Mountains in Clouds


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Hall Road Investments #35 (O-COO/OCIO Index & ESG)

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The Outsourced COO/CIO

Client segmentation and supplier matching – I’m very excited about some of the work we have done on fitting client reporting and data analytics with the right family office structure and requirements. It’s getting to a point with our experience and research that we can now accurately segment the client needs, know the suppliers that would satisfy those needs and fit them together. Questions like insource vs outsourcing, custodial vs non-custodial/hybrid, tax integration requirements, family reporting requirement, do it yourself or have it all done for you, multi asset, multi-currency, cost vs service etc. etc. It’s very cool.

Navigator Global Investments – The ASX listed parent of US based alternative manager; Lighthouse Investment Partners, is hoovering up minority ownership interests in alternative asset managers from Dyal (Neuberger Berman). The managers are Bardin Hill Investment Partners, Capstone Investment Advisors, CFM, MKP Capital Management, Pinnacle Asset Management and Waterfall Asset Management. Talk about diversifying with one shot.

Spitfire – has gone into administration after an investor reneged on a $3.5m payment. I know the platform and have seen the pitch book that’s been floating around for a while. The tech itself looks good and will probable be picked up for a good price by Avaloq or anyone looking for a bargain.

My issue with putting clients on underfunded platforms is illustrated by this point from the administrator:

“Our first task is to transfer the remaining financial planners and their clients off Spitfire Assets Managers platforms to new advisory platforms as quickly as possible. We want to create as little disruption as possible, as we enter into discussions with creditors and shareholders.”

I don’t care how good your deal is with a platform, it’s your clients that will suffer if it goes belly up. Let’s hope the transition goes smoothly, in my experience it rarely does.

Platforms – Class has purchased 100% of Smartcorp for just over $4m. Class Portfolio is a tracking tool we see a lot here, it’s more aligned to advisers but it’s good to see they are continuing to build out capabilities.

Funds Launch – Northcape is going retail through a distribution partnership with Warikiri, Atlas is going through Pan Tribal.

Contango – the income LIC is hoping to change strategy and farm out portfolio management duties as it can’t actually provide income. It’s looking to become a long/short global (EM, DM) equities strategy managed by US-based WCM Investment Management. Lanyon and WAM are going to block that though so I wouldn’t get my hopes up. I can see why Contango is looking to drop its current strategy, looking at the return - over one year the LIC had an NTA return of -20.75% and a total return of -16.51%. The last six months NTA provided a return of -20.60% and a total return of -18.50%. Wilson Asset Management is making a bid to take it out, they can’t do worse, I guess.

KKR – have pulled out of buying MLC. Not surprised with the CFS takeover probably causing enough of a headache.

Addepar – Silicon Valley portfolio tracking and data analytics platform has ticked over $2 trillion in assets under administration. Some reactions to the news were on point though – does FUA point to success or should they talk users and revenue? That $2 trillion could be a few wire-houses (Morgan Stanley is a client) and family offices – they charge a fixed fee at the account level, not bps of FUA.

Industry Super – Non Govt Schools (NGS) and Australian Catholic Super have announced a merger. Makes sense, wonder if Michael Block ends up group CIO? I’m guessing probably.

Transitions – State Street and Citi transitions team have been fingered as the originator of some big volume in value stocks. I don’t think they’d like the press and certainly not the naming of Lazard as the potential loser of the mandate. Every time someone calls out Indexing/ETFs for supposed high volume adding to volatility, maybe mention this active manager that has to liquidate positions on market when the client redeems/pulls the mandate, unlike, I don’t know….an ETF.

Platform – met with both Adminis (NZ) which was borne out of a family office established following the sale of Trade Me, and Mirador from New York which uses the Addepar solution.

Netwealth – saw a huge 110% increase in its managed accounts assets. Interesting that competitor Praemium announced it had lost almost exactly the same amount when a major client changed providers so maybe not as good as people think?

Spaceship – I must be missing something with this marketing firm dressed up as a super solution for “the kids”. Grok (Cannon Brookes Family Office) has tipped more into the business via a convertible note that raised another $10M. He was a very vocal supporter of the business’ original founders (who have all since gone) but must see value in the long term future or, has a case of sunk costs bias. I know they pay well; the staffing costs alone must be right up there.

