Mountains in Clouds


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Hall Road Investments #46 (Family Office Sherpa, Index & ESG)

The Sherpa Update

Betashares – I am suspect whenever a fund manager partners with a super fund at the product level. Seems that the government is also curious as to why Future Super has allocated 60% of its assets to three Betashares ETFs.

I get that it’s a commercial decision, the fund (and hopefully members) can leverage off the size of the allocation and reduce the fee. There does need to be careful consideration of the suitability of the investments and how much the overall relationship affects the risk and return. In this case, Future Super was the seed money for at least one of the funds so you would hope there was alignment.

When Future Super was questioned by Tim Wilson, the CEO revealed that they receive a rebate from BetaShares, though couldn’t clarify the amount.

Wilson also asked around the suitability of Cleanaway within the BetaShares FAIR ETF as it had recently been fined by the EPA. This shows that there can be benefits to mandating to a small number of counterparties, but you still need to think of the governance aspect. Especially if you market yourself as an ESG fund.

Blackrock - is adding Bitcoin futures to the universe of investments for two funds (Strategic Income Opportunities and Global Allocation). It only includes cash-settled Bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission.

Reddit – I won’t add to the volume of content out there on how the Reddit hordes on /r/Wallstreetbets have apparently turned the equity market upside down. I have been on Reddit for 10 years; I found the site following the demise of and enjoy a lot of the content if curated properly and avoid the main page. However, WSB is not the new normal – they are the current norm dressed down. If you want to look at the history of this sub, within its 8 million members you will find it teaming with professional investors seeking meme upvotes.

I’ll leave to it Peter Mallouk from Creative Planning to give those interested a nice 101 on the current situation and wait for the AFR to lose interest. One point made in his podcast is the fact that there is a real need to diversify not just across asset classes but sometimes across implementation (brokers). Robinhood is a free brokerage service, the client (and their volume) is the product, so I’m not surprised they shut it down when the actual client (Citadel) made a phone call.

Spare a though for this bloke, who I’m sure has been copping it from a legion of keyboard warriors that haven’t checked firm name correctly.

It hasn’t affected Robinhood’s ability raise more cash – it has raised an additional $US2.4 billion lifting the overall funding boost in less than a week to $US3.4 billion. I wonder how much of that will be parked in a defence fund.

Schroders – have changed the return target and names of three of its real return funds. Where previously they were targeting CPI +3.5% - 5%, they now have much lower expectations. The CPI +3.5% fund has even changed its benchmark to RBA cash rate.

I look at this change in two ways; 1) Schroders is managing expectations and therefore reducing the need to increase risk for the stated return and, 2) There is going to be a lot of similar funds changing their benchmarks as the returns on cash and FI won’t get you the classic CPI + 3% return for defensive investors.

Neo Banks – With Xinja folding and NAB announcing a $220M takeover of 86 400 there is an argument that expectations of disruption within the banking space should be tempered.

Milestone – has launched an APAC version of their powerful pControl Asset Allocation tool. If you’re an insto or wealth manager asset allocator this seems like good news for those that are considering insourcing.

Pearler – the splashy launch this week with no real detail of this self-proclaimed “anti” Robinhood. It looks like an online broker for ASX listed only stock with built in portfolios that includes some commission free (ie. Sponsored) ETFs from Van Eck, ETFS and eInvest. Accounts managed by Sanlam and broking through OpenMarkets.

It is pushing auto investing and long-term investment horizon – I’m very interested to see under the hood and whether they are the “marketer” of the product in a similar way to Spaceship.

Indexing and ETFs

ETF mechanics - One of the interesting by-products of the surge in Gamestop share price is the big redemptions in retail ETFs as investors realised that instead of holding 1% of the company as they normally would, the funds suddenly had a weighting of around 20%. Not something that that you would normally want in a sector play and you’d be looking at taking profits after a 40% surge in the ETF NAV.

The other theory is that insto clients looking to short are actually redeeming in kind as they receive shares instead of cash. If the borrow on GME is high and the number of shares on issue is low, getting hold of a significant amount through redeeming (rather than selling the fund on market) the ETF and then lending them out can be a profitable exercise.

The other thing to be mindful of is that these ETFs will rebalance back to weights. Going from 20% to 1% is a big sell. If the rally hasn’t dissipated before the rebalance, there is potential for some selling pressure. One point to be made is the difference between equal weighted and cap weighted. The biggest redemptions have occurred in the equal weighted SPDR ETF Retail Sector fund where redemptions amounted to around 80% of assets.

Launch – Apostle is launching an ETF version of Dundas’ Global Equity Fund.

ESG & Philanthropy

Greenwashing - Joe Aston in the AFR has continued to point out the slightly suspect green credentials of Larry Fink at Blackrock. Call me cynical but the big managers have started to care a lot more about environmental overlays as the money flows through but were missing in action and even specifically negative on the strategies when they were deemed fluffy.

I’m a big believer in not only the future benefits of impact and ESG in terms of producing better corporate citizens but also the risk of investing in companies that will most likely end up with significant stranded assets that are no longer supported by the next wave of investors. It is with that in mind that I look at true to label ESG managers that have a long history in this space, rather than the marketing driven soundbites uttered in the company jet.



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