma asks if they’re worth checking out again.
New research, to be launched on December 10, by the SMSF Association and the University of Adelaide calculates at what size SMSFs can compete with bigger funds, and why, again, diversification shows its worth. The ATO data on SMSFs was increasingly unreliable for the purpose of comparisons, researchers believe.
Western Asset’s White Paper this week focuses on global inflation, noting diverging recent inflation impulses, expectations for inflation paths in coming months and implications for bond yields.
In conclusion, here's a summary of the changes to superannuation rules that were legislated on 10 February 2022, all effective from 1 July 2022.
- Elimination of the monthly salary threshold of $450 that an employee must earn before they are entitled to the superannuation guarantee.
- Increase in the amount of voluntary contributions that will be eligible for release from super under the First Home Super Saver Scheme from $30,000 to $50,000.
- Reduced eligibility age for downsizer contributions that enable a contribution to super from the proceeds of selling a home from 65 to 60.
- Increase in the upper age limit for the bring-forward rule to be applied to non-concessional contributions from 67 to 75
There are also changes to the work test and exempt current pension income (ECPI) that are too complicated to summarise here, but which will be addressed in a timely manner.
