V0 - AUSE01Z01MA Economy well placed to buck …...2016/05/14 · The Aberdeen Australia Equity...
1
WEALTH THE WEEKEND AUSTRALIAN, MAY 14-15, 2016 theaustralian.com.au/wealth 35 V0 - AUSE01Z01MA Economy well placed to buck market bears As a natural resources power- house feeding China’s growth ma- chine, Australia’s economy — and its currency — rode high during the halcyon days of double-digit growth. But the dollar has become a one-way bet, falling from a high of $US1.10 in mid-2011 to US69c in January as China’s growth de- celerated and mining investment in Australia waned. However, there’s more to the Australian economy — and to the longer-term prospects for our currency — than just being a quarry with a beach view. Sure, Australia will continue to benefit from China’s long-term development of its inner provinces and its ambitions to build a new Silk Road linking the Middle Kingdom to Europe. But in the beauty contest that is the global currency market, the Aussie looks attractive given the nation’s low net debt to GDP ratio, a triple A credit rating, faster growth than that in other advanced economies, higher yields, and policy coher- ence reflected in 25 consecutive years of growth. The Reserve Bank’s recent in- terest rate cut to a record low of 1.75 per cent is intended to support the rebalancing of the economy and help steer low inflation back into the central bank’s target range of between 2 and 3 per cent. The short-term focus for the Aussie is whether the commodity rally has legs. Brent oil is up 51 per cent from its February low and copper has risen 11 per cent from its nadir in January, while iron ore has surged more than 76 per cent from its December low. There’s more to our ties with China than just selling dirt ROBERT GUY $US19.51, from its January low. The Aberdeen Australia Equity closed-end fund, up 18 per cent from its low, is also attractive, trading at an 11 per cent discount to net asset value and offering a 12 per cent payout. Those wanting a more direct play on the commodities rebound should look at mining giant BHP Billiton, which has experienced a 43 per cent rally in its American depositary receipts from their January low. Australian 10-year bonds also tempt, with 2.4 per cent yields in a world of low or negative interest rates. The key to whether the dollar can power higher and commodi- ties can levitate above their lows rests in the hands of seven men in Beijing. The Politburo Standing Committee, the apex of Chinese policymaking, has decided it’s time to stimulate growth again, if lending data from March are any Veteran emerging market investor Mark Mobius told Bloomberg a few days ago a re- bound in commodity prices and stocks could be “extreme” because they had “gone down too far”. So how can investors ride the renewed strength in commodities and the dollar? The easiest way to play the rally is through the iShares MSCI Australia exchange-traded fund, which has gained 20 per cent, to indication. The injection of cash pulsing through the arteries of China’s economy is great news for commodities producers, at least for the moment. The easy money is fuelling a wave of euphoria in the property market and a surge in speculative futures trading. To be sure, Australia would not be immune if China’s rapid debt build-up causes the Asian giant to stumble. But there’s more to ties with China than selling dirt. Another way to make money from property Global returns and interest rates are so low that in Denmark bor- rowers are finding their mortgage balances are declining, even with- out making payments, because in- terest rates are negative. Elsewhere, high-quality compan- ies are trading at eye-watering multiples. In private equity, too much money is chasing too few opportunities, and meanwhile in- vestors are happy to buy property that is yielding barely more than bank interest despite the higher risk profile. In such an environment, it is next to impossible to find high- quality businesses that are still cheap compared with our esti- mate of their value. But one of those companies is REA Group (ASX: REA), which has just repor- ted a 20 per cent increase in rev- enue in the third quarter. In fact 3Q16 revenues were reported by the company at $147m, which was up 20 per cent year on year. Investors could be forgiven for feeling slightly anxious on the back of the news coming out of Australia’s real estate market. In the space of a few days we have had: The revelations of dubious real estate financing, as mortgage bro- kers reportedly put foreign buyers with poor documentation through to the major banks; Reports of large falls in apart- ment prices in Melbourne, and; Reports from McGrath Lim- ited (ASX: MEA) of listing vol- umes declining by about 25 per cent in some areas of Sydney. However, REA’s revenues are primarily driven by the sales of premier/highlight