Mountains in Clouds


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Hall Road Investments #44 (Family Office Sherpa, Index & ESG)

Originally sent to subscribers on January 8th.

The Sherpa Update

Redemptions – ASIC has finally acted on some of the less liquid offerings out there saying one thing when marketing to clients and then leaning on the legal paperwork when things get a little volatile. I know I sound like a broken record but the reliance on the IM as a sole source of due diligence is a recipe for disaster, especially those strategies with illiquid underlying.

In this case ASIC is targeting La Trobe which was marketing 1st Registered mortgage funds to retail. We see a lot of this asset class in client portfolios; however, they are often direct with the counterparty and the family will most likely possess deep knowledge of that sector.

JBWere – has notified low revenue clients that their account will be closed. The firm is moving into line with the rest of the NAB Private Bank as it offloads smaller clients and concentrates on HNW and those that aren’t “self-directed” ie. Those that will pay ongoing fees rather than one off brokerage and don’t require the same level of compliance. They call this “personalised wealth solutions” and as MLC’s army of mid-market advisers and clients head over to IOOF, NAB has hired 50 private bank specialists that no doubt double as a very handy sales team for “bespoke solutions” only available to wholesale clients.

Active Manager Persistence – when you are in the top quartile as an active manager, you shout it from the rooftops. The marketing budget suddenly expands, and the numbers are trotted out at the front of every pitch deck. The reason for this is that it rarely lasts - shown in the latest persistence scorecard from S&P.

The data is a stark reminder how difficult it is to pick a good, long term manager and that selection criteria should not be limited to the best (or worst) performer that year – “Out of the top-performing funds in the 12-month period ending June 2016, only 1.0% persistently maintained a top-quartile rank, and 2.0% consistently beat their benchmarks in the following four consecutive years.”

Considering the move towards active bond funds in an attempt to find yield, proper due diligence and manager selection is at a premium; “only 6.7% of funds in the Australian Bonds categories managed to stay in the top quartile for three consecutive years”.

Now, just because you’re not in the top quartile every year doesn’t mean you are poor performer but for me this highlights the value of asset allocation through the cycle and you can’t just pick a manager on short term performance numbers.

Sayers – continues to attract staff with the news of six Deloitte partners jumping to the new advisory business. Some interesting specialties too – robotics and cognitive automation lead being one of them. The technology/platform team will add to the recent wealth and advice staff from Vanguard, PWC, JBWere and UBS.

Hyper Personalisation – Franklin Templeton has enlisted Singapore based Bambu and fintech loved custodian Apex Clearing to launch a new digital advice offering called Tango as they try to compete with Vanguard. Franklin provides the AI investment engine they launched in September last year, Bambu will integrate with Apex APIs to automate all the admin and allow advisers to launch their own Robo Adviser, firm badged and all.

This is the trend going forward – best of breed that can integrate through API, each firm bringing their own non commoditised value without having to spend and debug a new tech piece or start an asset management service.

Hall Road has a similar mindset – curate the best solution from those available, be vigilant and curious for clients.

Pershing Square – I don’t usually highlight performance numbers of funds but it’s worth noting that Bill Ackman’s fund has reported another big year for returns. The reason I bring this up is I get a lot of feedback on several funds that have wild swings in performance – one from Sydney (Caledonia) and one from Perth (Packer & Co) and I always go back to this excellent interview with Northern Trust from the i3 podcast on manager selection and chasing returns.

Meetings – Microequities Asset Management, Coolabah Capital.

Indexing and ETFs

China – the great index deletion continues as MSCI becomes the third manufacturer to remove US listed Chinese companies from their benchmarks. Add this to the fact that the NYSE decided to ditch the three biggest government owned stocks from the exchange, then changed its mind. Confused?

It should remind anyone that blindly invests in benchmarks – you shouldn’t. It also highlights the potential benefits of direct indexing – you can make these decisions for yourself and are not beholden to the myriad tweaks and counter tweaks of the index providers and exchanges and can maintain the actual exposure you’re looking for.

ESG & Philanthropy

Henry Paulson – has been recruited by Bono to run TPG Rise Climate, a fund that will focus exclusively on combating climate change. I can see the eye rolls from here but it’s worth noting that Bono has raised over US$5bn in the TPG’s Rise Funds that focus on impact investing.

One of the differences with TPG’s Rise funds is that they don’t expect investors to swallow lower returns for the greater good, a requirement to legitimise and scale these strategies. – An interesting move in the US which could have some applications here. This organisation launched a fundraising campaign to build a web-based platform that connects volunteer financial planners with individuals in need of pro bono planning. completed a pilot program with six Certified Financial Planners, partnered with some 200 individuals who participate in SaverLife, another nonprofit that helps participants save money. The program targets clients with household incomes of $50,000 or less.



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