Come And Have A Look Under The Bonnet
Built patiently and with purpose for exacting clients, Australian Standfirst now offers its capacity-constrained Global Core Fund Series, honouring the familiar touchpoints of original and thoughtful investment management, supported by an established leadership position, persistent track record and dedicated commitment to Australian Ultra High Net Worth (UHNW) and Philanthropic wealth management solutions.
Elevating Responsible Investing today demands that Environmental, Social and Governance (ESG) ideals are no longer niceties but are imperatives from now on.
In a step forward, Australian Standfirst is the first active fund manager to integrate ESG into our benchmark, which will publicly hold us to account and elevate ESG as an enforceable performance requirement: Announcing the S&P Global LargeMidCap Ex-Australia and New Zealand ESG and Green Bond TR 70/30 Monthly Blend Index.
The S&P Blend Index utilises an ESG scoring methodology, overseen by S&P DJI’s governance group and calculated by SAM, a unit of RobecoSAM, recognised since 1995, as the preeminent global investment specialist focused exclusively on Sustainable Investing.
Responsible Investing is further optimised throughout our global macroeconomic top-to-bottom process and places Responsible Investing equally alongside thoughtful due diligence, risk-first deep research and tactically proactive prescient investing.
The Fund will have a strong focus on displaying resilience in down markets and protecting capital is Australian Standfirst’s first priority, especially as investing does not follow a glide path of uninterrupted success.
Primary Remit: For Australian investors who wish to enhance their core investment portfolios with global multi-asset class investment opportunities which do not significantly overlap with their existing ASX200 exposures.
It is also a core and not satellite approach, which means it complements core holdings in individual relative value opportunities and does not take concentrated, high conviction idiosyncratic positions.
It is built with purpose squarely focused on what Australian investors seeking global capital appreciation and income require.
Australian Standfirst holds a long view and with patience.
Speed and agility matter at times but nothing substitutes for an informed decision process and the rigour received by steady hands.
An articulated methodology allows passion to transpose into metrics and segue clarity of message with fundamental currants and conviction calls.
This means in practice we approach our top-down analysis, holistically rather than reductively and we aim to identify a small number of opportunities with the best balance of potential return and limited downside geometric risks.
We’re not wedded to tag lines, only realised outcomes and focus on delivering excellent investment performance, regardless of the economic environment via a risk-first and controlled process.
This, subsequently, also uncovers risks more comprehensively, which then allows our portfolio to remain very different than others.
Importantly, we take the time to do it all properly.
To make a truly informed investment decision, an investor needs to understand how a hedge fund actually generates returns — how well does a manager: exploit opportunities over other market participants (generate alpha); manage and profit from exposure to market risks (beta); enhance returns through exposures to alternative systematic risks that do not exist in traditional buy-and-hold portfolios (carry).
They can earn a premium for taking on risks that cannot be diversified away.
These can be either:
1. Easily accessible systematic risks derived from directional market exposures (beta)
2. Alternative systematic risks, which require skill to access (carry)
Or, investors can:
3. Exploit an advantage over other participants in the financial markets (competitive edge — alpha)
Since none of these three sources of returns satisfy all the portfolio objectives on their own, the portfolio should include each. Further diversification can then be achieved within each of the three categories.
Prices may cure some issues but ultimately, secular bull markets rest on three pillars—growth, liquidity and valuations.
The Due Diligence and Portfolio Management (“DDPM”) team separates the noteworthy from the noisy and sometimes very compactly.
While it’s important to separate technical and fundamental market moves, every technical move has a fundamental spark.
If the concept “don’t own more just because more of it exists” is compelling for equities, it should be even more compelling for corporate bonds, where increased issuance may represent a problem rather than an opportunity.
Furthermore, the maturity profile of existing bonds reflects issuer objectives to minimise cost, which is contrary to investor objectives to maximise return.
As a result, the approach to corporate bonds should have minimum liquidity requirements, but not be too reliant on notional amounts outstanding to dictate portfolio positions.
Another main objective of our developing approach to corporate bonds: minimise losses given their asymmetric risk profile.
This approach should have a clear focus on quality in order to minimise losses which tend to spike with recessions.
|Asset Class||Class Specific Principles|
|Equities||Identification of thematic exposures across sectors and countries, allowing for combine short term risk management with long-term, high-convication company investments.|
|Fixed Income||Identification of global fixed income opportunities with consideration to our high conviction corporate and macro research to deliver strong risk-adjusted returns, alongside our deep research into bond issues and timing determination of our investments based on our cyclical and longer-term risk and return objectives. this allows for high-conviction exposures with an eye for risk and capital protection during a decade of unconventional monetary policies globally.|
|Alternative Investments||Our focus is to remain invested in liquid assets across non correlated multi-asset to derive genuine diversification.|
|Cash||Often times the best investment is cash as a means of managing risk and waiting for better investment opportunities.|
Our three Key Portfolio Management Principles Are:
- Do not take single party counterparty risk – we always face the exchanges or regulated markets
- Avoid conditional correlations, they mean nothing (positive) in a crash
- Secure your base
For longer-term investors, accepting liquidity risk presents an opportunity. A strategy of buying illiquid stocks and selling liquid stocks has generated a 4% annualized return since 1976.
