Mountains in Clouds


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Sherpa Newsletter #37

This newsletter was sent to subscribers on the 18th of September.

The Sherpa Update

Newsletter Change – I’ve decided to change the theme of this section of the newsletter to better reflect the work being done with our Family Office clients at Hall Road Investments. In the past it has been a mix of investments and operational news and information – it will still have those elements but as seen through the lens of our “Sherpa” mentality. Ie. How we act as an independent guide for clients navigating this ecosystem.

Data – I had a whinge last week around portability of client portfolio data. One piece of feedback I received was that the requirement to rebuild the portfolio meant the new team actually took the time to understand the history and detail of the portfolio and “buy in” to the new client’s portfolio. This is a great way of looking at what could be a painful exercise – understand the client, their history and gain in insight into their SAA and investment philosophy.

SaaS – when the service provider offers only a free call number and online helpdesk how can you ask deeper questions on functionality etc? After speaking to a few clients that use the same platform, maybe establishing a user group to improve leverage in getting amendments/improvements made could be the answer? We are looking into organising one for Sharesight as a start, let me know if you are using the platform and would be interested.

Tom Waterhouse – a contact on LinkedIn posted a screenshot from The Australian showing an article on Tom Waterhouse and his move into funds management. Because, how hard can it be really? He’s set up an unregistered wholesale fund called The Gambling Fund; it aims to invest in undervalued listed and unlisted gambling related businesses. Tom is CIO and it looks like he has two young analysts on board alongside a head of Operations.

Being a naturally curious person and having followed Dixon Advisory and the Mayfair 101 situation, I had a quick look at the IM. Seems that they are a CAR of Lanterne Funds Services and Saxo is the custodian.

Some funky stuff: there is a 1% buy/sell spread on the fund which already puts you behind on performance and seems like a big transfer of costs. Quarterly redemptions (that take 25 days to get paid) with a 25% gate per investor. 2 and 20 management fee! Dalio would be proud. Performance fee calculated monthly.

I would say let the market judge this fund but, as my contact on LinkedIn rightly points out – expect a shedload of marketing to hit The Australian targeting “wholesale” investors. The need for advice has never been more important.

Research Houses – MH Carnegie is selling a stake in managed fund research and investment consulting firm Lonsec to Rob Coombe’s Generation Development Group for $20M. Lonsec will be part owned by a fund manager/insurance group. The firm has been pushing heavily into managed accounts and investment consulting recently which makes it a more attractive proposition than the old model of over-charging fund managers to rate them.

Superhero – Zip and Afterpay staff are going into retail stockbroking after tipping into a recent $8M raising for this $5 flat fee brokerage firm. With recent ASIC reports on the dangers of overtrading by new account holders, what could possibly be better than going hard into discount brokerage aimed at new/young traders. I’m all for buyer beware and the fact that this could provide access to investing to a group not well serviced by Commsec etc but I’m interested in how this will be marketed. I have a suspicion that some form of cheap credit facility may start to creep in.

There’s a minimum trade of $100 so they aren’t going to be normal holdings, they’ll have to be in an omnibus HIN with subledger to aggregate settlements so any holdings won’t be directly owned – one of the biggest pluses of “old school broking”. I also call shenanigans on $5 brokerage fee as it seems there is a subscription cost of $9 per month that is charged annually. Without that fee you only get to follow 5 stocks with delayed pricing. Also, only market orders, no limits. Why charge annually? Why not monthly subscription? I guess that’s a big upfront revenue per user and locks them in for at least 12 months.

And $55 for in specie transfers? No.

Ignition/Morgan Stanley – Mark Fordree’s Ignition Advice is raising $35M through Morgan Stanley. I remember meeting Mark when they first started and it’s amazing to see how they have grown from what was originally going to be a robo advice style firm using ETFs. I did some webinar’s with Mark a few years ago on advice tech, very happy to see the firm succeeding.

Caledonia – for those following this concentrated fund, Jamie Odell has enlisted Will Vicars and external partners to pick up $1bn (35%) worth of stock in gaming company Scientific Games from Ron Perelman. As I often mention, having a fund like Caledonia will certainly not look like the index.

Reddit – I’ve been on Reddit for almost nine years, and if used correctly it can be a great source of information and amusement. It also houses some of the very worst of online trolls. Now, the AFR has published a Bloomberg article on how Wall St is looking to Reddit for clues on how “the kids” are trading through Robinhood and therefore bumping up prices. One of the subreddits mentioned was dumpster fire spec trading forum Wall St Bets. If this is the new factor for investing, then we should shut it all down.

Pooled Development Funds – I’m a bit embarrassed that I had no knowledge of this structure. They were closed to new listings in 2007 but there is still some trading on the ASX.

Wealth Management – UBS may be merging with Credit Suisse.

Indexing and ETFs

Index Arbitrage – When I started in broking just after the tech wreck in 2000, I saw a few insto clients try to front run the index changes. As indexing has gotten bigger, the more people will try and get in front of any big add/delete/rebalance. I’m yet to see this work consistently and when you’re on the wrong side of it, you can cop one right to the face – see Tesla’s 20% drop after failing to get into the S&P500 with Etsy getting a guernsey instead.

Some analysts note the volatility of Tesla and why that would cause some issues for S&P if they included it – no index provider wants to increase uncertainty in a market like this or make the index unattractive to insto investors. The other issue would be increasing the massive overweights to single companies in the sectors – Tesla would’ve been added to the industrials sector and represented 20%. Add that to Apple (25% of Tech Index), Amazon (25% of Consumer Discretionary), Chevron (23% of Energy) and Facebook (24% of Communication Services) and you have some serious idiosyncratic risk in what are supposed to be diversified benchmarks.

I’m going to assume that S&P waits until either Tesla’s volatility decreases, or its valuation normalises (when profit catches up to price).

Direct Indexing – for those that have been reading this newsletter since the start, you may remember I went on and on about direct indexing last year. It continues to be a point of interest for me, especially as Schwab looks to capitalise on its recent “slice” trading and may be about to launch a mass retail version of direct indexing in the US. The main benefit for clients will be tax loss harvesting. Now, you can’t “wash” in Australia anymore (since 2008) but I would say there are potential benefits for Aussie investors that are looking to minimize tax and frictional costs – look at how well Parametric has done with industry funds here, why can’t family office/retail benefit from tax efficient direct indexing?

ESG & Philanthropy

UBS Wealth – whilst no longer having a presence in Australia, UBS Wealth ($US2.6 trillion in AUM) has made a decision that may impact the way firms direct their adviser base locally. The firm announced it would advise private clients investing globally to choose sustainable investments over more traditional options. UBS is the first major firm to do this and have taken a first mover halo for it. Wonder if Crestone, a firm that still has close distribution ties to the Swiss bank, will do the same.

Chuck Feeney – The founder of Duty Free Shoppers who amassed a billion dollar fortune has achieved his goal of wanting to die broke. He has given all his money away to charity through the idea of Giving While Living – spend your money on big, hands on charity bets instead of funding a foundation upon death. The scale of this man’s giving is extraordinary – over $8bn donated to charities, universities and foundations – and anonymously. He had a method of giving that was to spend big and go for broke when the value and potential impact outweighed the risk.



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