listings on the realestate.com.au website, and data that records listing volumes can be used as a proxy for where said revenues are headed. While nationwide listings are down since the end of December as per the seasonal trend, on a year-on-year basis, considerable growth is observed. And in a mar- ket where listings volumes have been under pressure, REA’s reve- nues have grown more than 50 per cent on the back of price increases and changes in the volume of premier ads (i.e. ‘mix shift’). This resilience — a function of pricing power — is an attractive quality to owners of the business. For the nine months to the end of March 2016, group revenues rose 20 per cent year on year to $461m. This result was partly boosted by the consolidation into the accounts of the acquisition of the iProperty Group announced November 4, 2015 at $4 a share. Operating expenditure of $69m had risen 21 per cent year on year, which was not a surprise to the market, and so EBITDA rose by 18 per cent year on year to $77m. Of the $6bn spent on market- ing properties in Australia each year, real estate agents collect about 86 per cent and REA Group’s realestate.com.au website collects just 5 per cent (with the rest of the pie being split between traditional media and competi- tors). My investment thesis is partly reliant on the idea that real estate agents do not deliver 86 per cent of the value in a real estate trans- action and that real-estate.com.au delivers more than 5 per cent. The change in the equation — in favour of REA Group — will be initially effected by a change in the willingness of vendors to accept higher prices for advertising on re- alestate.com.au but not higher charges from real estate agents. The second phase of the change in the equation will be that real- estate.com.au’s higher prices will eat into the total spend of the ven- dor such that vendors will insist on lower fees from the agents. As an investor, I was pleased that REA introduced a price rise from July in the range of 10 per cent to 15 per cent, which beat some analysts’ expectations and confirms the pricing power of the model as well as reinforcing our thesis of being able to ultimately take a larger share of the total real estate market pie. Encouragingly, REA also con- firmed that despite investing agg- ressively, further EBITDA (earnings before interest tax de- preciation and amortisation) mar- gin expansion in the fourth quarter should be expected be- cause marketing costs will be lower then. The company also announced that the US business Move Inc is now EBITDA positive. The REA valuation is cur- rently $65 (against about $54.70 now) this compares with analysts we know who have price target/ valuations between: $52.19 and $56.50. The implication is that if we are right, not only could we make more money for our investors but it could happen quickly if the rest of the analyst community rerates the company. The downside risk is that even though we expect the company to make more money in a property market downturn — because more properties will be listed and for longer — sentiment towards REA Group’s share price could turn negative Disclosure: The REA Group is a subsidiary of News Corp, owner of The Australian Roger Montgomery is founder and chief investment officer of the Montgomery Fund. www.montinvest.com ROGER MONTGOMERY SHARES Despite popular perception, mining accounts for less than 10 per cent of Australia’s economy, with consumption accounting for about 70 per cent. Rate cuts are supporting retail sales and property construction. China’s fast growth in services is a source of demand for Australian agriculture, wine, tourism, and education. The true believers say the task of urbanising and developing China’s inner provinces should sustain demand for commodities — a positive for the dollar over the long term. A long-term driver of demand will be China’s ambition to con- struct a new Silk Road through the “One Belt, One Road” initiative linking the Middle Kingdom to Europe via Central Asia. While aggressive chequebook diplomacy will buttress China’s growing geopolitical influence, it also provides an outlet for the excess capacity that haunts many industries, such as steel and cement. Indeed, the waning of the mining investment boom in recent years underscored the need for a more diversified economy. Whereas Australians used to lament the so-called tyranny of recent years, the world’s 12th- largest economy looks like an island of policy coherence and competence compared with the high farce among debt-burdened major economies seemingly trapped in the vise-like grip of unconventional policy. Australia’s 3 per cent annual growth outpaces most advanced economies, while unemployment is back below 6 per cent. The hunt for yield could draw foreign money into Australian bonds, thereby supporting the local