Mountains in Clouds


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Hall Road Investments #34 (O-COO/OCIO Index & ESG)

Originally sent to subscribers on the 7th of August.

The Outsourced COO/CIO

Perpetual – has gone all in US, picking up 75% of Texas based value manager Barrows. I looked at the firm and found that Vanguard had replaced them in 2016 after 35 years as part of an overhaul of its sub adviser list. The move came after founder Jim Barrow stepped back from managing portfolios in 2015 and the funds had some mediocre performance against the index.

So, a value manager that has recently underperformed is buying another underperforming value manager, in US dollar. It doesn’t seem to offer any diversification through the cycle and makes Perpetual ostensibly a US value stock picker. As someone mentioned to me, it looks like a classic value trade. Let’s hope for them it’s not a value trap.

AI – I read with interest about Castle Ridge’s Wallace AI market neutral strategy and its performance during a time that hit even the best quant managers. I love a narrative, and this was one of the better ones: “If you’ve never been to Japan, you land, and you don’t know what to do. So, you look around and mimic what other people are doing. You have no independency bias. Conversely, if you are in your own environment and surrounded by people less knowledgeable, you make independent decisions. We can detect that independency — when companies are behaving independently. That tells us they have something or know something that someone else does not.”

Apparently, it has a zero correlation with the S&P 500 and other market neutral funds, of which I am yet to see persistently outperform.

Magellan – another “ground-breaking” move, pushing together three separate strategies into one complex, $15bn listed/unlisted entity. If nothing else, they are keeping operations staff and ratings agencies busy.

Caledonia – Will Vicars and the team had a great year. If you have the stomach for it, the concentrated, high conviction nature of this fund provides outsized returns (and losses). Their new position is fascinating and shows why I’m not a stock picker – Warner Music. As someone that pays $10 per month for access to millions of songs, I can’t quite see how this area makes money. But as I mentioned, I’ll stick to my lane.

Family Office Tech Webinar – I participated in a KPMG webinar on Family Office technology, a good turn out who seemed to stay on for the whole presentation.

Kenny Arnott – I saw a missive on LinkedIn from Mason Stevens MD Tom Bignell as they have added Arnott Capital’s Opportunity Fund to their platform. I can understand why he was happy, and this allows better access for wholesale.

New term - IOOF mentioned in its recently release that it had “offboarded” some low revenue planners. I’ve been made redundant three times in my life, but thankfully never offboarded.

Fee rebates – often you get rebate arrangements on co-mingled funds, the pricing flexibility is often not as well-known as those for seg mandates. It causes an admin headache and is a pain to manage if there is a significant amount of them. Seems netwealth has decided enough is enough and has plonked a $2K per client rebate fee on managers providing these.

Professional Services – ouch. HLB Mann Judd has been fined and banned from audit work in the US after the American auditing standards watchdog found it did not have adequately skilled staff or proper quality control mechanisms.

Pershing – I’m sure this is a first, they have been convicted of a criminal offence in regard to client money transactions.

Self Aware – I’m self-aware enough to know what I don’t know (a lot). I’m always eager to learn from those that obviously know more about aspects of finance and markets than I do. For simplifying complexity well, I’ll always read a Howard Marks (Oaktree) piece. His latest attempt to arrest his own investment bias is a cracker.

Indexing and ETFs

CFA ETF Capital Markets Webinar – As mentioned in the last email, I chaired a panel discussion on the ETF Capital Markets which was a lot of fun. Some interesting points on ETF issuers refusing redemptions and how liquidity providers and market makers set prices and hedge risk. I believe it was recorded so may be available from the CFA.

Launches – lots of fund listings recently, let me know if there are any you are looking at specifically and want more detail.

State Street – as mentioned in a previous newsletter, SPDR is launching a new fund (finally). It’s ESG and it’s at the very inexpensive end of that theme which will hopefully drag the rest of the high fee funds down. I could never understand why ESG index funds were so much more expensive, even when you allow for the index costs. I call BS on any fund manager calling ESG trackers “active”.

Leveraged ETFs – ETF Securities have launched two new leveraged US stock ETPs. Careful.

Active ETFs – Janus Henderson has launched an active income ETF on Chi-X. Full replication despite only $500K seed – the power of allowing the feeder fund structure.

Dimensional Fund Advisors – is joining the ETF market in the US meaning even those that haven’t been to the boot camp and drunk the Kool Aid can gain access. Maybe it’s a sign from DFA that they can no longer ring fence their products that aren’t performing – International Core Equity is heading into its third year of underperforming a cap weighted benchmark. When you won’t shift on your factors (value, size) but still want flow? Go direct. Just like ex DFA CEO Ed Repetto did with Avantis and cleaned up.

Oil ETPs – Betashares has changed the futures contracts for it OOO ETP back to one month. They changed it to 3 months during the recent volatility when oil went negative. Not sure why they changed it back, keep an eye on that one.

ESG & Philanthropy

Governance – the overhaul at AMP continues, Alex Wade has shuffled off for unknown reasons. The amount of red flags for ESG aligned strategies must surely mean that AMP is no longer in your portfolio?



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