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Printed: 21 June 2024 10:31 AM


29 Jul 2022 - Hedge Clippings |29 July 2022



Hedge Clippings | Friday, 29 July 2022


It's all doom and gloom on the inflation / interest rate / recession front, and at least the newly installed Treasurer isn't pulling any punches.  One could be cynical and say "why should he" when he can genuinely claim no responsibility, and can also point to the fact that compared with data from the US and Europe, and just about everywhere else in the world, relatively speaking we're all in the same boat - even possibly traveling better than most.

Dr. Chalmers is correct in saying most of the inflationary pressures are external, and is sensibly hosing down expectations from some quarters for wage rises. Provided the wage/price spiral doesn't take hold, inflation will get worse - but not much worse, and interest rates will rise further - but in our view not much more - simply because the economy, and property in particular, is so leveraged to any rate rise after they've been so low for so long. Which of course is part of the problem.

The sad news is we're all going to have to get used to it, and discretionary spending is going to suffer. Unfortunately for those without the luxury of discretionary cash to spend in the first place, that's going to be tough.

Parliament got down to business again this week and it didn't take long for the newly installed opposition to do what we suppose to do - namely oppose everything and anything the government's trying to do, even if Peter Dutton did look stupid when doing so. Luckily Scomo wasn't there, as that would have been a further distraction, and probably more than a little embarrassing for him, although we somehow think his hide is thick enough that he wouldn't care. Scomo was overseas warning against the approach and rise of China's influence in the Pacific, and the reaction to his comments is likely to be insignificant if Nancy Pelosi lands in Taiwan. Mr. Xi doesn't like losing face, and one would imagine the US can't afford to back down either, so our only advice is to look out!

Turning to the performance of managed funds, hopefully a less contentious subject and one we know a little more about than diplomacy. An article in today's AFR, with a misleading headline "10 reasons fund managers underperform" when in fact the list was 10 reasons investors underperform. In our experience, the reasons many investors underperform is that they choose the wrong fund manager, or don't diversify sufficiently.  Maybe we're being a little pedantic, as the sub-editors role is to write a headline to grab the reader's attention - which in our case, it did.

According to the AFR article, and based on a US data set of 2,000 funds, only 32% of funds outperformed their benchmark in FY2021, and only 33% outperformed over 5 years. As far as AFM's dataset of Australian funds is concerned, 65% of Equity funds outperformed the ASX200 total return over 1 year, 64% over 3 years, falling to 48% over 5 years.

As we always point out, averages are dangerous - if your head's in the freezer, and feet in the oven, your temperature is probably average. The challenge is choosing the right manager - or as above, diversifying across managers, strategy, sector, and asset class.

The other important factor is that different funds and their respective strategies perform differently in different market conditions, and investing in managed funds is a long(er) term exercise. This week's video interview with three equity managers - David Franklyn from Argonaut (resources), Rob Gregory from Glenmore, and Rodney Brott from DS Capital (both small to mid cap equity managers) is a case in point in a market which is down 10% YTD, and 6.5% over 12 months. Whether the market has factored in the bad news Dr. Chalmers is alluding to or not only time will tell, but it's worth noting that markets tend to move ahead of, not behind the economy.

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