Mountains in Clouds

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Hall Road Investments #47 (Family Office Sherpa, Index & ESG)

First sent directly to subscribers on the 19th of February.

The Sherpa Update

LinkedIn – some ask where I get a lot of the detail for this newsletter so I’ve decided to start posting the articles and news sources on the Hall Road Investments LinkedIn page. Those interested can follow the page and use it as a more dynamic news update.


Natasha Nankivell – her brother, Peter Lyneham has joined her at GAF.


NFP Reporting – I have had several conversations over the last few months with senior professionals that also sit on the board of not for profits. The common theme is that the reports delivered by wealth managers that have been given the investment mandate are very average at best. Big name shops with very scattered information, no care taken from the RM when sending it to the board and no added value in providing easily digestible and important information in a way that engages the less financially savvy members that sit on these committees.


There are a few cost-effective alternatives that these NFPs can look at, I am happy to assist pro bono as I think this is a problem across the space and you can’t count on the counterparties to do the heavy lifting. Please let me know if this is of interest to yourself or someone you know.


Performance Fees – If you are interested in how a fund manager is performing across all strategies and they happen to be listed, look at the performance fees revenue. MER stays constant, performance fees are a good indicator of the actual alpha (or sometimes incorrect benchmark) provided by the manager across all clients and strategies. Magellan performance fees fell 70% in the H1.


People will also be keeping an eye on the Magellan figures as they own 40% of Barrenjoey, Finclear and… Guzman and Gomez and will have to report the success or failure of these private ventures. I can imagine a few competitor firms cleaned out by Barrenjoey (JP Morgan and UBS in particular) will be sending analysts armed with pointed questions to the 2021 reporting calls.

US Tech Webinar – I was invited to attend a US Zoom panel discussion called “Empowering the Modern Family Office with Technologies” which was presented by Fidelity Family Office, Mirador LLC and iPalladin LLC.


It was very cool; the discussion covered a lot of the main issues faced by US family offices when it comes to technology and how to cut through the sheer volume of offerings. Lots of relevant points for families and advisers in Australia as the same issues arise here.


I have notes and have looked at the iPalladin solution which I think has some relevance to local offices. One piece of information struck me – apparently, over US$100 trillion in wealth is still managed in Excel. Please reach out if you’re interested in the notes from the presentation or the firms mentioned.

AMP – in a not so surprising decision, Ares has dropped it’s bid for AMP. Following a look under the hood, the firm has decided the that the only asset worth bidding for is AMP Capital. Like Macquarie’s recent takeover of Waddell & Reid, wealth management is no longer the end game – it’s selling product.


Industry Super – something a bit different from the usual mergers, Maritime and Hostplus have instead decided to pool assets into one trust whilst remaining independent. To me, this looks like Maritime has mandated Hostplus to manage the assets via their Pooled Superannuation Trust (PST).


They both use JANA and there has been much said about Hostplus using the asset manager for heavy lifting, so I guess this makes sense? It follows Maritime’s failed merger talks with TWU and Mine Super.

Investment Due Diligence Software – I must admit, I’m at the shallow end of the knowledge pool when it comes to DD software. In my experience, clients will often have a dedicated investment team or consultant that uses the usual tech to perform due diligence on potential managers (Bloomberg, Morningstar, proprietary research, network, asset managers) but we are starting to see the emergence of software in this space that could provide a better result and reduce some of the outsourcing. This article from Francois Botha in Forbes/Simple is a good introduction to this area of infrastructure.


Masttro – I met with this tech platform this morning; they are pushing more into APAC through an affiliation with PWC. A few families have mentioned them as a possible solution, and they have some definite points of difference which would suit some clients here.


SPACs – I mentioned in a previous email that this type of “blank cheque” vehicle was not available in Australia anymore. In a workaround of sorts, Patrick Grove launched a $300M SPAC on the NYSE that will focus on Asia and Australian tech companies. Get those pitch books ready.


Platforms – for those following the fortunes of the new breed of investment platforms and where the flow is heading as the big banks move back to selling product, Praemium reported a 69% jump in funds under administration to $34.3 billion with its Australian platform FUA gaining 132% and the international platform up 24%.


Netwealth's statutory profit reached $27.6 million and funds under administration grew to $38.8 billion while funds under management grew $1.5 billion to $9.3 billion.


Interesting reading for global players looking at the domestic opportunity.


Meetings – Masttro, Beckon Capital, InvestSuite (Story Teller), Praemium, Onda Group, India Avenue, KPMG, Pitcher Partners, MicroEquities, FiftyOne Capital.


Indexing and ETFs


Cathie Woodif you’re thinking of launching an ETF business, it’s worth looking at the business model of ARK, Cathie Wood’s thematic investment firm. They have raised a staggering US$11Bn in asset in the first month of this year. Total assets sit at US$20bn, they were just under $4bn this time last year. To say that they’ve had a good run is an understatement and with and MERs running just shy of 80bps they would have to be one of the most profitable ETF business in the US.


Admittedly, the innovation and tech theme of the firm was a huge tailwind. However, they were the one of the biggest beneficiaries of this in terms of net flow. Why? They are a marketing force in terms of client buy in (hats, t-shirts etc) and they stay true, and own, their niche.


The funds are active ETFs, listed on the NYSE and Cathie Wood herself is an engaging figure head. Where Vanguard’s idol was your grumpy grandpa, often telling you ETFs were actually a terrible idea, Cathie is your intelligent aunt that seems willing to engage you as you start on the investment journey.


Capacity – one of the side-effects of all this inflow is capacity. I remember when a garage band ETF issuer released HACK in the US, the initial reaction was less around the inflow but more on the ability for them to deploy this newfound billion dollars to a relatively small amount of (illiquid) companies.

Will ARK have the same issue? Holdings are getting up there – Bloomberg research shows the firm now owns over 10% of free float stock in at least 25 companies. Over 20% of three companies.


This illustrates the issue that I have when active managers complain about indexing “distorting” the market with dumb money flow. These are active funds and are more likely to have concentrated positions in a small number of stocks – wouldn’t the impact be greater, and the downside exacerbated even more than if it were a broader exposure across the industry or sector?


One difference is that as an active manager there may be scope to hold more cash or, ironically, index ETFs that provide exposure to the sector without having to buy single stocks. Indexing rarely gives that flexibility outside of liquidity sleeves for redemptions or distributions. Look for holdings in futures, ETFs or cash/cash like assets to creep in if the mandate allows it.


Dimensional – have raised over US$700M in its three US ETFs. For advisers looking to access the DFA strategy but don’t want to drink the Kool Aid, there is an alternative it seems.


Fund Launch – Van Eck is launching a clean energy ETF (CLNE) which tracks and S&P index.


ESG & Philanthropy


Bitcoin I have no opinion on crypto as an investment. I’ll leave that for others to argue over. What I do know, however, is that the mining of Bitcoin takes a huge amount of power and at the moment that comes from fossil fuel. For those looking to the green credentials of any manager that invests in the space (recently Blackrock added Bitcoin to its universe), there needs to be a question of the emissions generated from managing these assets.


From Bloomberg: “The Cambridge Centre for Alternative Finance keeps a running estimate of annualized use: It jumped from 6.6 terawatt-hours at the start of 2017 to 67 terawatt-hours in October 2020 to 121.9 in early February as prices surged. One estimate, by Digiconomist, puts Bitcoin’s annualized emissions at 37 million tons of carbon dioxide, which is on par with New Zealand.”


If the price of mining goes down as it moves to cheaper fuel, will this cause the price of Bitcoin to go down? If someone has a better understanding of this, please elucidate.


Cheers,

Shaun

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