March 2021 reports and other interesting stuff

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Hi

All three Funds delivered positive returns in March. You can access the monthly reports below, as well as a replay of the recent Affluence LIC Fund Webinar. Or if you’re short of time, the presentation we gave can be accessed here. As foreshadowed last month, the Affluence LIC Fund will close to new investors on 30 June.

Among our usual batch of things we found interesting this month, we explain why you should be wary of fund managers quoting 12 month performance right now and the reasons it’s much better to look at a 14 month number and longer.

If you’d like to invest with us, monthly applications for the Affluence Investment Fund and Affluence Small Company Fund close on Friday 23 April. Affluence LIC Fund applications must be completed by Friday 30 April. Investments will be effective 1 May, with confirmations emailed about a week after that. As always, go to our website and click the “Invest Now” button to apply online or download application/withdrawal forms.

If you have any questions, simply reply to this email or give us a call at any time.

Regards, and thanks for reading.

Daryl, Greg and the Affluence Team.

Affluence Fund Reports & News

AIF Monthly Report

Affluence Investment Fund Report

The Fund returned 0.9% in March. Since commencing in 2014, returns have averaged 8.4% per annum, including monthly distributions of 6.6% per annum. See the report for more including detailed performance and top holdings.

AIF Monthly Report
ALF Monthly Report

Affluence LIC Fund Report

The Fund returned 1.3% in March. Since commencing in 2016, returns have averaged 12.9% per annum, including quarterly distributions of 7.4% per annum. See the report for more including detailed performance and top holdings.

ALF Monthly Report
ASF Monthly Report

Affluence Small Company Fund Report

The Fund returned 1.5% in March. Since commencing in 2016, returns have averaged 8.8% per annum, including quarterly distributions of 6.0% per annum. See the report for more including detailed performance and top holdings.

ASF Monthly Report
Webinar Replay

Affluence LIC Fund Webinar

This Fund will be closing to new investors at 30 June. If you’re interested, here’s the link to a replay of last months webinar. We reviewed 2020 performance, discounts/premiums, the portfolio and took a look at some key LIC holdings.

Access replay

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ALF Portfolio

With a unique discount capture strategy, quarterly distributions and access to a wide range of quality LICs, the Affluence LIC Fund may be a useful addition to your portfolio.

It has outperformed the ASX200 by around 3% per annum since commencement and owns a portfolio of LICs at an average 15% discount to their underlying value.

Click below to learn more about the Affluence LIC Fund.

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Other Interesting Stuff

Chart of the month:

The ASX200 Accumulation Index (which includes dividends and share price growth) made new highs in March 2021. And there are a lot of 12 month numbers floating around at the moment that look pretty good. But beware. Timing is everything. One year ago, markets had just passed their extreme lows of 2020, and anyone can look good from a bottom of a cycle.

Going back just two more months, and measuring performance from January 2020, gives a much better perspective of a fund manager’s performance. That’s because January 2020 was the last monthly high before the pandemic hit markets. So, by looking at this period, you can get a feel for how a manager performed in both the downturn and the upswing.

Although it’s still a short period, it is, in effect a full market cycle. For example, here’s our three funds measured against the ASX as well as a reasonable overall investment target of inflation + 5% (click the image for a larger version).

Performance from Jan 20

Had you invested in the ASX200 at the January 2020 month-end high until March 2021, it would have returned just 0.7%, only recovering back to the starting point in the last month. By contrast, all of our funds outperformed in the downturn had recovered all the losses within 4-5 months of the lows and delivered pretty good total returns over the period.

These are the periods when active managers should outperform (and earn their fees). But if they haven’t, you’re quite entitled to ask some hard questions as to why. That’s because the best opportunities to make money happen at turning points when market valuations are most unrealistic. You don’t even necessarily recognise them as turning points at the time. But if you recognise the imbalances, you’re halfway there. And if you can outperform on the downside and are in a position to be flexible, you’re three quarters of the way there. The rest is down to actually taking action. Doing something about it.

So, as far as performance goes, ignore the 12 month numbers and look longer term. Speaking of performance, here’s an exceptional piece on how fund managers trick you into thinking it’s better than it is. Thankfully, the problem is not as severe in Australia as perhaps in other places. But, some of the things we regularly see from fund managers that we frown upon include:

  • Performance numbers being omitted altogether (usually a guarantee of underperformance).
  • Performance before fees and costs are deducted (unless they are planning or working for you for free).
  • Listed Investment Companies that show NTA performance only (without also including shareholder returns using share price data).
  • Performance comparisons to irrelevant benchmarks (unless you’re running a cash fund, why would you compare performance against the RBA cash rate).
  • Quoting total returns since inception (rather than annualised).