currency. Australian stocks are also experiencing renewed foreign interest, thanks to yields of about 5 per cent. At the Credit Suisse Asian investment conference held in April, attendees voted Australia one of their favoured markets in Asia. The broker’s Australian strat- egy team came away from Hong Kong feeling comfortable with its commodities exposure, with BHP, Rio Tinto, South 32 and rail opera- tor Aurizon Holdings among their favoured stocks. This is an edited version of a cover story that first appeared in Barrons.com distance from markets in Britain, the Lucky Country is well posi- tioned to profit from its proximity to Asia’s fast-growing economies. The transition from “mining to dining” is underscored by the huge gains in stocks of companies such as organic baby formula producer Bellamy’s Australia, vitamin maker Blackmores and Capilano. Concerned with food safety issues and contamination of infant formula, many Chinese look to Australia for organic food or simply for food not grown in polluted air and soil. All three stocks look like good long-term bets, but investors may want to wait for a pullback before buying. The weak dollar also fired up tourism, with record numbers of Chinese visiting Australia. Education is also booming, as Asia’s middle classes send their children to Australian universities. Despite Australia’s revolving door of prime ministers over The hunt for yield could draw foreign money into Australian bonds SEVEN STOCKS WITH UPSIDE FROM DOWN UNDER $A4.41 $5.69-$3.35 $9.1 6.9% Rail freight operator, coal haulage 10.80 $16.50-$3.36 $1.0 0.5% Organic baby formula maker $27.66 $49.71 – 18.46 $69.8 2.3% World’s largest iron ore miner $A169.67 $A222.90 – 67.50 $2.9 2.8% Vitamin maker 23.15 $23.92-11.50 $0.2 2.3% Honey supplier $30.50 $47.37 – 21.89 $57.1 7.0% Iron ore miner $A1.57 $A2.45 – 0.87 $A8.3 - Miner Aurizon Holdings (AZJ) Bellamy’s Australia (BAL) BHP Billiton (BHP) Blackmores (BKL) Capilano Honey (CZZ) Rio Tinto (RIO) South32 (S32) 52 week high-low Recent price Company Market value ($bn) Dividend yield Services provided Source: Barron’s Australian investors are regularly encouraged to diversify their holdings and look for alternative asset classes beyond the familiar options of shares and cash. But the woes plaguing one al- ternative asset class long favoured by the ultra-wealthy — hedge funds — are a timely reminder that not all alternatives are creat- ed equal. Hedge funds are known for taking big risks and reaping the re- wards. Investment styles vary and can include making illiquid in- vestments, short-term trading of equities or computer-generated strategies. Many hedge funds bor- row money, amplifying the gains (or losses) of their strategies and bets. The rewards can be handsome. During 2015, five hedge fund boss- es were paid more than $US1 bil- lion each, even though about half of all hedge funds lost money over the same period, an industry sur- vey in the US found. Clients are often asked to pay through the nose. A common fee structure is known as “two and twenty” — 2 per cent of assets under management and 20 per cent of performance every year. But with markets proving choppy over the first few months of this year, institutional investors have been starting to question whether they can get returns that are just as good or even better for a lower cost elsewhere. Outflows have been rising. In- vestors took back a net $US15bn in the March quarter, the biggest withdrawals since 2009, accord- ing to a specialist hedge fund re- search house. Here are some of the high-pro- file names in the US who have re- cently questioned the appeal of hedge funds: ● Legendary investor Warren Buffett recently launched a tirade against a broad class of active managers and consultants, criti- cising both their performance and their fees. The Berkshire Hatha- way chairman told his annual meeting of a bet he had made with hedge fund Protege Partners that their fund of funds could not beat a Vanguard S&P500 index fund over a decade. The investment of the hedge fund — which initiated the bet — has a cumulative return of 21.9 per cent since 2008, while the index fund managed 65.7 per cent. ● Insurance giants AIG and MetLife both reported falls in first-quarter operating income and partly blamed the perform- ance of their investments in hedge funds. With interest rates staying negligible for years, insurers have been looking for better returns on capital. But both companies now plan to move money out of hedge funds — AIG expects to halve its exposure by the end of 2017, while MetLife is set to slash its holdings by two-thirds in about two years. Investors have raised concerns that the funds’ performance isn’t worth the fees, but that’s not the only worry. As some funds make investments in illiquid assets, it can be difficult for clients to get their money