The long and short of an absolute return fund

--  |   24/03/2021 Text size  Decrease  Increase   |  
email_fwd
<p><strong>Lex Hall: </strong>Hi, I'm Lex Hall for Morningstar. The Bennelong Kardinia Absolute Return Fund outpaced the market by a pretty healthy margin last year, so I thought I'd catch up with one of its portfolio managers, Kristiaan Rehder, to talk about strategy, to talk about performance and of course, to talk about what lies ahead.</p> <p>Hi, Kristiaan. Welcome to Morningstar. Thanks for joining us.</p> <p><strong>Kristiaan Rehder:</strong> Hi, Lex. Thanks for having me on your program.</p> <p><strong>Hall: </strong>Not at all. Now, in the past year, the fund returned 6.72 per cent versus 2.23 per cent, which comprises the RBA cash rate plus 2 per cent and since inception in May 2006, it's returned 8.83 per cent, which compares to 3.36 per cent. How does a fund&mdash;how do you beat the market like that? Is that what an absolute return fund does, it beats the market in all weather?</p> <p><strong>Rehder:</strong> Well, we're an absolute return fund. So, we're slightly different, I can imagine, to many of your guests on your podcast.</p> <p><strong>Hall: </strong>Sure.</p> <p><strong>Rehder:</strong> An absolute return fund that has the ability to go long and short. In the old world, we were kind of referred to as a hedge fund. These days, we like to refer to ourselves an absolute return fund. And just to take one step back just for the background knowledge of your audience, when I think about absolute return funds in the Australian context, I really see absolute return fund sitting in three main buckets. The first bucket is market neutral. They manage their net exposure to around zero and they do that by entering in a pair trade. So, they will typically go long a stock in a particular sector, usually the highest-quality name they can find, and they'll go short the lowest-quality name in that same sector. And then, they'll apply a healthy dose of leverage, so they can use 5 to 6 times&rsquo; leverage, it's not uncommon, to magnify those returns.</p> <p>And active extension is the second bucket. It's like a 120/20 or 130/30 fund. They don't manage their net exposure to zero. In their case, they manage their exposure to 100 per cent and they do that by fully investing in their long book and then selling short; in the case of a 120/20 fund, 20 per cent of that fund short and they will receive short sale proceeds when they sell those shares, and they will use that 20 per cent at the end if they want to push their long book up to 120 per cent. So, their long book becomes 120 per cent, 20 per cent short. They basically set their net exposure over 100 per cent.</p> <p>The way I think about an active extension strategy is very much a bull market strategy. If you're very confident the market is going to go up and you want leverage to that, then it's not a bad place to be. We're a variable beta strategy. So, we don't manage our exposure to 100 per cent of our net exposure to 0. We have the flexibility within our mandate to vary it depending on how bullish or bearish we are. So, that's kind of the way we think about our portfolio. It's probably very similar to the way anyone manages their own personal portfolio. If they're bullish, they will apply more money to the market. If they're bearish, they will liquidate their positions and go to cash.</p> <p>The interesting thing about Kardinia is we've been going for 14 years. So, we're one of the longest established absolute return funds out there. The nice thing about having a 14-year track record is that we've seen both bull markets and bear markets. The strategy has certainly been tested. We're very conservative. We limit our net exposure to 75 per cent. We've don't use leverage. We're very disciplined stock (indiscernible) in place. But what that actually means is that we have lower volatility than the underlying markets. So, our volatility sits around 7 per cent; the underlying market is around 15 per cent.</p> <p><strong>Hall: </strong>So, who, Kristiaan, have been sort of the big performers in short for your fund?</p> <p><strong>Rehder:</strong> Look, we kind of approach our shorts the same way as our longs. We get I think a lot of questions about our shorting because it's something which I think many people are intrigued about, have much familiarity with. (Lots of the) absolute return funds treat their shorts in different ways. As far as the Kardinia Capital is concerned, we treat our shorts as a profit centre. They need to make money for us. We approach our shorts exactly the same way as we approach our longs.</p> <p>So, what does that mean? Well, we're often looking for not winning stocks as such. On the long book, we're looking for winning stock attributes. And so, some of the attributes we're looking for is we're looking for businesses with a strong balance sheet. We're looking for businesses that have high returns returning businesses. We're looking for businesses that are operating within the industry that tends to be growing. And then, if the company can demonstrate market share growth within a growing industry, then you get the double leverage effect. We're also looking for companies that operate in large, total addressable market sizes as well.