...this time with a letter to his hedge fund investors:

http://www.scribd.com/doc/91764042/April-2012-TEF-Commentary...

A very interesting commentary with quite profound implications for asset allocation and risk diversification. Well worth a read!

Regards,

Courant

A very interesting and contrarian view of the world.
He believes strongly the Far East/Japan/China will implode at some point in the not too distant future.
I have never made any significant gains out of Japan and whilst it is favoured by some (RCP I believe), I remain sceptical.
How is your Asset Allocation looking in regard to these 3 sectors? I have 3.1% / 3.8% / 1.3% So not overweight by any means.

De1b0y

Delboy

Regarding Japan I believe you are thinking of RICA rather than RCP

(I hold both)

HTH

G12

Hedgefundsters are very good at this. They hype up their views in the hope that sometime they will be proved right. This could take 1, 2, 3 or 10 years. Then they crow from the tree tops. Hendry has been spouting this for 4 years now and has missed out a tasty mini bull market as a result. Nowt wrong with that IF he turns out right in the end.

I do agree that his contrarianism is useful as a diversifier and i have been tempted by the UT he runs. I tend to prefer Troy really - not quite as extreme. But holds a lot of Gold. I'd buy into the conviction ITs but not at premiums - maybe Personal Assets, though.

Interesting stuff, and he might be right.
After a few pages it did whiff of data mining though, given a gloss of expensive education.
The japanese corporate stuff felt plausible. Olympus has the feel of a floodgate starting to open.
I'm just not sure how anyone, irrespective of research, can get a feel for China given it's scale and opacity. I think he's just gone with chaos theory - things tending to disorder.

Nice way to make a living though so I'd blag it as long as I could.

Wuffle.

Hendry has been spouting this for 4 years now and has missed out a tasty mini bull market as a result.

As happened to poor Tony Dye who was convinced a bear market was coming and we'd all be in the poo. He lost money for his clients, lost his job and then died just before his prediction came true.

But even if his timing had been better, it's doubtful that selling out would have been the right thing to do - unless you are into relatively short term trading. I was at that time, and although I clipped off the worst of the falls, it is remarkably difficult to have to courage of your convictions and carry it through without losing much of the upside. All praise to the few who are able to!

Arb.

Wuffle,

"I'm just not sure how anyone, irrespective of research, can get a feel for China given it's scale and opacity"

I would go much further than "opacity" and say that anyone researching company financial data in China is p'g in the wind. From my admittedly extreme viewpoint, it is foolish to rely on anything anyone there says. Mr Bolton and his new fund have famously come a cropper in China trying to make sense of what is going on. It's utterly pointless. After 23 years in Hong Kong, I do view government and market statistics here to be as believable, or otherwise, as anywhere else at least for Hong Kong listed non-mainland companies. The same does not apply to China. I have about 24% of my portfolio invested in Hong Kong listed companies, including HSBC for example, but zero in China proper.

Take Chinese banks. Their published accounts make them look well capitalised and reasonably solid. The reality is they have, among other things, very huge government-mandated irrecoverable off-balance sheet loans to antiquated loss-making government owned companies. Fancy a punt? Elm Street Revisited!

Jim

this came out a while ago too.

http://online.barrons.com/article/SB500014240527487037860045...

I'm just not sure how anyone, irrespective of research, can get a feel for China given it's scale and opacity. I think he's just gone with chaos theory - things tending to disorder.

Ah, but investing is subtly different. You don't need to know everything, you just need to work out what the market knows/assumes and work out whether that's wrong or not, with respect to prices. That's essentially Hendry's position with the CDSs he talks about. Also, he doesn't have to be right all of the time (I'd be surprised if he was right a quarter of the time) but by taking asymmetric bets, the size of the winners outweighs the losing positions.

Nice way to make a living though so I'd blag it as long as I could.

I think it's actually pretty stressful, given the extreme positions he's taking and the fact he lives and dies by his P&L! No easy money that will hang around if he starts losing money, not like e.g. a quasi-tracker long only equity fund!

Regards,

Courant

How is your Asset Allocation looking in regard to these 3 sectors?

I'm light on emerging markets in general, heavy on Japan. Though do do believe that Hendry has been long certain Japanese equities, so it's not all negative! Actually, what makes me wonder more is my indirect exposure to China via Western companies, this is much more of a concern (thinking e.g. Nestle, which everyone loves, which is set to grow strongly in emerging markets).