back as quickly as they’d like. US regulator the Se- curities and Exchange Commis- sion has been investigating this issue, as well as the question of how the fund managers value il- liquid holdings. ● A bad bet by billionaire Bill Ackman’s Pershing Square on Valeant Pharmaceuticals has also received considerable coverage in the US financial media, as the drug maker’s stock tumbled al- most 90 per cent over the past year after accusations of fraudu- lent accounting. Some upstarts are claiming to provide lower-cost alternatives, with asset managers saying they can use quantitative models to se- lect, for example, a basket of stocks with low volatility. Smart hedge funds have even started of- fering low-cost alternatives to their main funds to retain hesitant clients. Automation more broadly poses a challenge to the labour-in- tensive work of security selection. Analytics tool Kensho — in which investment banking giant Gold- man Sachs has taken a stake — uses big data and artificial intelli- gence to provide information about market patterns that would have previously taken well-paid bankers days to complete. Hedge funds will also face questions about how to justify their costs when computers can offer insights and replace some work done by humans. Plenty of large institutions are still sticking with their hedge fund investments for now. But the funds are facing a chorus of criti- cism that is difficult to ignore. Investors question hedge fund fees, returns ELIZABETH REDMAN NORTH AMERICAN BUSINESS CORRESPONDENT Operated by Guidepost tours and the SCT travel group in conjunction with Scott McGregor’s Railway Adventures – Lic# 2TA5895 Ride Australiaʼs most eccentric and appealing trains and take an island-hopping flight through the rugged Queensland Outback. Enjoy a character filled small group tour exploring the icons of Far North Queensland by train, plane, boat and coach with your expert leader. 11 - 25 October 2016 • LONGREACH • WINTON • MT ISA • • THE GULF COUNTRY • QUEENSLAND'S SAVANNAH • CAIRNS AND THE TROPICS • FEATURING: • The Spirit of the Outback • The Gulflander • The Savannahlander • The Bally Hooley Steam Railway
Transcript of V0 - AUSE01Z01MA Economy well placed to buck …...2016/05/14 · The Aberdeen Australia Equity...
WEALTHTHE WEEKEND AUSTRALIAN, MAY 14-15, 2016
theaustralian.com.au/wealth 35V0 - AUSE01Z01MA
Economy well placed to buck market bears
As a natural resources power-house feeding China’s growth ma-chine, Australia’s economy — andits currency — rode high duringthe halcyon days of double-digitgrowth. But the dollar has becomea one-way bet, falling from a highof $US1.10 in mid-2011 to US69c inJanuary as China’s growth de-celerated and mining investmentin Australia waned.
However, there’s more to theAustralian economy — and to thelonger-term prospects for ourcurrency — than just being aquarry with a beach view.
Sure, Australia will continue tobenefit from China’s long-termdevelopment of its inner provincesand its ambitions to build a newSilk Road linking the MiddleKingdom to Europe. But in thebeauty contest that is the globalcurrency market, the Aussie looksattractive given the nation’s lownet debt to GDP ratio, a triple Acredit rating, faster growth thanthat in other advanced economies,higher yields, and policy coher-ence reflected in 25 consecutiveyears of growth.
The Reserve Bank’s recent in-terest rate cut to a record low of1.75 per cent is intended to supportthe rebalancing of the economyand help steer low inflation backinto the central bank’s target rangeof between 2 and 3 per cent.
The short-term focus for theAussie is whether the commodityrally has legs. Brent oil is up 51 percent from its February low andcopper has risen 11 per cent from itsnadir in January, while iron orehas surged more than 76 per centfrom its December low.
There’s more to our ties with China than just selling dirt
ROBERT GUY
$US19.51, from its January low.The Aberdeen Australia Equityclosed-end fund, up 18 per centfrom its low, is also attractive,trading at an 11 per cent discount tonet asset value and offering a 12 percent payout.
Those wanting a more directplay on the commodities reboundshould look at mining giant BHPBilliton, which has experienced a43 per cent rally in its Americandepositary receipts from their
January low. Australian 10-yearbonds also tempt, with 2.4 per centyields in a world of low or negativeinterest rates.
The key to whether the dollarcan power higher and commodi-ties can levitate above their lowsrests in the hands of seven men inBeijing. The Politburo StandingCommittee, the apex of Chinesepolicymaking, has decided it’stime to stimulate growth again, iflending data from March are any
Veteran emerging marketinvestor Mark Mobius toldBloomberg a few days ago a re-bound in commodity prices andstocks could be “extreme” becausethey had “gone down too far”.