Theory suggests that investors should be compensated for owning illiquid stocks, which have higher transaction costs and which can take longer to trade. Empirical results support this theoretical “illiquidity premium.”
Liquidity shocks are associated with a wider distribution of index returns and higher index volatility on average. There is a feedback loop among liquidity, volatility, and returns, as high volatility reinforces low liquidity and vice versa.
Liquidity shocks have been associated with lower index returns on average since 1985, but also come with a wider distribution of outcomes as weak liquidity can be present in both sell-offs and rallies.
For example, the 16% sell-off in December 2018 and the 10% rally in January 2019 both came alongside poor liquidity, as investors remained cautious and kept length light. This pattern is consistent with the strong link between liquidity and volatility.
Accepting liquidity risk presents an opportunity for longer-term investors.
Since 1976, the most illiquid stocks have generated a 17% average annual return, compared with 13% for the most liquid stocks and 12% for those in the US’s S&P500.
Consistent with theory, illiquid stocks generate higher returns (“illiquidity premium”), even after controlling for market, size, value, and momentum.
The long/short strategy has posted a 4% average annual return since 1976 with a 63% hit rate of outperformance (27 of 43 years).
Illiquid stocks outperform most during periods of tightening financial conditions and S&P 500 sell-offs, as investors tactically adjust portfolios by selling their most liquid holdings.
Given the increased frequency of financial repression by central banks, institutional and individual investors need all tools available to sustain wealth, for themselves and for their constituents.
The rules are based on long-term principles of investing: buy stocks with good value, momentum and quality; buy currencies based on their higher expected relative yields and momentum; buy companies that are targets for merger arbitrage, engaging in share buybacks, subject to index inclusion, conducting spinoffs, etc; and buy commodities based on their price trends and roll yield.
It is important to remember that the concept of “inflation”, in itself, is not a bad thing.
Broadly speaking, inflation represents the rates at which price levels for goods and services within any given economy rise.
Inflation often accompanies economic expansion, which is a desirable outcome.
This is why measurements of GDP Growth are often coupled with inflation expectations.
Inflation becomes undesirable when the lifting of these price levels begins to outpace economic activity, productivity and growth.
This scenario has the result of eroding the “purchasing power” of any given currency.
When excessive, this phenomenon is referred to as “hyperinflation”.
Attuned, well-constructed and most importantly, properly diversified balanced portfolios should remain responsive to any number of possible changes in these variables.
Resulting in moderate levels of inflation being welcomed as a stimulatory and not corroding attribute.
Forever and a day, strategy is probabilistic, not deterministic and allows us to sit at the waterfront of possibilities.
Offence wins games and defence wins championships – in the realm of investing, the rate of compound returns is all we care about and it’s the severe losses that crush the rate of compounding, it is not the small loses, a.k.a., a ‘volatility tax’, it is the large losses that crush an investors rate of compounding.
Clausewitz’s first principle is, “secure your base” – which is not achieved through Modern Portfolio Theory (MPT).
To ensure bases are secured, we have found that the best safe haven is the one you have to invest the smallest amount in it which gives you the largest payout in a future potential retracement (crash).
We therefore focus on two types of risks: month-to-month variations in returns and the risk of a large loss.
The month-to-month variation is commonly measured by the volatility of returns, while the risk of a large loss is harder to measure and requires elaborate stress testing to quantify since it occurs relatively infrequently.
An optimal portfolio maximise returns, minimises risk characteristics and satisfies liquidity requirements, at any given dynamic market moment.
We focus on topics about which we have something of value to say, not on chatter and speculation.
At the same time, we don’t shy from making clear recommendations for action.
For Australian Ultra High Net Worth investors there’s an ever-present need to modulate the amount of accepted risk and wariness surrounding the likelihood of an erumpent in contagion.
Simplified this is known as, ‘risk-on’ and or ‘risk-off’.
Modulating the amount of risk in a portfolio is probably the most important task we undertake daily – we like the world but were not overreaching for risk.
Momentum – Moving Average Convergence Divergence (“MACD”) is one of the longest standing and widely used model trading techniques, prevalent in the classical hedge fund equities universe.
MACD is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price.
MACD indicators can be interpreted in several ways, but are used by our DDPM team to identify asymmetric and idiosyncratic crossovers, divergences, and rapid ratchets of price momentum upwards or down (which flags velocity and potentially latency).
High Frequency Trader’s (HFT’s) know the price of everything and the value of nothing.
Technology has also been a significant contributor to improved liquidity in the US and the developed markets for which we focused upon.
