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Hedge Clippings | Friday, 27 May 2022
So the election (thankfully) is over. The result, with the benefit of hindsight, was predictable or at least hiding in plain sight. Whether one is pleased, disappointed, or couldn't care less would depend on your political hue - blue, red, green, teal, or yellow. Although he navigated the country reasonably safely through COVID, Scomo certainly stirred up some ill feeling across sections of the community who would normally have voted Liberal. Meanwhile, Albo didn't seem to be across all the economic facts, was sidelined for a week with COVID, and didn't appear to be the most inspirational of campaigners. However, it looks like he'll just get across the line in his own right, albeit with less than one third of the primary vote. Irrespective of one's view either way, having a clear winner is positive. Having laid out his policies, the new PM and his team should be entitled to get on with implementing them, without being distracted or blackmailed by minority groups with their own agenda. They'll be able to do that in the lower house. The Senate might be a different matter. So now we can get back to normal - or should that be the "new normal", the economy? In many ways, not much has changed. Debt levels are sky high at the household level, thanks to over a decade of falling interest rates, and, over the last couple of years, government COVID assistance thrown by the bucket-load at a willing individual and business community, whether it was needed or not. The problem with throwing bucket-loads of anything is that while some hits the mark, much of it misses and lands up being wasted - or adding to the mess. Market wise, sooner or later there was going to be a day of reckoning, with inflation back with a vengeance, aided by COVID, supply chain issues, and a war in Europe's backyard. Meanwhile, valuations in the tech/crypto sector in particular defied long term history lessons, and investors are learning, or being reminded of the lessons - or benefits - of diversification. Diversification can take many forms - from the simple (and not always very effective) investment in a broadly based low cost "index" fund to a concentrated fund investing in just 15 or 20 companies within the same index. However, depending on the skill of the fund manager, the concentrated fund might outperform in one market environment but significantly underperform in another. Thus logically, the careful or risk averse investor (those that hope for the best, but plan for the worst) spread their investments across funds to avoid manager risk, across strategies, and across asset classes. Diversification works well, as long as one considers the correlation between funds, strategy and asset class. In addition to correlation, a key indicator to consider is a fund's Down Capture Ratio, which in effect just measures correlation in negative markets. All too often, particularly in rapidly falling markets, diversification doesn't work if the correlation is high (as it is at present) between equities and bonds. With over 650 funds on the Fundmonitors.com database, there's the dilemma, or difficulty, of too much choice. In rapidly changing market environments, particularly in negative or falling markets, make sure that your fund selections are not only diversified, but also not overly correlated. For instance, including long/short funds, or in the current environment, funds investing in "clean energy" minerals such as Argonaut's or Terra Capital's focus on lithium or nickel. Outside equities, alternatives such as Laureola's Life Settlements, which has zero correlation to any other market or asset class. News & Insights A brave new world | Kardinia Capital Equity risk premium | IQuay Global Investors Revenge Travel | Insync Fund Managers Infrastructure assets are well placed for an era of inflation | Magellan Asset Management |
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April 2022 Performance News Bennelong Concentrated Australian Equities Fund Equitable Investors Dragonfly Fund |
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