As I've said before, I don't think a specific asset allocation decision should sway you with regards to e.g. RICA and Japanese overweighting, because it's done in the context of a balanced and well hedged portfolio. For me, it's more binary: their process is to take contrarian but balanced positions so either you accept the process (e.g. knowing that a contrarian portfolio is *always* going to contain uncomfortable positions, this won't change - today Japan, tomorrow something else) or not. For me, that's fine and I'll take it, and I consequently have quite a large holding in RICA and a growing one in the Eclectica fund.

Regards,

Courant

Thanks Courant.
I to will stick with RICA and potentially expand as one of my Absolute Return ITs, but not so sure now about my Japan Tracker. Maybe I should target my Japan holding through RICA alone if they are hedging this.

De1b0y

I have just browsed the Eclectica Absolute Macro A fund and not surprisingly their TER of 2.74% makes it an exclusive club to join.
It seems to have a very short history (late 2009?).
It has underperformed PNL and Ruffer over the 2 year history, although better recently. [I know this is meaningless, but what else is there. :-) ]
Does Hugh Henry have 'form' from a previous life?

De1b0y

Courant,

Do you hold his fund?

He's always interesting but I feel strangely unconvinced. I'm a big fan of contrarian, focused and macro funds, and am perfectly to hold a "basket" of them given how idiosyncratic they each can be.

Or maybe it's just because it's an open-ended fund and I promised myself I wouldn't buy them any more . . .

Yes, the UCITS (not the hedge fund... if only I had so much cash!). The quoted TER (I'm guessing you got this from HL?) is not accurate, it's closer to 2%, AMC is 1.75%. It's not cheap. However, it's principle attraction is not the return, it's the inverse correlation. Witness the amount of stress investing in gilts is causing people at the minute! I'm simply on the lookout for non-government bond sources of diversification. This is one. There are others and, lootman, I agree that a mixed bag of idiosyncratic funds makes sense in this respect.

Regards,

Courant

Does Hugh Henry have 'form' from a previous life?

Yes, at Odey, and then running his hedge fund since 2001, since when it's returned about 12% pa, with most of the big gains coming in terrible markets (e.g. +31% in 2008).

Regards,

Courant

Yes. Morningstar have the TER at 'only' 1.98%.
a mixed bag of idiosyncratic funds makes sense in this respect
Looks like PNL / RICA / Eclectica look an attractive 'mixed-bag'. Courant/Lootman do you have others you might add to this?

De1b0y

Courant/Lootman do you have others you might add to this?

Capital Gearing and RIT are often mentioned alongside Personal Assets and Ruffer.

I'm afraid I don't know much about the OEIC funds.

I hold one hedge-like fund - Third Point. It's done fairly well but is also fairly equity-related. And a few zeroes that I regard as only loosely correlated to equities.

I also have a number of individual holdings in so-called alternative assets like timber and royalty trusts that I like to believe are non-correlative to equities.

Finally, in recent years, the pound has correlated quite well to equity markets, while the dollar has been inversely correlated to equities. I don't know if that will continue but I certainly see the value of being diversifed as to currency as well.

Thanks Lootman.
I have never got my head around currency exposure.
If I am in, say, 50% UK Equities and 50% US Equities via, for simplicity, two UK-based Trackers. Am I currency diversified, even though they are denominated in GBP?

De1b0y

If I am in, say, 50% UK Equities and 50% US Equities via, for simplicity, two UK-based Trackers. Am I currency diversified, even though they are denominated in GBP?

In such a case, I'd say that what absolutely does not matter is the currency that the ETF is denominated in, nor the currency of the country that the fund is domiciled in (which is probably Ireland).

On the face of it you're 50% in GBP and 50% in USD. You have nothing in, say, euro's, asian currencies or the so-called commodity currencies.

Looking deeper, i.e. on a look through basis, your currency exposure is more varied. Some 70% of the revenues of UK companies comes from overseas. The figure for US companies is less, but still significant. So your currency exposure is more complicated. The UK and US currencies could decline, but that will make the exports of those countries more competitive, and the overseas earnings of those companies more profitable. So it can happen that, at least for equities, many of the effects net out.

That excludes a Greece-like situation where the currency, equities and bonds all do badly in a death spiral. Let's assume the UK and the US won't do that, and if they do we're all in trouble anyway.

So I think that one should not worry too much about the currency distribution of equities funds, but I do think about it as an overall asset allocation issue. The other factor I think about is single country risks like political risk, tax risk and regulatory risk.

But overall, if you have a decently diverified global equities portfolio, I think currencies take care of themselves.

Thanks.
That's what I hoped you would say, from your previous posts.
My portfolio is definitely 'World' with a UK-bias (20%-UK), so currency-wise it appears I am OK.

De1b0y

On the face of it you're 50% in GBP and 50% in USD. You have nothing in, say, euro's, asian currencies or the so-called commodity currencies.