So how can investors ride therenewed strength in commoditiesand the dollar?
The easiest way to play the rallyis through the iShares MSCIAustralia exchange-traded fund,which has gained 20 per cent, to
indication. The injection of cashpulsing through the arteries ofChina’s economy is great news forcommodities producers, at leastfor the moment. The easy moneyis fuelling a wave of euphoria in theproperty market and a surge inspeculative futures trading.
To be sure, Australia would notbe immune if China’s rapid debtbuild-up causes the Asian giant tostumble. But there’s more to tieswith China than selling dirt.
Another way to make money from property
Global returns and interest ratesare so low that in Denmark bor-rowers are finding their mortgagebalances are declining, even with-out making payments, because in-terest rates are negative.Elsewhere, high-quality compan-ies are trading at eye-wateringmultiples. In private equity, toomuch money is chasing too fewopportunities, and meanwhile in-vestors are happy to buy propertythat is yielding barely more thanbank interest despite the higherrisk profile.
In such an environment, it isnext to impossible to find high-quality businesses that are stillcheap compared with our esti-mate of their value. But one ofthose companies is REA Group(ASX: REA), which has just repor-ted a 20 per cent increase in rev-enue in the third quarter. In fact3Q16 revenues were reported bythe company at $147m, which wasup 20 per cent year on year.
Investors could be forgiven forfeeling slightly anxious on theback of the news coming out of
Australia’s real estate market. Inthe space of a few days we havehad:
The revelations of dubious realestate financing, as mortgage bro-kers reportedly put foreign buyerswith poor documentationthrough to the major banks;
Reports of large falls in apart-ment prices in Melbourne, and;
Reports from McGrath Lim-ited (ASX: MEA) of listing vol-umes declining by about 25 percent in some areas of Sydney.
However, REA’s revenues areprimarily driven by the sales ofpremier/highlight listings on therealestate.com.au website, anddata that records listing volumescan be used as a proxy for wheresaid revenues are headed.
While nationwide listings aredown since the end of Decemberas per the seasonal trend, on ayear-on-year basis, considerablegrowth is observed. And in a mar-ket where listings volumes havebeen under pressure, REA’s reve-nues have grown more than 50 percent on the back of price increasesand changes in the volume ofpremier ads (i.e. ‘mix shift’). Thisresilience — a function of pricingpower — is an attractive quality toowners of the business.
For the nine months to the endof March 2016, group revenuesrose 20 per cent year on year to$461m. This result was partlyboosted by the consolidation intothe accounts of the acquisition ofthe iProperty Group announced
November 4, 2015 at $4 a share.Operating expenditure of $69mhad risen 21 per cent year on year,which was not a surprise to themarket, and so EBITDA rose by 18per cent year on year to $77m.
Of the $6bn spent on market-ing properties in Australia eachyear, real estate agents collectabout 86 per cent and REAGroup’s realestate.com.au websitecollects just 5 per cent (with therest of the pie being split betweentraditional media and competi-tors).
My investment thesis is partlyreliant on the idea that real estateagents do not deliver 86 per cent ofthe value in a real estate trans-action and that real-estate.com.audelivers more than 5 per cent.
The change in the equation —in favour of REA Group — will beinitially effected by a change in thewillingness of vendors to accepthigher prices for advertising on re-alestate.com.au but not highercharges from real estate agents.The second phase of the change inthe equation will be that real-estate.com.au’s higher prices willeat into the total spend of the ven-dor such that vendors will insist onlower fees from the agents.
As an investor, I was pleasedthat REA introduced a price risefrom July in the range of 10 percent to 15 per cent, which beatsome analysts’ expectations andconfirms the pricing power of themodel as well as reinforcing ourthesis of being able to ultimately
take a larger share of the total realestate market pie.
Encouragingly, REA also con-firmed that despite investing agg-ressively, further EBITDA(earnings before interest tax de-preciation and amortisation) mar-gin expansion in the fourthquarter should be expected be-cause marketing costs will belower then.
The company also announcedthat the US business Move Inc isnow EBITDA positive.
The REA valuation is cur-rently $65 (against about $54.70now) this compares with analystswe know who have price target/valuations between: $52.19 and$56.50.
The implication is that if we areright, not only could we makemore money for our investors butit could happen quickly if the restof the analyst community reratesthe company.
