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Five Year Returns

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(adapted from the Dragonfly Fund Quarterly Update - December 2019)

Stock performance is rarely linear with ebbs and flows through time. Equitable Investors is focused on the medium-to-longer term window and while very conscious of managing volatility, fully expects there to be good and bad interim windows for investment performance.
We are fans of the question posed by quantitative investor Wesley Gray, PhD, author of Quantitative Value, several years ago: “If God is omnipotent, could he create a long-term active investment strategy fund that was so good that he could never get fired?” The answer was that God would get fired. Not because God would be a bad investor, of course, but because picking the investments that would deliver top decile (top 10%) returns over five years then sitting back and waiting would mean that God’s clients would have to hold their nerve in the interim period when the “perfect foresight” portfolio suffers drawdowns of as much as 76%.
Equitable Investors has …

10k Words - Jan 2020

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Apparently, Confucius didn’t say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.
The big have been getting bigger as momentum continues for passive, market-cap weighted index investing, as Morgan Stanley has set out for the US market (S&P 500); at the same time US stocks with negative tangible assets have outperformed the market according to Bloomberg. There once was a time when revenue multiples were hardly ever referred to but these days they are all the rage - and Equitable Investors shows they have increased across high and low percentiles. Then returning to Price-to-Earnings (PE) multiples, Morgan Stanley shows that Australian "value" stocks are trading at a discount to "growth" stocks t…

Dash for Cash

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(adapted from the Dragonfly Fund Monthly Update - November 2019)

In the current investment climate, there appears to be a fatal attraction to the next new shiny toy - be it IPOs or capital raisings. But we are very sceptical of the merits of many of the deals on offer. There has been approximately $1.2b raised in the first two weeks of December alone, across 55 ASX-listed companies, according to data from Fresh Equities. Similar activity levels continue at the time of writing, based on the deal flow we’ve seen.

We were interested to read a report ASIC has just released on IPOs in the mining and exploration space. We think the findings are also reflective of what occurs across the broader market:

There “can be an environment encouraging a rapid return on the initial investment rather than an investment aimed at the medium to longer term returns”“Promotional materials such as investor presentations, explanatory material and email marketing methods are often subject to substandard complia…

Ten Thousand Words: December 2019

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Apparently, Confucius didn’t say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.
With another calendar year coming to a close and interest rates remaining "lower for longer", there are plenty of measures by which large-cap equities look to be priced highly. In Australia, the market PE multiple has continued to expand to record levels despite earnings expectations softening, as Morgan Stanley sets out. Australian consumer confidence, by the way, is at its lowest point for several years, according to the ANZ-Roy Morgan survey (but the implication for stocks is unclear). Looking globally, here are some of the ways by which stocks can be measured as over-priced or fully-priced: we have a high S&P 500 PEG r…

We're not Amays-ed to hear of M&A interest

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Press reports indicate that potential acquirers are eyeing off digital-first mobile telephone and energy retailer Amaysim (ASX code: AYS) - either to buy it all or to split mobile and energy.

The Australian says here that "private equity firm Anchorage Capital Partners is the latest group to kick the tyres on Amaysim, which has been under scrutiny from other buyout funds and even telco Optus". It goes on to add that "at least one group" is considering buying both Amaysim and the retail arm of Vocus.

Equitable Investors Dragonfly Fund owns shares in Amaysim and wrote about it as a likely M&A candidate in our last monthly update.

Here's what we wrote:

Amaysim (AYS) is deliberately investing in building out its customer base to put in the best position to negotiate supply terms but we think that at the same time it will be making itself more attractive to acquirers. AYS has just under one million mobile subscribers as well as 203,000 energy customers. 

Its marke…

Ten Thousand Words: November 2019

Image
Apparently, Confucius didn’t say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.


Volatility has been on strike recently as demonstrated by Robeco's JS Blokland and the % of days US equities have fallen more than one percent. But WSJ's Jason Zweig illustrated how volatility is volatile, at least historically. In this low inflation environment, Antipodes has called out a "bubble in duration" arguing that equities are increasingly behaving like bonds. Yet, at the same time, Crescat Capital chimes in with a chart showing that US EPS growth is now falling behind the modest inflation levels. And finally, AQR sets out the case for "value" to return to favour, finding it to be "the cheapest i…

Ten Thousand Words - October 2019

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Apparently, Confucius didn’t say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.


Starting with a sobering thought, businesses that have debt graded as speculative or that can't cover their interest bills - Interest Cover Ratios (ICRs) of less than 1 - are "almost 40 percent of total corporate debt in the economies we studied", the IMF noted (as reported by the Financial Times). On a more upbeat note, Bespoke tabulated how a 1% decline in the S&P 500 to start October has typically been followed by healthy returns; and the rise of software M&A was charted by PitchBook. One of our favourite themes - the far greater opportunity set in small and micro cap stocks - has been illustrated by Verdad Advi…

Volatility & Uncertainty

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Volatility across all the asset-class proxies deployed in Equitable Investors' Risk-Parity Core strategy increased over the past 12 months but - as set out in the chart below - volatility remains below its peak levels of the past five years.

Figure 1: Annualised Standard Deviation (trailing 12 months)

Source: Sentieo, Equitable Investors
Similarly, the S&P/ASX 200 VIX Index, a domestic equities volatility measure, has increased over the same period but remains well below the peaks of recent history.

Rising volatility in risk assets (equities, commodities, real estate etc) is consistent with increased levels of uncertainty in the world as illustrated by the World Uncertainty Index (based on counts of the word “uncertainty” and variations in quarterly Economist Intelligence Unit country reports).
Figure 2: World Uncertainty Index Source: Ahir, H, N Bloom, and D Furceri (2018), “World Uncertainty Index”, Stanford mimeo (via policyuncertainty.com)

This text has been adapted from Equitab…

Ten Thousand Words - September 2019

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Apparently, Confucius didn’t say “One Picture is Worth Ten Thousand Words” after all. It was an advertisement in a 1920s trade journal for the use of images in advertisements on the sides of streetcars. Even without the credibility of Confucius behind it, we think this saying has merit. Each month we share a few charts or images we consider noteworthy.


Aussie equities haven't been in vogue judging by the EPFR Global measurement of cross-border fund flows. Yet the Australian equity risk premium is adjudged to be on-par with the US by valuation guru Aswath Damodaran. Are bonds in a bubble? Investors doubled their money in a couple of years, as BGC Partners highlighted, by buying 100-year Austrian government bonds with a coupon of 2.1% that has since traded up in price to a 0.66% yield. Looking at valuations, high growth Software-as-a-Service (SaaS) stocks have recently pulled back from peak valuations, as illustrated by tomtunguz.com, while PZENA Investment Management shows tha…

Sleepy Heads

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Australian investors have done well out of sleep with ResMed’s market cap multiplying nearly 19x since 2002. Equitable Investors Dragonfly Fund’s best performed investment (at the time this was written), Rhinomed (RNO), has a different angle on sleep. So does a newer investment for the Fund, Oventus Medical (OVN). Both were contributors to the Fund’s positive performance in July.

RNO has a consumable nasal insert sold as a solution for mild sleep apnea but is also now emerging as a drug delivery platform. During July, RNO (a) released data showing its “Mute” nasal insert is the fastest growing product in its category in US drugstores; (b) received a CE Mark registering its “Pronto” nasal insert that releases vapour (essential oils) for Europe (having already received US FDA and Australian TGA approval); and (c) released its June quarter cashflow showing cash receipts up 150% year-on-year to $1.5m. As Figure 1 below shows, RNO has emerged as a rapidly growing product in US drug stores.

W…

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