</p> <p>Now, on the shorting side, it's the complete opposite of that. When long-only manage is, kind of, come across the company and they identify a number of red flags, they typically put their pens down and walk away, and that's the end of their analysis. For us, we can kind of extend that analysis, complete it, and then we can take one step further and actually profit off it by going short. So, we're looking for companies that have very weak balance sheets. We're looking for companies that are operating in industries that are declining, with declining earnings and margins, poor cash flow. They are the kind of businesses we target.</p> <p><strong>Hall: </strong>One word on your holdings. NAB is the biggest holding. Can you tell me why that's the biggest? Is there something people are missing there? Or what you're seeing that others aren't?</p> <p><strong>Rehder:</strong> Well, it's quite interesting. If you look back over the last five years, we were basically naked banks. We actually were shorting a number of the banks and we made quite a good money off it. I can reveal that we were short Adelaide Bendigo Bank for some time. We've now closed out that short. But if you look back over the last five years, it was almost a perfect storm for the banks. You had the royal commission, which the banks, obviously, didn't shroud themselves in, in much glory. You had the RBA cash rate continued to climb and that applied significant pressure on the banks' margins. You also had COVID coming into the mix. You had restrictions on credit with responsible lending changes, and that all culminated in a very tough operating environment for the major banks.</p> <p>Now, if you look at all those issues now and you want to clock forward to today, you will find, I think, that a lot of those headwinds have now become tailwinds. So, the balance sheets of consumers are much stronger than I think what people anticipated last year. So, we're really seeing a situation where margins for the first time in a while is starting to come back. The balance sheets are particularly strong and well-capitalised. We think in the next 12 months, you're going to start to see capital return by way of buybacks and the reinstatement of dividends from the banks, which I think will be&mdash;will put them in pretty good stead for next year.</p> <p><strong>Hall: </strong>OK. Well, you, kind of, anticipated, Kristiaan my&mdash;I was going to ask you&mdash;or remind you rather&mdash;that six months ago you said you were &ldquo;reasonably cautiously optimistic&rdquo;. So, I suppose we can remove the reasonably and the cautiously from that?</p> <p><strong>Rehder:</strong> Yeah, that's right. We are optimistic. I mean, it's interesting. I read recently that the pandemic will be over in 100 days and we have been watching the global statistics incredibly closely. And I have to say it does sound counter-consensus at the moment, but I tend to agree. If you look at all the statistics globally that are occurring, we now have inoculated only 4 per cent of the global population, but some countries are doing better than others and a great country to look at is obviously Israel. They've vaccinated around 55 per cent of their population with their first dose. The insignia about Israel is that it's a large sample size and they are vaccinating quickly, and you can see in real time the results of that vaccination program and all the key statistics have been incredibly positive. So, the COVID death rates have fallen well down, serious symptoms are down. It's almost a 99 per cent success rate based on those measures as far as we can see.</p> <p>The US, it has been a slow start, but it's getting there. Mid to low 20 per cent of their population has been vaccinated. The UK is around 35 per cent. If you do look at the capital markets, look at equity markets and debt markets, it is pretty clear that they're looking through this virus already and they are more firmly focused on stronger growth that's coming down the pipeline, inflation and then the steepening yield curve.</p> <p><strong>Hall: </strong>OK. And finally, Kristiaan, in your update you also talk about copper. What's the significance of this and why are you bullish on it? What should investors know about that?</p> <p><strong>Rehder:</strong> Well, look, copper is an interesting commodity. We think there's been a lot of underinvestment of copper for some time. And it's not just copper. A lot of the base metal commodities have also suffered from underinvestment. You've had a particular spike, I guess, in copper. I think it's 15 per cent up this month alone. It was up around 85 per cent since March of 2020. So, it's had a decent spike. I think what's driving the price growth in copper has been just the return of demands. And so, you're seeing global economies really starting to accelerate in terms of growth. You've seen the industrial production base of the US and China really springing back to where it was and now, even beyond where it was. I would also say that in this world of decarbonisation and the electrification of power, it's going to require a tremendous amount of copper, and we simply don't think there's enough copper out there to satisfy the demand.</p>

Video Archive...