The downside risk is that eventhough we expect the company tomake more money in a propertymarket downturn — becausemore properties will be listed andfor longer — sentiment towardsREA Group’s share price couldturn negative
Disclosure: The REA Group isa subsidiary of News Corp, ownerof The Australian
Roger Montgomery is founder and chief investment officer of the Montgomery Fund. www.montinvest.com
ROGER MONTGOMERYSHARES
Despite popular perception,mining accounts for less than 10per cent of Australia’s economy,with consumption accounting forabout 70 per cent.
Rate cuts are supporting retailsales and property construction.China’s fast growth in services is asource of demand for Australianagriculture, wine, tourism, andeducation.
The true believers say the taskof urbanising and developingChina’s inner provinces shouldsustain demand for commodities— a positive for the dollar over thelong term.
A long-term driver of demandwill be China’s ambition to con-struct a new Silk Road through the“One Belt, One Road” initiativelinking the Middle Kingdom toEurope via Central Asia.
While aggressive chequebookdiplomacy will buttress China’sgrowing geopolitical influence, italso provides an outlet for theexcess capacity that haunts manyindustries, such as steel andcement. Indeed, the waning of themining investment boom in recentyears underscored the need for amore diversified economy.
Whereas Australians used tolament the so-called tyranny of
recent years, the world’s 12th-largest economy looks like anisland of policy coherence andcompetence compared with thehigh farce among debt-burdenedmajor economies seeminglytrapped in the vise-like grip ofunconventional policy.
Australia’s 3 per cent annualgrowth outpaces most advancedeconomies, while unemploymentis back below 6 per cent.
The hunt for yield could drawforeign money into Australianbonds, thereby supporting thelocal currency.
Australian stocks are alsoexperiencing renewed foreigninterest, thanks to yields of about 5per cent. At the Credit SuisseAsian investment conference heldin April, attendees voted Australiaone of their favoured markets inAsia.
The broker’s Australian strat-egy team came away from HongKong feeling comfortable with itscommodities exposure, with BHP,Rio Tinto, South 32 and rail opera-tor Aurizon Holdings among theirfavoured stocks.
This is an edited version of a cover story that first appeared in Barrons.com
distance from markets in Britain,the Lucky Country is well posi-tioned to profit from its proximityto Asia’s fast-growing economies.
The transition from “mining todining” is underscored by the hugegains in stocks of companies suchas organic baby formula producerBellamy’s Australia, vitaminmaker Blackmores and Capilano.
Concerned with food safetyissues and contamination of infantformula, many Chinese look toAustralia for organic food orsimply for food not grown inpolluted air and soil.
All three stocks look like goodlong-term bets, but investors maywant to wait for a pullback beforebuying.
The weak dollar also fired uptourism, with record numbers ofChinese visiting Australia.
Education is also booming, asAsia’s middle classes send theirchildren to Australian universities.
Despite Australia’s revolvingdoor of prime ministers over
The hunt for yieldcould draw foreignmoney into Australian bonds
SEVEN STOCKS WITH UPSIDE FROM DOWN UNDER
$A4.41 $5.69-$3.35 $9.1 6.9% Rail freight operator, coal haulage
10.80 $16.50-$3.36 $1.0 0.5% Organic baby formula maker
$27.66 $49.71 – 18.46 $69.8 2.3% World’s largest iron ore miner
$A169.67 $A222.90 – 67.50 $2.9 2.8% Vitamin maker
23.15 $23.92-11.50 $0.2 2.3% Honey supplier
$30.50 $47.37 – 21.89 $57.1 7.0% Iron ore miner
$A1.57 $A2.45 – 0.87 $A8.3 - Miner
Aurizon Holdings (AZJ)
Bellamy’s Australia (BAL)
BHP Billiton (BHP)
Blackmores (BKL)
Capilano Honey (CZZ)
Rio Tinto (RIO)
South32 (S32)
52 week high-low
Recent price
Company Market value ($bn)
Dividend yield
Services provided
Source: Barron’s
Australian investors are regularlyencouraged to diversify theirholdings and look for alternativeasset classes beyond the familiaroptions of shares and cash.
