Rudi’s View: The Year Of Shame (Part 1)

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jan 24 2019

No Weekly Insights, but today's Rudi's View story got a bit lengthy, so I cut its content in two parts. Non-highlighted items appear in Part Two later this week:

-2018, The Year Of Shame For Fundies
-Byron Wien's Ten Surprises For 2019
-Conviction Calls
-Join The CSL Challenge
-Waiting For February
-Pub. Beer. Pitt Street Research
-US Earnings Recession, But How Deep?

By Rudi Filapek-Vandyck, Editor FNArena

2018, The Year Of Shame For Fundies

Maybe the biggest surprise from 2018 was not so much that there were so few places to hide from persistent selling orders, once they started hitting financial markets, but that so few actively managed portfolios have managed to stay clear from temporary Armageddon.

As pointedly pointed out by award-winning journalist Jonathan Shapiro at the Australian Financial Review, the official industry line that has been constantly put forward against the global trend to use more and more passive investment products is that when the day of reckoning arrives, as it did in September 2018, investors will experience with their own eyes the safer hands of the experienced professional compared with the mindless mass-produce that can only result in something akin to passive carnage.

Not so. Quite the opposite happened with many a professional fundie having to admit this month performance in 2018, and more particularly in the final four months of the calendar year, has been quite the disappointment, with minus double digit percentage returns not the exception the industry would have touted beforehand.

As far as the full year's return is concerned, I have come across -15.8%, -19% and -23.9%. And those are the ones that spontaneously spring to mind. Clearly, there are quite the number of fundies around who are now forced to eat a whole lot of humble pie, potentially for a long time too.

The FNArena/Vested Equities All-Weather Model Portfolio achieved a narrowly positive performance in calendar 2018 (up a grand total of 0.75%), which doesn't seem much at face value, but in the context of the above this puts the All-Weather Portfolio in the better half of the industry. The ASX200 Accumulation Index returned a negative -2.84% while the median long only Australian equities funds surveyed by Mercer booked an annual loss of -4.2%.

Shapiro's story, Year Of Shame For Fund Managers, published on Monday, 21 January 2019, contains a number of hard hitting paragraphs and observations that are worth re-reading while the topic is still relevant:

"Morningstar and Lonsec both explained that having a "value" approach was the undoing of most large-cap managers. Cheap stocks simply got cheaper, while pricier ones gained. And some stocks that appeared good value at the start of the year, such as the big banks and AMP, were decimated by the unfolding Hayne commission."

"Some sophisticated investors have given up on Australian large-cap, "long-only" managers altogether. Some simply don't believe managers in this sector can add value above fees, which are being forced lower. Others believe good active managers may be out there, but identifying them beforehand is impossible."

"While a small group of funds are being hailed for navigating the toughest year in a decade, success is often short-lived in funds management. The table toppers of today are often the cellar dwellers of tomorrow."

CLSA only this week initiated coverage on the sector in Australia, predicting fund managers in Australia should still benefit from compulsory super and increased offshore distribution in the years ahead, while global equity markets might be enjoying a less negative time as well. But downward pressure on fees is here to stay, and so is performance pressure in an environment of lower returns overall and plenty of passive and lower cost alternatives around.

CLSA predicts M&A will become a feature as funds will be seeking expansion to counter lower fees.

As far as individual managers are concerned, only two received a maiden Outperform rating at CLSA; Magellan Financial ((MFG)) and Janus Henderson ((JHG)) with price targets of $33.01 and $30.87 respectively. Each of Pendal Group ((PDL)), Perpetual ((PPT)) and Platinum Asset Management ((PTM)) commences coverage with an Underperform rating.

Data crunching by some also revealed that Australia's list of best performing funds is, quite frankly, virtually the exclusive domain of industry funds, which must be an incredible embarrassment for a federal government looking to change the industry structure away from union-based domination. Apparently, all fifty bottom performers in the sector are retail funds, most owned by major banks and other large and well-known financial institutions.

And when it comes to ultimate embarrassment, funds owned by Westpac ((WBC)) and ANZ Bank ((ANZ)) are at the bottom of the bottom performers.

Industry legend Jack Bogle, founder of Vanguard's market cap weighted funds and indices, passed away early in 2019. As he reminded us all in 2013, "Beating the market is a zero-sum game for investors. Money managers, as a group, must provide the market return... But that return comes only before their exorbitant fees, operating expenses, and portfolio turnover costs are deducted. The zero-sum game before costs becomes a loser's game after costs."

As it turned out, 2018 was worse, a lot worse.

Below: Performance of major asset classes lined up by Morgan Stanley, 2008-2018.

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