Good afternoon,

Last week I attended the Hannemann & Brown Wealth Syposium in Torquay. It’s a small, invite-only conference of c.50 of the countries top investment advisors and financial advisors. Unlike other industry conferences (which I largely avoid at all costs), that revolve around listening to a few fundies plug their specific funds and strategies in a glorified sales-pitch for inflow, this conference was more focused on what being a top practioner in 2019 looks like and learning from each other. There were a few interesting takeaways, that I thought I’d share.

It’s abundantly clear the industry is changing dramatically.

Some of this is a result of regulation, but to be honest, I think most of it is a just what customers are demanding and the forces of the market. What’s changing:

  • If you don’t have a net worth in excess of $1m, you can’t afford financial advice anymore. It was the consensus of the advisor panel that a high-touch practice can’t really make the economics of servicing small clients work. Why? Education requirements, the cost of employing great people, compliance costs. I think it’s going to be the case where those with smaller asset bases will be forced to use industry super and/or the other free/readily available services are. And there’s lots of them that will do a perfectly fine job for you. You just won’t have a experienced, humanbeing councilling you through the dark days and helping you avoid making silly mistakes.
  • “Economies of Scale” as a business strategy is dead. Boutqiues have 95% of the access as a big investment banks or buldge-bracket broker. The digitisation of the platform space, the improving technology advancements available with APIs/data feeds and the raft of execution and custody services available means having a “seat at the exchange” or a “national presence” is an absolute waste of time and money. Everyone has access to the information, takes the same meetings and by and large, has access to the same set of corpoate opportunities. “Access” or “information” in and of itself, is pointless. What clients need is “curation” – they need a filter for the noise, someone to help them make sense of the data and a guide to help them recognise their biases.
  • Everyone is running the same asset allocation – most of the bigger practices I spoke to are employing one of the run of the mill asset consultants to do asset allocation (Lonsec, Zenith etc.) and there’s not that much difference in a “growth” or “balanced” allocation at one firm to another. If they aren’t using a consultant, they are just mirroring the Future Fund. Personally, I don’t see significant ‘value-add’ at this level, there’s just not that much difference between people’s views (which, on inspection are mostly valid and justifiable) Yep, asset allocation drives return, but it’s more about your personal circumstances than about trying to make money in my view. I still think its the assets you own inside your allocations that matter most!
  • The hunt for yield is real. And unrealistic. The reality is you can’t make 6%-7% per annum without taking on equity-like risk. We are, and will continue to be, in a low and falling return environment (you can thank the Federal Reserve, the aging population globally, technologies, developing middlle-class/outsourcing of labour – all deflationary). If you need mid-to-high single digit returns, no longer can you just rely on fixed income to do the job – you need to move up the risk curve.
  • Nobody is taking any risk. It seems to me that there’s a lack of concentration risk. Planners recommend clients buy 15 different equity funds, each of which own upwards of 30 stocks, all offering a slightly different strategy, and wonder why they don’t outperform. I’m not arguing against diversification, I’m just saying, “growth” allocations actually need to be meaningful to generate “growth” – and advisors need to have conversations with their clients about how to acheive LT growth in a low return environment.

ASX 200 had another fairly flat week, with mid-caps dominating.

There’s really two divergent data points at the moment.

On one hand, you’ve got equity markets rallying hard on the back the Fed changing it’s tune on interest rates/China seemingly willing to support its economy with easy policy when things slow.

Meanwhile the bond market telling investors there’s a recession/signficant global economic slowdown on the horizon. Below is a chart of the US 10 year treasury yield and the S&P 500 indexed at a year ago.

Equities have rallied, pricing in c. 7% of earnings growth over the next 12 months. However bonds, which as the risk free asset help us estimate forecast inflation, are only offer 2.5% return for 10 years.

And though the growth outlook looks a little weak, the credit market certainly isn’t concerned about defaults – US and Aus investment grade credit spreads below. High price = low risk of default and positive for equities/risk assets.

I’m not super pumped on the data coming out of the US, looks like the accelerating trend has been broken and it’s either muddle through (most likely) or significant slow down.

Probably no need to be alarmed with PMI’s in the mid-50s and a diffusion index just flashing below 0, though couple this weakening data with what appear to be relatively bullish earnings growth forecasts… I’m not sure in this environment growth is going to go from 4.24% this year to 11.37% next year and 9.94% the year after – which is what the current consensus forecast implies. Though it’s important to note that in Oct’18, these forecasts were >20% and actuals last year were 25%. Revisions are still negative for both sales and EPS across 1, 2 and 3 month horizons.

What’s keeping the market ticking along higher? China. Manufacturing PMI’s saw their first uptick in several months. This is supportive of commodity prices

It’s a world devoid of returns and I don’t think that’s going to change. I’m fairly bearish/neutral from here and don’t see a lot of compelling value. Banks look cheap but are a leveraged play on the Australian economy (which isn’t going great). Resources are a leveraged play on China which I think isn’t going great (despite recent uptick.) Industrials have got tiny growth forecast and those that do have decent growth forecasts aren’t cheap. And I think a lot of the domestic tech names are good businsess priced for excellence. It’s a real stock pickers market in my view (which I like) but which stocks to pick is the eternal question? Might do that next week.


Movers & Shakers

A slight improvement to the movers and shakers regular section this week. I’ve added consensus price target return figures which might be of some interest.

SYR had a big week, though is still down from $4.50 back in Jan 2018.

Jumbo (JIN) had a big initiation from Morgan Stanley which saw it’s price rocket higher – shareholders probably having a better time of it than the punters buying their online lotto tickets!

Z1P also broke through $2.00 which is fantastic. Business continues to build operating momentum though I’m still concerned about the sub-20% revenue yield…. not sure it stacks up LT if they can’t sort that out.

Not much of interest to me in the losers, SIQ continues to look cheap though the market is clearly not sure about salary packaging or the group’s acquisitions. Bellamy’s also battling after a decent run from $8 to $12 and back to $10.

Not much of interest to me in the losers, SIQ continues to look cheap though the market is clearly not sure about salary packaging or the group’s acquisitions. Bellamy’s also battling after a decent run from $8 to $12 and back to $10.

Have a good week,
LL