But the woes plaguing one al-ternative asset class long favouredby the ultra-wealthy — hedgefunds — are a timely reminderthat not all alternatives are creat-ed equal.
Hedge funds are known fortaking big risks and reaping the re-wards. Investment styles vary andcan include making illiquid in-vestments, short-term trading ofequities or computer-generatedstrategies. Many hedge funds bor-row money, amplifying the gains(or losses) of their strategies andbets.
The rewards can be handsome.During 2015, five hedge fund boss-es were paid more than $US1 bil-lion each, even though about halfof all hedge funds lost money overthe same period, an industry sur-vey in the US found.
Clients are often asked to pay
through the nose. A common feestructure is known as “two andtwenty” — 2 per cent of assetsunder management and 20 percent of performance every year.
But with markets provingchoppy over the first few monthsof this year, institutional investorshave been starting to questionwhether they can get returns thatare just as good or even better for alower cost elsewhere.
Outflows have been rising. In-vestors took back a net $US15bn inthe March quarter, the biggestwithdrawals since 2009, accord-ing to a specialist hedge fund re-search house.
Here are some of the high-pro-file names in the US who have re-cently questioned the appeal ofhedge funds:
● Legendary investor WarrenBuffett recently launched a tiradeagainst a broad class of activemanagers and consultants, criti-cising both their performance andtheir fees. The Berkshire Hatha-way chairman told his annualmeeting of a bet he had made withhedge fund Protege Partners thattheir fund of funds could not beata Vanguard S&P500 index fundover a decade. The investment ofthe hedge fund — which initiatedthe bet — has a cumulative returnof 21.9 per cent since 2008, whilethe index fund managed 65.7 percent.
● Insurance giants AIG andMetLife both reported falls infirst-quarter operating income
and partly blamed the perform-ance of their investments in hedgefunds. With interest rates stayingnegligible for years, insurers havebeen looking for better returns oncapital. But both companies nowplan to move money out of hedgefunds — AIG expects to halve itsexposure by the end of 2017, whileMetLife is set to slash its holdingsby two-thirds in about two years.
Investors have raised concernsthat the funds’ performance isn’tworth the fees, but that’s not theonly worry. As some funds makeinvestments in illiquid assets, itcan be difficult for clients to gettheir money back as quickly asthey’d like. US regulator the Se-curities and Exchange Commis-sion has been investigating thisissue, as well as the question of
how the fund managers value il-liquid holdings.
● A bad bet by billionaire BillAckman’s Pershing Square onValeant Pharmaceuticals has alsoreceived considerable coverage inthe US financial media, as thedrug maker’s stock tumbled al-most 90 per cent over the pastyear after accusations of fraudu-lent accounting.
Some upstarts are claiming toprovide lower-cost alternatives,with asset managers saying theycan use quantitative models to se-lect, for example, a basket ofstocks with low volatility. Smarthedge funds have even started of-fering low-cost alternatives totheir main funds to retain hesitantclients.
Automation more broadlyposes a challenge to the labour-in-tensive work of security selection.Analytics tool Kensho — in whichinvestment banking giant Gold-man Sachs has taken a stake —uses big data and artificial intelli-gence to provide informationabout market patterns that wouldhave previously taken well-paidbankers days to complete. Hedgefunds will also face questionsabout how to justify their costswhen computers can offer insightsand replace some work done byhumans.
Plenty of large institutions arestill sticking with their hedge fundinvestments for now. But thefunds are facing a chorus of criti-cism that is difficult to ignore.
Investors question hedge fund fees, returnsELIZABETH REDMANNORTH AMERICAN BUSINESS CORRESPONDENT
Operated by Guidepost tours and the SCT travel group in conjunction with Scott McGregor’s Railway Adventures – Lic# 2TA5895
Ride Australiaʼs most eccentric and appealing trains and take an island-hopping flight through the rugged Queensland Outback. Enjoy a character filled small group tour exploring the icons of Far North Queensland by train, plane, boat and coach with your expert leader.
11 - 25 October 2016
• LONGREACH • WINTON • MT ISA •• THE GULF COUNTRY • QUEENSLAND'S
SAVANNAH • CAIRNS AND THE TROPICS •
FEATURING:
• The Spirit of the Outback• The Gulflander• The Savannahlander• The Bally Hooley Steam Railway