They’re looking to launch new product with the money as well as extricate themselves from the current trustee. Initially a managed fund selected on environmental, social and corporate governance principles, then a capital-protected product aimed at customers saving for a house deposit. Not exactly reinventing the wheel then.

Morgan Stanley – first it was the financial planners moving from insto aligned firms, now it’s the big shop wealth managers who are taking advantage of the improvement in technology to set up their own shop. Emmanuel Whybourne is the newest wealth manager in Brisbane, taking around $750M in FUA from their old shop and setting up through Praemium takeover target (and client), PowerWrap. I’m sure Morgan Stanley will be tightening the client retention legals for all their other big writers.

Indexing and ETFs

ETP Market – hit an all time high of just over $67bn following the recent rally and strong inflow across the board. In 2016 when the market was just over $20bn, I was quoted in the AFR when asked on recent growth: "In five years I expect it to lot more nuanced – and also a lot bigger." Should’ve started an ETF business with that sort of predictive power.

Magellan – I’m getting a little tired of talking about this firm, but they are staying very active in the ETPs space during this period of uncertainty for which you have to give credit. They are copying Blackrock in issuing a “core” set of ETPs that are significantly cheaper than their very similar, very expensive alternatives. State Street did the same, they launched a bunch of very, very low-cost ETFs in the US to compete with Vanguard and iShares Core.

Magellan has long been pricy; this gives the sales team an alternative for those investors that haven’t seen the value in paying 135bps and 10 yet.

ETFs causing Volatility in the match – The amount of wasted oxygen I spend arguing with people pointing the finger at ETFs every time there is a spike in volatility at the closing auction is concerning and not time well spent. If you ever need an article to send to the next underperforming active manager crying into their beer on the dangers of ETFs (when they actually mean indexing, but I digress) in the closing auction then the latest from Blackrock finally puts some data around it.

Market on Close (MOC) trading has increased (US is 11.6% of daily volume, up to 21% in DM Europe). But as BR rightly points out – “increased MOC activity reflects broader industry trends, including the growth of algorithmic trading, the increasing preference of market participants to avoid overnight risk, systematic and factor-based funds leveraging the close to help ensure consistency with investment processes, and brokers offsetting intraday hedges at the close.”

If you know there is going to be liquidity in the close, take advantage of it. Let me know if you want the full note from BR, it has some great data points on trading, rebalancing (don’t get me started), secondary market vs primary etc.

DFA – I read with slight bemusement the very positive report in the AFR on Dimensional and how they are just, you know, the best. It mentioned that they don’t sell to retail which is horse apples as they have launched a range of ETFs in the US. Seems they are starting to fire up a PR machine in Oz as performance suffers.

Indexing for income – a global income fund we launched at State Street used an “aristocrats” index and included some criteria such as stable distributions and that the payout ratio could not go above 100%. Telstra seems to be paying out more than it earns, I wonder if there are any indices out there that will have to drop the stock as it now breaks a rule? It would be a big tracking error for any Aussie equity strategy considering the often-high weighting the stock has.

The cutting and reducing of dividends across a range of industries will certainly make the next index rebalance for income ETFs interesting, check your methodology.

Fund Launches – Van Eck has gone full thematic with their new listings which will hit the boards soon. Video Gaming and eSports (ESPO), Global Healthcare Leaders (HLTH), World Ex Australian Wide Moat (cheeky ticker of GOAT), Australian Moat Income (DVDY).

ESG & Philanthropy

Philanthropy – I read “Shoe Dog” by Nike founder Phil Knight with recently and it’s a cracker. I didn’t know much about him but then had a bit of a search and saw that he gave a significant donation to The University of Oregon and I thought; cool, that’s a Uni that doesn’t seem to get as much endowment money. Then I saw that he gave a bigger donation to Stanford which isn’t exactly short of cash ($22bn). It’s why the recent announcement by Mackenzie Scott of her $1.7bn donation to smaller colleges in the US is so much more interesting than the next pile of cash given to Yale or Harvard etc to sit on top of their already massive piles of cash. The impact of donations this size must be huge for endowments and charities that are not at the top of the billionaires give list.

AMP – you can’t make this up, Boe Pahari has appointed himself chairman of the company’s Inclusion and Diversity Channel. Read the room.



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