Overall 2018 was a poor year for the performance of Australian
fund managers, with some experiencing truly appalling results.
Charlie Aitkin’s Gobal High Conviction Fund lost 23.8%
for the year which to me is an unforgivable performance given that the fund has
the ability to go long and short and therefore should theoretically make (or at
least protect) money in any environment. The Gobal High Conviction Fund now has
a negative return since its inception.
In the Switzer
Super Report of 27 April 2017, Charlie Aitkin wrote:
If
you are going to charge active fees, which are higher than passive fees, then
my view is your after fee returns have to be significantly better than what
passive delivers.
I couldn’t agree more, so maybe it’s time to give up
the game or return fees to investors?
Steve Johnson’s Forager Australian Shares Fund lost 19.4%
and they held (by their own admission) 25-35 percent of their portfolio in cash
for the year, which makes the result truly horrendous.
The L1 Capital Long Short Fund had lost 21.9% to 30
November 2018. Very ugly indeed.
According to the Sydney
Morning Herald (SMH) of 24 January 2019, Caledonia Investment’s main fund
lost more than 15.6 per cent, while a secondary fund which is almost entirely
invested in Zillow, Grubhub and The Stars is down 27.6 per cent.
The SMH went on to state that Zillow shares have
dropped 44 per cent in the last six months, while food delivery app Grubhub is
down 15 per cent and Canadian gaming outfit The Stars is down 49 per cent.
The SMH also stated that Caledonia has 75 percent of
its funds invested in the three abovementioned companies. This is sheer hubris.
Caledonia wrote to their investors stating that:
It bears repeating
that we are not macro investors and we try not to let speculation enter our
thinking.
To my way of thinking, placing 75 percent of your funds
in only three companies is speculating on a truly epic level and Caledonia is
now seeing the end result of that.
All of these funds charge high fees and all of their
investors would have performed far better had they just invested in a low cost
index fund such as those offered by Vanguard or iShares (Blackrock), or
alternatively picked one of the old (low cost) listed investment companies such
as Argo, AFIC or Milton and gotten far superior returns while sleeping well at
night.
What all of these high fee active managers seem to have
lost sight of is the first rule of money management, which is to protect the
money you already have. This can sometimes mean being very defensive. It
can be as simple as running a well-diversified portfolio where no investment
represents an excessive percentage of the fund, keeping a reasonable level of
cash (when markets are at high levels as they clearly were in 2018) and putting
protection in place through the use of index put options (rather than shorting
which requires far more skill). All of the abovementioned funds will have
failed on at least one or two of these three points.
The Australian Government’s Future Fund now has a
policy of favouring index funds over active managers and they are to be applauded for
that. The Future Fund very significantly outperformed the above mentioned high
fee funds over 2018 and has a very sound record since its inception. This is
incredibly impressive given the vast amount of money managed by the Future Fund
and the fact that its employees earn far less than your average private sector
fund manager.
A lot of investors who chase higher than benchmark
returns are really giving up birds in the hand for birds in the bush. In
addition, it’s hubris on the part of investors to believe that they can pick
active fund managers who are going to outperform over time – this is truly a fool’s
game. But as I’ve said before, there is no shortage of fools in this country
and nothing that I write (or anyone else writes) will change that (they make
more of them every day).
Footnote: One of the outstandingly positive
performances from an active manager in 2018 was John Hempton’s Bronte Capital. Bronte’s
Amalthea Fund returned 20.8 percent in 2018. However, since its inception, Amalthea
has only outperformed its benchmark (MSCI ACWI) by 0.8 percent per annum (14.1
versus 13.3 percent), which shows that even the best of them struggle to
materially outperform a passive index.
All quoted performance figures are from the fund
managers’ own web sites (apart from Caledonia Investments which was sourced
from the Sydney Morning Herald).
