A tale of two fund managers

The Hughes Family Superannuation Fund owns two global equity fund managers, being Platinum Asset Management and Magellan Financial Group. Both companies are well managed, have pristine debt-free balance sheets, offer retail (stickier than institutional) products with high research house ratings and, perhaps more importantly, both companies fit in with my broad view that Australian equities (or at least those dependent on domestic economic activity) will offer inferior investment returns to global equities over the medium term. I am still comfortable with these holdings even if this view is wide of the mark - perhaps Australia will perform well, in which case I hope there will be large pools of retirement savings finding their way to these managers. If this fails.... damn. That's why we have a diversified portfolio!

2011 was a year of contrast for the pair: 

Thankfully the far larger holding, Magellan, had a superb year. Particularly pleasing were the strong returns for its Global Fund, which generated positive absolute returns, obliterated its benchmark and earned lucrative performance fees of almost $5 million. 

I am not one who believes in chasing last year's return, but sadly, the whole financial services industry in this country is. For that reason I anticipate planners, advisers and retail punters providing Magellan with another leg up in FUM growth after seeing the group firmly entrenched at the pointy end of the 1 year and 3 year performance figures (and by some margin - a number of competing products have been nothing short of disastrous. Given the nature of its investments, and the ground others have to make up - I foresee Magellan hanging around here for a while). 

Platinum... well, as a small holding I am still comfortable with this. It is not going to blow up my portfolio if it goes to zero (I find this highly unlikely). There are those who will point to key man risk with regards to Kerr Neilson, and particularly poor performance in recent years. There is definitely no doubt the company is experiencing persistent outflows. I have not given up on them just yet though - there is a very strong brand that has been built with Australian investors over an almost 20 year period. There were long periods of underperformance throughout this period too - every manager will under perform at one point or another - but there were also longer periods of remarkable outperformance. I'm backing that will happen again in future. 

Follow up on RCU

Price action in the last month (I sold 15/12/11 - and it appears just in time):

 

Lessons

Today's lesson is one that burns. I am very fortunate (whether by skill, or perhaps and I readily admit, a few healthy doses of good luck) that in a terrible environment for investment markets I have managed to grind out positive returns in the last twelve months. I may regret saying that in the near future, as I take a firmly glass half full view on all things Eurozone and over leveraged Western consumers. I could very easily lose a lot of money - and quickly. 

Nonetheless I am pleased with how I have fared. And yet, I should have fared 2% better. I bit the bullet and sold out of RCU today at a substantial loss. RCU is the one stock in my portfolio where I deviated from the principles that govern every other position, and it has cost me badly. This reinforces exactly how important discipline is to the investment process. 

So, what can I take away from this to ensure I improve as an investor ?

No matter how cheap it looks  - even if it is 0.3x book....

1) Stick to higher quality businesses. It works!

2) Stay the hell away from highly leveraged balance sheets. Especially when depending on who you listen to, the global banking system is royally f*.....

Disappointing stuff, but a lesson learned. Onwards and upwards! 

I'm back!

Well it has been some time since my last post, as I have been held completely hostage to the wonders of the Spring Racing Carnival. I even managed a quick break from work to get down to Melbourne, and it was simply fantastic! A little bit more luck on the first Tuesday in November - I backed three horses at decent each way odds that went down by little more than an inch - and it would have been even better. 

Now invariably on a male trip away, sans wives, girlfriends and acquaintances, there are few opportunities for respite. After a long day in the sun at Flemington race course of making donations to the bookies and paying an arm and a leg for entry, food and drink, there really is only one option for the evening. That is to go to Crown Casino to win it all back. 

I have been to Crown once before with my wife in 2007. We stayed in Melbourne for the weekend just to get away from home. There had been a family tragedy and we just needed a break. Punching well above our weight, we booked in to Crown Towers for accommodation and the place was truly outstanding. However, neither of us being the casino type, we refrained from visiting the gaming floor on this occasion.

Fast forward to October 30, 2011. My first thought on walking in to the gaming floor was simply, wow. While others were thinking red or black, odds or evens, I couldn't help but start to wonder. How many people walk through here every day? How much do they spend? What are the margins? Is it always this busy? The floor was simply buzzing and I just smiled and thought, wow, I'd love to own some of this. 

What price would I pay? Hmmm, interesting question. That's for another post, but I can say that with the price hovering at around $8 a share I haven't bought any yet.

One day...

One day I would love to manage money professionally. 

When I do, I hope to be as smart as these guys...

http://www.brontecapital.com/Letters.html

Amazing returns. And I'd be lying if I didn't say I love reading John Hempton's blog.

 

2 years!

The passing of September marks two years since taking control of our family's humble retirement savings. Here is how it is going so far:

A few notes on the chart:

• Returns are pre-fees and costs (i.e. annual audit fees, our life insurance premiums).
• Despite putting this up, I'm actually not interested in returns over anything less than a 3 year period. This is capital invested for the very long term. Just thought it would be worth an interim update to see whether I should sack myself and give the cash back to the pros or whether my wife ought to leave me on account of losing all our money.
• When I can't find anything I am confident in I will hold plenty of cash, maybe up to 50% of the portfolio, but for the most part I plan to be very heavily (almost fully) invested in growth assets. I'd therefore expect some volatility and some periods of negative performance, but as I said I am looking at investments playing out over a much longer period of time than the last week, month or even year.

It's not exactly scintillating to see that I could have lobbed everything in to an at call cash account for two years and achieved the same raw returns. If I was a Markowitz man I'd be shattered... heavens, the excess risk I have taken for no excess return! What a shameful Sharpe ratio, information ratio bla bla bla. (My colleagues are well aware of my thoughts on MPT).

But overall I am actually pleased. It is very much a capital growth portfolio and to have held some cash in reserve while the market took an absolute beatdown has proved a wise move. I have put most of that cash to work now as markets have fallen and hopefully I will find some winners. I am actually very excited about the potential for crystallisation in latent value in two of my old favourites, Brickworks and Soul Patts, now that New Hope Corporation has thrown up the for sale sign. 

Despite huge falls, following the big rally last week I think Australian market valuations are merely OK. In aggregate the market is not a screaming bargain but is not exactly due for a 1987 crash either. I can't categorically state this won't happen - Europe is a mess but as steps are belatedly and reluctantly taken to avoid a systemic banking disaster I am much more sanguine about these risks than I was perhaps a month ago. 

There are of course individual pockets of value and some stocks which I think present excellent opportunities, but on a market wide basis I would not be backing up the truck. It promises to be an interesting 12 months as the E in the widely followed PE comes under plenty of scrutiny amidst significant private sector deleveraging, falling commodity prices and a stagnant property market. 

Wow...

That's it - put a fork in me, I'm done. 


A four, five, six percent rally on a rumour from none other than Steve Liesman, from undisclosed sources... involving leverage and a structure that has been described as a CDO "squared"... and to date with no hint of confirmation. This market is a joke.