We recently lodged a submission in response to the draft of an ASIC-commissioned report by Deloitte into competition in the managed funds industry. One of our key recommendations is that ASIC or the Government issue more prescriptive guidance on the reporting of performance by fund managers. We hope it eventually happens.

The best opportunity:

Recently, Firstlinks asked us (and a bunch of other fund managers), “What is the best opportunity for investors over the next few years?” This was our answer:

“We’re contrarians at heart. We love investing in things that are unloved and cheaper than average. Right now, there are plenty of opportunities to choose from that meet that criteria. Our best idea is to invest into one particular subsector of the market where several undervalued opportunities converge. An investment allocation to Australian small and micro-cap value stocks combines three areas where we feel there is above average value.

Firstly, this idea backs Australian stocks over global stocks. The ASX has lagged US market returns substantially over the past ten years. But with our economy much better placed than most for the medium term, it’s time for the ASX to shine. Plus, if you invest locally, you get the extra benefit of franking credits.

Secondly, we much prefer value stocks over growth right now. The price gap between these two is as extreme as it’s ever been, with the possible exception of the tech bubble in 2000. And we know what happened after that. We feel like the turning point for value stocks has finally arrived.

Finally, we’ve seen a big drift towards investing in large caps in the last ten years, helped by the popularity of passive investing. A lot of smaller companies have been left behind. There are plenty available at very attractive prices, including many on single digit earnings multiples. So it makes sense to focus on small and microcap companies.

So, look to add some Aussie small cap value stocks to your portfolio. What’s the best way to do it? We suggest rather than go it alone, that you can execute this idea the same way we do. By investing in a number of different unlisted funds and LICs that focus on ASX small cap value stocks. By accessing more than one fund manager in this space, you’re diversifying and also probably lowering the risk.

As an example, unlisted small cap value funds we currently hold include Phoenix Opportunities, EGP Capital, Wentworth Williamson, Cyan Capital 3G and Terra Capital Natural Resources. LIC’s we own include Spheria Emerging Companies, Sandon Capital, NGE Capital, Ryder Capital and Thorney Opportunities. There are a range of other great small cap value managers out there to choose from.

These are far from the only investments we own – but they represent one of our largest total exposures. Collectively, we think this strategy provides the potential for strong double digit returns over the next few years.”

If you want to see all 45+ responses, go here.

This month in (financial) history:

In April 1955, a middle-aged milkshake-mixer salesman opened a franchise in Des Plaines, Illinois. It racked up $366.12 in sales of 15-cent hamburgers and 10-cent french fries on the first day. The milkshake makers name? Ray Kroc. The store was the very first McDonalds franchise. The rest, as they say, is history.

In 1912, early in the morning of 15 April, after striking an iceberg around midnight, the Titanic sank to the bottom of the North Atlantic. In stark contrast to the supposedly efficient market hypothesis and the great human tragedy, the value of its listed owner, International Mercantile Marine Co., barely fell at all the next day. Here is a comparison of the Titanic vs today’s largest (but idle) cruise ship, Symphony of the Seas.

In the late 1880s, the first boom in electric vehicle stocks began. Yes, the 1880’s. That is not a typo. A key player through much of that time was The Electric Vehicle Company, which was founded in 1897 and in 1899 purchased and consolidated several other electric vehicle makers. The companies purchased included the Electric Carriage & Wagon Company (ECWC). ECWC pioneered the manufacture of an electric cab system that included service stations for quick change of batteries and repair work. Twelve of these cabs were in use in January 1897. After the merger, ECWV concentrated on building heavy but reliable electric cabs. Between 1897 and 1899, several hundred vehicles were built.

The Electric Vehicle Company hoped to develop a monopoly by placing electric cabs on the streets of major American cities. By 1899, The company was the largest motor car manufacturer in the US. It was overtaken by Oldsmobile in 1901. The Electric Vehicle Company made and sold about two thousand electric cars. Despite the strong start, the company fell on hard times in 1900 after facing competition from gas-powered cars, as well as legal challenges and problems with the poor performance of its vehicles. The company went into receivership in 1907. And that was pretty much it for the first electric car boom

Five things to think about:

  • Why is the alphabet in that order?
  • Since bread is square, why is salami round?
  • If you arrest a mime, do they have the right to remain silent?
  • What would a chair look like if your knees bent the other way?
  • If you were invited to a party by a psychic…would you have to RSVP?

And finally:

Everyone’s talking about inflation, but almost without exception, believe it’s either not going to happen, or it will be temporary. We believe the chances of an inflation surprise are very underappreciated. That’s not necessarily a bad thing, provided your investment portfolio is prepared for it.

Rear View Mirror

Media and Presentations

We regularly present to investment groups on various topics including our Affluence Funds, how we choose great fund managers, LICs and the investment environment.

If you would like to meet with us or have us speak with your investment group, get in touch.

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