Mountains in Clouds

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Hall Road Investments #33 (O-COO/OCIO Index & ESG)

The Outsourced COO/CIO


Hall Road – Big week, on Tuesday I’m chairing a CFA Society panel discussion that includes Deutsche Bank and Susquehanna on ETF capital markets and how that system performed during the March volatility. On Thursday I will contribute to a KPMG webinar on building out Family Office technology. If you’re in the CFA you would have received an invite and for the KPMG webinar, you can register here.


Oaktree – Howard Marks is using Crestone via US based Spire to target Aussies for a new fixed income absolute return fund. Looking to raise US$15bn for a strategy that allocates capital to defensive, core or opportunistic buckets, depending on the market cycle.


According to the AFR, investors, Spire will collect money in the Spire Capital Master Fund, which feeds through to the unlisted and Luxembourg-based Oaktree Opportunities Fund XI Feeder fund.

Oaktree was going directly to some family offices during March/April with dislocated credit strategies.


Ratings – Roger Montgomery’s Aussie equities fund has been downgraded by Lonsec to Investment Grade. This is the kiss of death for fund managers that sell into planning clients that require a recommended or above. The researcher cited poor performance and high fees (1.36% and 15.38% performance fee). The fund seems to have changed from quant to fundamental and had a big allocation to cash.


In the past 5 years it has underperformed the ASX 300 Accumulation index by 1.2% per annum so maybe no surprise.


VC Funds – Local venture credit fund OneVentures has ruled off a final close for its venture credit fund after raising $80M total, just short of its stated $100M target. Not bad for this market though. The fund will be run with the help of Israel's Viola Credit - part of Israel's Viola Group which has $US3 billion invested in technology companies.


PWC – reports that 11 partners are seeking to move as a block. Reading details of the compensation required to leave the firm as partner gives new meaning to golden handcuffs. I’m going to assume they re-think the group approach.


AFSL secondary market – seems that those that are looking to exit the industry and have already sold on their client book are now looking to sell “vanilla” AFSLs to those looking to become independent. I wonder how much one costs?


Xinja – apparently the neobank has pivoted to be the next Robinhood and provide commission free US equity trading. You know, commission free except the 1% FX commission and an $8 per month subscription fee. Just like ING Direct before them, they have a deposit base making little revenue so they’re looking to funnel them into something that provides ongoing transaction or FUM fees. What could go wrong with encouraging clients to punt on US stocks instead of keeping funds in cash? The new product is called Dabble, I can see the marketing already. Just have a little try, what’s the harm? I’m seeing CFDs and FX in the future…


This rule seems obvious for opening an account – “investors who buy and sell stock within a day; four days in a row will have their account blocked.”


Speaking of zero commission trading, this article illuminates how firms such as Robinhood make money from stop loss orders.


Wingate – Melbourne based credit manager is launching a new fund. Looks like dislocated credit similar to KKR, Oaktree et al but about a month or three later. May help to alleviate some of the losses from their mezzanine property loans.


John Hempton – It must be hard being right and not get rewarded for it. John’s Amalthea Fund had Wirecard short for a long time and despite the company recently blowing up didn’t provide a profitable trade. Paulson showed that timing is everything with his big short in the GFC – he wasn’t the first to see the trade but made the biggest profit from getting in just before it went pear shaped.


In house product – lots of advice firms provide clients access to a managed account solution which stands to reason, why pay a third party when you can retain the manager fee. The best interest rule holds up when done well and can provide a good client and firm outcome. When done poorly (high costs, ill-defined strategy and benchmark, underperformance or index hugging, high brokerage from transactions, high turnover) it can be sub optimal for the client and ethically concerning for the firm. I have seen some shockers in the past.


With this in mind it should come as no surprise that according to The Fold legal, the majority of managed accounts were white labelled by, or associated with, financial advice licensees which made them in-house products. When advisers recommended them to clients, they would generally receive a direct or indirect benefit, and this created a conflict of interest. Colour me shocked.


Non bankable assets – if you’re talking to European or US tech providers, this term comes up a lot. We would call them serviced assets or similar, basically ones that require manual inputs and pricing etc.


Fund Managers – Kapstream has “restructured” its credit team and made its head of credit portfolio management Raymond Lee redundant. Not sure if that’s a good thing.


Terrible name changes – First State Super has joined the crap name change brigade with its decision to rebrand as Aware Super. I’m flummoxed, why change a name that sounds like a state pension/industry super fund and all the halo effect that gives to one that sounds like the next in a long line of marketing speak “millennial focussed” funds that have all been in the news recently for the wrong reasons?


I know they recently rebranded, I’m wondering how much member funds will go into this new one?


Mirador – Another reporting service out of the US that was recommended by a family office group in Sydney. I had a call with the founder this week, let me know if you would like any information. They provide an outsourced service to administer the reporting functions for family offices and advisers. They build and administer the architecture with their preferred suppliers (Addepar etc) and maintain an ongoing consultant relationship where they manage all the components of the platforms and provide the client with the output they’re looking for.

I had to look up the definition of mirador.


Credit Suisse – Is looking to offload its 23% stake in retail broker Bailliue along with other investors. Apparently, this is a process for a total 50% sale for a business with $15bn in FUA and a big chunk of revenue from Private Wealth. Maybe KKR is looking to add to Escala with a more middle market offering?


Indexing and ETFs


Marketing vs reality – Perennial has shut its “zero” fee cash ETF after just 10 months. I never liked this fund. It’s not zero fees if you still pass on the 15bps of costs and to claim that it is disingenuous, and clients don’t like double speak.


It does bring up an important component of the due diligence process though - just because it says MER of xx bps doesn’t mean that’s the total cost. Be wary of costs that the fund manager passes on to the investor, in particular when they add it to their buy/sell spread.

They claim that low interest rates were the reason for low uptake, but I call shenanigans on that. Inflow into BetaShares’ AAA and the equitable iShares cash products shows over $300M in inflow in June alone.


Vol Indexing – Michael Ho from T3 developed SPIKES Volatility Index and has launched a new index that tracks the volatility of bitcoin options. I must admit, I’m at the shallow end of the knowledge pool when it comes to crypto currency but I’m making a concerted effort to educate myself. I know a few family offices have used T3 for hedging tail risk so will look into this new index.


Cheers

Shaun

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