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Firstlinks newsletter - 19 November

Graham Hand  |  19 Nov 2020Text size  Decrease  Increase  |  
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Underperforming asset managers receive little sympathy from critics and investors, but what does 'underperforming' mean? It's normally a reference to not matching a benchmark, but what should a fund manager do if the market is behaving in a way that is totally anathema to a belief in how companies should be priced? Change their style or tough it out? Most supporters want style consistency, even if it does not work in the short term. Investor choosing a fund manager should consider it a long-term commitment, at least seven years.

More than ever, this is where many of our highest-profile fund managers find themselves. For example, the tech-heavy NASDAQ index has doubled in the last two years, as shown below in the blue line. If earnings had doubled in the same period, many 'value' managers who focus on fundamentals such as quality earnings would have invested more in tech companies.


Source: Yahoo Finance

But NASDAQ company earnings have been flat for at least two years, as shown below highlighted in red. This is called 'multiple expansion', because buyers are paying higher prices as a multiple of the earnings. The NASDAQ price gains are driven by reductions in interest rates and excess liquidity, not higher profits. Yes, the period from 2009 to 2015 was excellent for tech earnings, but not more recently, and yet prices continue to run.

NASDAQ growth

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Our interview with Graeme Shaw of Orbis explores what has happened and why he thinks we are at a critical moment in investing history. As he says:

"But if you look in the last three years, the multiples applied to those businesses have expanded much faster than the underlying earnings. That's where a lot of the overvaluation has come from as everyone gets over excited and things start getting silly and that's what's happened."

On the other side of the coin, many managers have benefitted from the tech theme, including some featured in Hearts and Minds Investments (ASX:HM1), chaired by Chris Cuffe. Its portfolio is constructed around the recommendations from core and other selected fund managers who present at the annual Sohn Hearts & Minds Investment Leaders Conference, held last week. The additions to the portfolio for 2020 are listed below. At HM1, instead of charging an investment management fee, a donation is made to medical research.

HM 1 15 stock ideas

In this week's other articles, Adrian Harrington explains why there is life in the office market in a post-COVID world as businesses assign more space per employee. Anyone who has worked with me knows I was never a fan of activity-based working so it's good to see the end of that counterproductive idea.

Matt Rady reports on mid-pandemic research on retiree reactions to the investment climate. They are experiencing doubt about how long their money will last and their ability to withstand further losses. On a related theme, Max Pacella looks at intergenerational wealth transfers, especially as the Baby Boomers age and pass money to people with different spending and investing habits.

Many retirees expected to rely on bank dividends to compensate for negligible rates on cash and term deposits, and the surprise cancellation or reduction in dividends in 2020 was a shock. Hugh Dive checks the recent bank results and their potential to restore profits and dividends. Who will win in 2021?

While more investors are looking to bonds and bond funds for the defensive allocation in their portfolio, some of the terms are still confusing. I dislike references to running yield because it ignores the capital loss when a bond is purchased at a premium. Nathan Boon goes back to basics including four tips on the outlook.

In the week when the ASX has been plagued by service disruptions which also affected its competitor, Chi-X, Ash Hart expains the value of real-time data and how Application Programming Interfaces (APIs) have become crucial to our investing, and what is required in a good software interaction.

This week's White Paper from Shane Oliver of AMP Capital gives five reasons why Australian shares are likely to outperform in the next year. Most Australian feel lucky to live here during the pandemic, and Shane suggests it also a good place to invest.

According the The Australian today, the Government will release the Retirement Income Review tomorrow. The article claims the Review warns:

* tax concessions for superannuation will exceed the cost of the age pension by 2050
* increasing the super guarantee to 12% by 2025 would widen the equity gap between genders
* wage earners and women would pay for the increase from the current 9.5%.

The Government is not expected to respond at this stage. The newspaper also says there will be a delay on the decision to increase SG to 10% until the May 2021 Budget.

is the editorial director of Morningstar Australia.

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