Australian banks face margin pressure amid low rates: Reporting season roundup
15/09/2021  Rising customer deposits and access to cheap funding helped Australia's banks stave off net interest margin pressure, but analysts see warning signs.
Greenwashing explained
14/09/2021  Morningstar's Hortense Bioy on how to spot greenwashing and how to avoid it.
Earnings down as private money circles infrastructure: Reporting season roundup
13/09/2021  Utilities and infrastructure names battle the impact of covid as private equity and pension funds circle. 
Frenzy of mergers in energy: Reporting season roundup
10/09/2021  Hydrocarbons poised for a comeback.
TPG tipped to recover as mobile competition eases: Reporting season roundup
09/09/2021  Providers have lifted prices after years of a debilitating chase for subscribers at all costs , says Morningstar's Brian Han.
Short-sellers bet against ARK Innovation ETF
08/09/2021  What shorting ETFs means for long-term investors.
Surging lumber prices were no match for Brambles: Reporting season roundup
07/09/2021  Morningstar senior analyst Grant Slade says Brambles secular growth trend is intact despite nearterm headwinds. He discusses results from the building and construction materials sector.
Miners soar thanks to iron ore: Reporting season roundup
03/09/2021  Miners bask in the glow of iron ore prices while bargains remain in coal.
BHP-Woodside merger is mutually beneficial
23/08/2021  Post-merger Woodside would be well positioned to deliver on the value we've seen for a long time, say Morningstar analysts.
Investors are getting serious about sustainability
16/08/2021  But the sector lacks uniformity, says Morningstar's Christopher Franz. 
Long term outlook for AGL is positive
11/08/2021  Higher wholesale electricity prices bode well for AGL, according to Morningstar senior equities analyst Adrian Atkins.
How you can hedge your portfolio against inflation
11/08/2021  Morningstar FundInvestor editor Russ Kinnel describes some direct and indirect hedges for inflation protection.
The iron ore party can't last: Morningstar
10/08/2021  Copper and iron ore have benefited materially from China’s stimulus and the developed world recovery. But Morningstar analyst Mat Hodge see these benefit as transitory.
What the Afterpay acquisition means for investors: Morningstar Minute
05/08/2021  We believe the transaction has a high chance of succeeding.
Cannabis' federal legal status is not a total buzzkill
03/08/2021  The industry still has significant growth potential.
Stock of the week: Toyota
03/08/2021  Is one of the biggest sponsors of the Olympics positioned for an all-electric future?
2 listed microcap names to consider
23/07/2021  Morningstar's Lex Hall talks micro-cap stock picks with Carlos Gil, chief investment officer at Microequities Asset Management.
Big returns, big risks: Making money with microcaps
22/07/2021  Mornngstar's Lex Hall catches up with Carlos Gil, chief investment officer at Microequities Asset Management.
3 small-caps with Dawn Kanelleas
21/07/2021  The head of Australian small and mid-cap stocks at First Sentier Investors has her eye on ARB, Breville and IDP Education.
Forecast 2021–2022: A correction could be around the corner
20/07/2021  The strong performances of global stock markets in 2020–21 are unlikely to be repeated in the coming year says Morningstar's Peter Warnes.
'Overvalued' warnings grow as ASX 200 hits new high
12/07/2021  Morningstar equity analysts warn that equities remain overvalued despite Australia's strong economic recovery.
What to know about private equity
08/07/2021  Private equity is an exciting area for investors, with lots of hotly-tipped stocks. But there are risks to be aware of, says Pitchbook analyst Dylan Cox.
Lazard's 3 top picks for the global covid recovery
08/07/2021  Warryn Robertson is looking at French infrastructure, retail pharmacy and tax services.
Aussie banks $34bn surplus points to more shareholder dividends, buybacks
06/07/2021  Australia's largest banks have excess capital because they cut dividends, were more conservative on lending, divested assets and raised equity last year. Morningstar's Nathan Zaia thinks most of it should be returned to shareholders.
Weighing up the PEXA IPO
02/07/2021  PEXA burst onto the ASX this week in the biggest float since 2019. Morningstar's Gareth James gives his take on the company's future growth prospects.