That isn't true. FTSE and S&P are full of big global companies. EG 10 largest in FTSE (45% of it) are HSBC, BP, VOD, RDSA, GSK, BAT, RIO, BG, BHP. If anything these have more exposure to Asia than the UK.

On the face of it you're 50% in GBP and 50% in USD. You have nothing in, say, euro's, asian currencies or the so-called commodity currencies.

That isn't true. FTSE and S&P are full of big global companies. EG 10 largest in FTSE (45% of it) are HSBC, BP, VOD, RDSA, GSK, BAT, RIO, BG, BHP. If anything these have more exposure to Asia than the UK.


Yes, and that is why I immediately followed the words you cited with these words:

Looking deeper, i.e. on a look through basis, your currency exposure is more varied. Some 70% of the revenues of UK companies comes from overseas. The figure for US companies is less, but still significant. So your currency exposure is more complicated.

I happen to think there are limits to how much global diversity you can achieve merely by buying home-based large-caps that have overseas exposure. And not all sectors are fairly represented in the UK. But it certainly is a good start. Other than over-weighting the UK in the same was as Delboy was saying, I need a reason to allocate globally divergent from a cap-neutral weight.

I need a reason to allocate globally divergent from a cap-neutral weight
One main reason I have a small UK-bias is that I believe there are opportunities for active managers to exploit Mid/Small/AIM companies. My transitional portfolio is approaching 50% ETF/OEIC Trackers and increasing.
>>
On a separate note on Currency exposure, if you look here:-

http://www.eclectica-am.com/report.aspx?target=fundlist&...

Eclectica shows, for example, a 19.7% exposure to the UK but 83.1% exposure to GBP. This appears to contradict the premise that having a global exposure gives exposure to global currencies. If the link above doesn't work then go to http://www.eclectica-am.com and follow 'Funds', 'CF Eclectica Absolute Macro Fund', 'Latest Report', 'Asset Allocation'.

De1b0y

Eclectica shows, for example, a 19.7% exposure to the UK but 83.1% exposure to GBP. This appears to contradict the premise that having a global exposure gives exposure to global currencies.

Be careful here, because the currency exposure can be (and is in this instance) hedged. Further, the impact of the "0.5%" of options (which are valued on a premium basis in the asset allocation summary) is far greater than this number might suggest. The most helpful chart for understanding the asset mix in this fund is the Asset Allocation (% VaR) pie chart in the monthly report. (If what I've written has not made sense, I'd recommend doing some reading before investing here, because this is not a straightforward long-only or even long-short fund, and it makes heavy use of a wide range of financial instruments.)

Regards,

Courant

I'd recommend doing some reading before investing here
Most certainly. I've read the material on their website already, but will check out some of their reports when they fix the website (which was malfunctioning this morning).


De1b0y

Eclectica shows, for example, a 19.7% exposure to the UK but 83.1% exposure to GBP. This appears to contradict the premise that having a global exposure gives exposure to global currencies.

Without being familiar with this fund, my guess would be that Courant is correct, and that they are hedging the currency exposure back to sterling, or otherwise managing the currency allocation independently from the asset allocation.

As I indicated before, from my point of view, part of the purpose of investing overseas is to gain overseas currency exposure, so I'd generally avoid pure equity funds that invest overseas and then hedge out the FX "risk". To me, the FX exposure is part of the opportunity.

That said, if a fund like this is seeking a sterling-based absolute return, and invests across multiple asset classes, then hedging might make more sense. Hedging can make much more sense for, say, a bond fund.

Also bear in mind that hedging is a cost too. Not only do you give up any currency gains but you also have the cost of the FX forwards or futures that constitute your hedge. So it's worth getting to the bottom of this apparent contradiction if you're considering putting money into it.

As I indicated before, from my point of view, part of the purpose of investing overseas is to gain overseas currency exposure, so I'd generally avoid pure equity funds that invest overseas and then hedge out the FX "risk". To me, the FX exposure is part of the opportunity.

Agreed. There's hedging to reduce FX volatility and there's also hedging to make directional bets. You want to avoid the first because it's a drain on long-term returns; the second is what this fund is engaged in, as part of a portfolio of other bets, which is a distinct feature of this kind of investment approach.

Delboy - re Japan. Actually, it looks as though Hendry is long japanese equities (see the last page of the letter) to cover a bullish growth and high inflation scenario.

Courant

re Japan. Actually, it looks as though Hendry is long japanese equities (see the last page of the letter) to cover a bullish growth and high inflation scenario

He may be Long Japanese equities but how does this correlate with his anti-corporate Japan piece in his article? Page 8. He is beginning NOT to make sense. :-)

De1b0y