HFT’s have grown to become dominant suppliers of liquidity in the US equity market and increasingly across Asia-Pacific as well.
However, HFT’s often supply liquidity without taking into account fundamental information and are forced to withdraw liquidity during periods of market stress to avoid being “adversely selected.”
There is some evidence from international markets that HFT’s volumes drops in the minutes around macro events and for us as global macro risk-first managers, this trend raises the risk of abnormally large drops in liquidity during subsequent crises.
Therefore, to redress our structuring surrounding risk mitigation, we don’t have the luxury of knowing what the next crisis will look like but what we do is cover our contingencies; not just one but many of them, a concatenation of events.
Speculated hypotheticals include:
- Rehypothecation Risks: given a scalpel to dissect a rainbow, the best optimists are those with the worst memories, id est, the Credit Crunch, Global Financial Crisis and the Great Recession of 2007 to 2009.
- Ubiquitous Liquidity Concerns: the sea refuses no river.
- Government Bonds, dubbed, “Govies”, are the new subprime thanks to the fact that monetary interventionism is a Faustian bargain, which obvious ominous consequences down the line.
- Black swans continue to paddle darkness towards visibility (but often far too late).
We regularly remind ourselves of the potential oversight determinants:
- Such as “double downs” on volatility concentrations
- Portfolio tail, “black swan” or related contingency mitigation scenarios
- Always remember that interest rates are to stocks what gravity is to matter.
In the past and at our best, realising ‘Intrinsic’ Value takes time. We find that on a trailing 10-year basis, funds with low portfolio turnover (less than 25% per year) have beat both their benchmarks and higher turnover peers.
Changes in index constituents are a significant source of tracking error. To minimise market impact and improve tracking error, when deemed appropriate, shortly before a corporate action or other index changes, the DDPM team may rebalance the portfolio or use small futures positions.
Small positions in futures may be taken to achieve index exposure for dividend and other receivables in the fund with the aim to achieve closer tracking of the index.
Ongoing assessment of the trade-offs between transaction costs and tracking error is done for each underlying Index in order to provide investor with the aim to provide an efficient index exposure.
For purposes of back-testing, we elevate compound geometric returns, as they look very different than arithmetic returns but it’s the big losses that affect you geometric compounding.
When “sampling” or “optimised sampling” method is used, the replication relies on mathematical models to build a portfolio consisting of a smaller number of securities than the broader basket the portfolio is tracking.
The accuracy of the tracking when sampling therefore is model dependent.
There are three primary reasons why backtesting methods may not work well:
- False positives: It is possible to back-test a strategy and obtain what appears to be attractive risk-adjusted returns with an acceptable set of statistics, but in reality, be latching onto a “false positive”. In other words, the strategy worked over the tested time horizon, but is more a reflection of randomness and less a predictor of future performance
- Market impact: It is also possible to identify an investment strategy in a back-test, but underestimate the speed with which new capital drives up the price of the factors involved, reducing their potential to add returns. Simply put, it is difficult to assess in advance how much capital will cause cheap factors to become expensive
- Real life vs backtest: Approximations and simplifying assumptions during back-testing which do not encompass all procedures necessary to run a strategy on a live basis; underestimation of turnover and transactions costs are two examples.
The speed with which the DDPM team terminate what turn out to be false positive strategies matters.
Strategies have to make sense from a market and economic perspective before testing them.
Furthermore, the strategy has to have a viable “’counterfactual”; someone would need to want to take the opposite view for the identified risk premium to persist.
The DDPM team uses options and other derivatives for hedging purposes or to express a specific point of view.
The Fund can be opportunistic when market dislocations arise and uses leverage in a deliberate and measured way when deemed appropriate.
Within a few guiding principles, the team’s strategy is intellectually flexible and opportunistic.
Notwithstanding, the DDPM team has a strong framework of rules to manage counterparty risk arising from securities lending and derivatives usage, for instance, with prescribed maximum exposures, diversification and collateralisation requirements and limits.
In our view, uncertainty is the enemy of growth and to approach our systemic quantitative determination, the Australian Standfirst DDPM team has developed a proprietary top-down determination filter, we call our Core Activity Indicators (CAI):
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This information contained herein has been prepared and issued Australian Standfirst Asset Management Pty Ltd ACN 612 265 219 as an AFS Representative 1276948 of Australian Standfirst Funds Management Ltd ACN 618 083 079 AFSL 510315 and is provided for educational purposes only and should not be taken as advice. This is not an offer to buy/sell financial products. We do not provide personal advice nor do we consider the needs, objectives or circumstances of any individual. Financial products are complex and all entail risk of loss. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not indicative of future performance, future returns are not guaranteed and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and over-the-counter derivatives, give rise to substantial risk as they are highly leveraged, and are not suitable for all investors. Please ensure you obtain professional advice (including tax advice) to ensure trading or investing in any financial products is suitable for your circumstances, and ensure you obtain, read and understand any applicable offer document.
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