Can the iron ore price keep rising?
30/06/2021  Iron ore prices have  been on a tear, boosting the profits of Australia's top miners.  How did we get here and is the only way up? Lex Hall sits down with Morningstar's Mat Hodge.
2 new stocks to watch
28/06/2021  Morningstar has recently initiated coverage of a food delivery app and a consumer finance product. 
'Strongest earnings season I've ever seen'
24/06/2021  Meeting the deluge of demand is the biggest task for US companies, says Bell Asset Management's Ned Bell.
Biotech beyond covid
22/06/2021  Are there still opportunities in the biotech sector now the covid-19 vaccine roll out is underway? We ask International Biotechnology Trust manager Ailsa Craig
Alibaba is still deeply undervalued
21/06/2021  Morningstar's director of Asia equity research is confident the e-commerce giant will bounce back.
Weighing up the Endeavour IPO
18/06/2021  A wide moat and attractive dividend potential are among the key takeaways of Woolworth's decision to demerge from the liquor and hospitality group.
'Then we got hit with the equivalent of a war'
15/06/2021  Lazard Asset Management's Warryn Robertson explains how companies in the Global Equity Franchise fund have adjusted to covid, and assesses the threat of rising inflation.
Understanding Magellan's active ETF strategy
11/06/2021  Magellan's Craig Wright tells Emma Rapaport why it is leading the charge in the active ETF arena and how its global equity product works.
3 off-the-radar small caps
10/06/2021  Callum Burns of ICE Investors explains his conviction in pharmaceutical distributor Ebos, PSC Insurance Group, and elite sports analytics provider Catapult.
Small cap gems and how to find them
09/06/2021  Callum Burns explains how ICE Investors identifies companies with original products and sticky customer bases.
Stock of the Week: Salesforce.com
08/06/2021  They’re building an empire.
3 oil stocks we still like
07/06/2021  A year ago the oil price went negative. How have oil giants handled the past 12 months and what's the outlook from here? Morningstar analyst Allen Good explains.
Considering crypto? Here's what to think about
04/06/2021  As the investment world goes crazy for crypto, Morningstar Investment Management's Dan Kemp explains what to consider before putting it in your portfolio
Why we like Wizz Air
03/06/2021  The airline sector is set to recover as international travel resumes. Morningstar analysts think Wizz Air offer the best opportunity among low-cost carriers.
3 global infrastructure picks
28/05/2021  4D Infrastructure's Sarah Shaw outlines the investment case for Spanish multinationals Cellnex, and Iberdrola, and the potential of Mexican airports.
Are crypto ETFs coming?
28/05/2021  The SEC continues to sort out its regulatory concerns.
Stock of the Week: Apple
27/05/2021  We’re raising our fair value as sales hit new highs—but investors need to put it in perspective, says Andrew Willis.
Opportunities in global infrastructure
25/05/2021  Covid-19 has enhanced rather than impeded the future for global infrastructure, says Sarah Shaw of 4D Infrastructure.
Tribeca's eye for Domain
24/05/2021  Tribeca's Jun Bei Liu also explains why she sees opportunity in sleep apnea specialist ResMed as well as Treasury Wine Estates.
Stocks for emerging markets
19/05/2021  American Century Investment's Patricia Ribeiro sees growth in Chinese battery technology, biologics, and building materials in Latin America.
2 stocks for the rise of the robots
18/05/2021  Robotics is a fast-growing area of tech, creating opportunities in medical, logistics and life sciences sectors and much more.
Square: Stock of the week
18/05/2021  Square's Bitcoin purchase is more marketing than operations
Tesla: Stock of the week
10/05/2021  If Elon Musk ends up delivering, we might need to raise our fair value to US$1500 a share.
Why Tribeca's so upbeat on stocks
07/05/2021  Banks and resources are poised to deliver dividends, and Treasury Wine Estates and BNPL are worth a look, says Jun Bei Liu of Tribeca's Alpha Plus long/short fund.
Looking for value in emerging markets
05/05/2021  Digital banking, ecommerce and 5G are among the key trends set for rapid growth, says Patricia Ribeiro of American Century Investments.
Cash slashed, Aussie equities up: Why Morningstar updates Model ETF portfolios
04/05/2021  Analysts have made changes to the fixed interest, property, cash and equity allocations of Morningstar's Model ETF Portfolios to take advantage of the current market environment. They've also refreshed some of the funds in the portfolio.
Investing basics: Explaining the disconnect between the stock market and the economy
30/04/2021  The stock market and the economy are not the same. Here's why.
Why deforestation matters for investors
23/04/2021  EARTH DAY 2021: Why should investors care about deforestation and how can it can be taken into account within an investment portfolio? 
The silent killer: How to prepare your portfolio for inflation
21/04/2021  Do investors need to worry about inflation, and how do you prep your portfolio to protect you from it? Morningstar Investment Management's Dan Kemp explains.
ESG investing is about more than feeling good: Morningstar equity research
20/04/2021  Values-based investing is ultimately up to the investor.
2 US wide-moat stocks to buy on a dip
16/04/2021  Amazon.com and ServiceNow are looking increasingly attractive.
Fidelity's Kate Howitt names her 3 top stocks for 2021
15/04/2021  Investment tips from Australian equities fund manager Kate Howitt.
Back to basics: What is income investing?
14/04/2021  What is income investing, why is it important and which investors should focus on it? Morningstar Investment Management's Dan Kemp has the answers.
Hunting for pockets of value in an overheated market: Morningstar
13/04/2021  Morningstar equity strategist Gareth James discusses the great value rotation, why he believes the Australian share market is overvalued and where opportunities still lie for hungry investors.
Vaccine rollout drives energy's rise
12/04/2021  But the sector's current tailwinds are likely unsustainable, so investors should prioritise high-quality businesses with stable balance sheets, says Morningstar's Dave Meats.
Finding value with Kate Howitt
08/04/2021  Kate Howitt oversees Fidelity’s Australian Opportunities fund. She discusses her investing approach, the outlook and where she sees value.
Investing for millennials
07/04/2021  Goldman Sachs's Laura Destribats talks about the millennial investment trend, and why tech and experiences are so important to this generation.
What if I want to buy Bitcoin?
06/04/2021  Remember that the returns on speculative assets like Bitcoin are high risk
EGG, SGF, ZBRA: Foraging for the unloved gems
01/04/2021  Steve Johnson explains why Forager Funds Management has bought and held Enero, SG Fleet and Zebra Technologies and why they're poised for further growth.
Why the 'covid spending economy' will flourish
30/03/2021  Forager's Steve Johnson explains why he's bullish on consumer spending, enterprise software companies, and why he has cashed in on big names like Uber.
Proteomics set for growth, says Kardinia
29/03/2021  Kristiaan Rehder explains why the West Australian biotech is among the top performers in the Bennelong Kardinia Capital Absolute Return Fund.
Should you be worried about inflation?
26/03/2021  And how to make inflation "personal."
Crypto what?
25/03/2021  The how, what, and why of cryptocurrency.
The long and short of an absolute return fund
24/03/2021  An absolute return fund aims to seek returns in all weather. Kristiaan Rehder from Bennelong Kardinia Capital explains how.
3 dividend-paying real estate stocks for your watchlist
23/03/2021  Diversified portfolios, strong balance sheets and healthy payouts. Grant Berry singles out three big contributors to the SG Hiscock Property Income Fund.
AREITs in the time of covid
22/03/2021  SG Hiscock's Grant Berry explains how real estate was affected by the pandemic, how property stocks coped, and the chase for income in an evolving retail landscape.
Have we reached peak video gaming?
19/03/2021  Video gaming has soared under lockdown, can this sector keep growing post-covid? Morningstar analyst Neil Macker takes a look.
Myer: five stars and poised for the rebound
18/03/2021  The retail giant's strong balance sheet will help it navigate the shift to online shopping and capitalise on the return to normal life, says Morningstar's Johannes Faul.
Deliveroo IPO: what you need to know
10/03/2021  Ahead of Deliveroo's IPO, Morningstar analyst Ioannis Pontikis looks at the outlook for the business, its valuation and concerns about gig workers.
2 stocks for the e-learning boom
08/03/2021  E-learning has become the norm for young students and university-goers across the world. Morningstar analyst Michael Field looks at whether the trend is here to stay. 
February Reporting Season Wrap Up with Peter Warnes: Webinar
04/03/2021  Special guest Peter Warnes, our head of equities research, joins the Morningstar Foundations of Investing Webinar series to give his unique take on February Reporting Season and answer subscriber questions.
One year after the market crash, through the ETF lens
03/03/2021  The growth and adoption of exchange-traded funds has only accelerated as a result of the latest market crisis.
Brighter picture for big four banks
01/03/2021  Morningstar's Nathan Zaia on the outlook for the banks, dividend payouts and the move by the Bank of Queensland to acquire ME Bank.
One year on: lessons learned from the 2020 bear market
25/02/2021  The biggest takeaway from that period is not to panic when the market tumbles.
What if...I want to buy a gold ETF?
23/02/2021  From ETFs backed by bullion to miners with more upside potential - here's how to get yourself some gold.
'Full return to normal in 2021'
23/02/2021  If the US is to stage a recovery by mid-year, it will need the consumer services sector to fire, says Morningstar's head of economic research Preston Caldwell.
Google, Facebook versus Aussie news stocks
19/02/2021  Morningstar's Brian Han weighs up News Corp's deal with Google and examines the effect of Facebook's decision to block content from Australian media outlets.
Global real estate as a store of value
18/02/2021  Quay Global Investors' Chris Bedingfield explains how self-storage, data centres and industrial property can offer diversification and growth.
Spotting the 'covid winners'
16/02/2021  Uniti Group and Nextdc are among the companies that SG Hiscock's Hamish Tadgell says have flourished during the pandemic.
The transition from hope to growth
15/02/2021  Hamish Tadgell of SG Hiscock explains the portfolio changes he’s made in a bid to capitalise on the shift.
The future of the US economy
10/02/2021  Which pandemic-related trends have already passed, and which ones might be around the corner?
GameStop frenzy is history repeating
05/02/2021  The battle between the Reddit army and hedge funds is nothing new—the question is will regulators be willing to step in, says Morningstar's John Rekenthaler.
Who are the fast fashion winners?
03/02/2021  Competition is fierce for fast fashion retailers such as Asos, H&M, Zalando and Inditex. Morningstar analyst Jelena Sokolova takes a look at the sector.
Can your portfolio withstand volatile times?
01/02/2021  Volatility can be around any corner, says Morningstar director of personal finance Christine Benz.
How much equity exposure is too much in retirement?
28/01/2021  Retirees require stocks' growth potential, but they need a cash and bond buffer, too.
Key trends for China investors
27/01/2021  Rebecca Jiang, manager of the JPMorgan China Growth & Income Trust, looks at why Chinese stocks soared in 2020 and whether the trend can continue.
Redpoint's 3 top picks in industrials
25/01/2021  Redpoint's chief executive and portfolio manager Max Cappetta tells Lex Hall why he's got his eye on JB Hi-Fi, Goodman and Reliance Worldwide in 2021.
Looking for growth and income among industrials
21/01/2021  Redpoint CEO and portfolio manager Max Cappetta looks at the dividend potential of large-cap names, the resilience of Qantas, and the local tech landscape.
What we expect from oil prices
19/01/2021  Stocks still look cheap across all subsectors, especially oilfield services and refining, says Morningstar analyst Dave Meats.
What’s app-ening: investing from your phone
19/01/2021  What are the rewards and risks of using this technology?
A Democrat clean sweep and corporate America
15/01/2021  Morningstar's head of policy research Aron Szapiro explains what sort of changes a Biden government will make and how they will affect company valuations.
3 stocks for climate transition
14/01/2021  Freight-rail, building temperature efficiency, and carmaking are among the sectors Aviva Investors' Jaime Ramos Martin has his eye on.
The outlook for dividends
13/01/2021   Dividend investors had a hard time in 2020, but Morningstar analyst Dan Lefkovitz think the outlook is brighter for the year ahead.
3 themes for fund investors in 2021
11/01/2021  Morningstar Investment Management's Dan Kemp reveals the three investment themes on his mind for the year ahead.
What next for oil and gas companies?
06/01/2021  Morningstar equity analyst Allen Good looks at the prospects for oil and gas giants in the year ahead.