I don’t dislike their long investments. Mining and minerals is not my thing but Regal study that area and I’m comfortable with their inclusion as part of a balanced portfolio. I disagree with ‘Shorting remains an important tool in protecting investors’ capital from downside movements in markets’. Equity markets have tended to increase in price over time. Otherwise probably one wouldn’t invest there. Ideally you’d go 100% long and 100% short and both would be uncorrelated and each shoot the lights out, but that’s probably risky and improbable. Shorting to protect downside risk is a false argument IMO. Just like having a cash weighting, it decreases upside gains as well as downside losses, thus reducing volatility. However if markets rise over the long term, then such a strategy will lead to more decreased gains than reduced losses. People who want reduced volatility should be in some other vehicle. Any gravitation towards limiting volatility dampens long term returns and we can’t have it both ways. Aren’t these Fund managers the ones that over and over talk about taking advantage of market volatility and using it to profit from taking the opposing view to the market?
Why I dislike currency hedging
The logic is similar. I don’t know how much hedging costs. I believe it varies according to where the exchange rates are. Let’s examine the effects if the cost were only 1% per annum. My best guess is that AUD /USD tends to be at 2/3 ratio with fluctuations above and below. It doesn’t tend to behave like markets that tend to increase over time. Therefore the longer they hedge the more likely they (we) lose money on the hedging. Over 30 years, the dollar has to move a very long way and in a particular direction to outperform due to hedging. I would love to see when they started hedging, at what exchange rate it was and the total costs of the hedging. I’m pretty sure it contributed to their loss making activities* Again I don’t accept the rationale of doing it to reduce volatility nor doing it to avoid taking a position on currency that could erode the direct equity decisions. Every decision is an investment, including currency positioning. Unless they’re going to profit from the hedging positionings then save the money, save the loss-making hedging fees and just leave it unhedged and focus on the companies only. Currently they claim to be taking a position on the currency (not something I generally expect of my fund managers). I don’t believe we’ll have published the results of closed out currency positions (and versus the hypothetical unhedged position over the same time period) so I find it hard to believe it’s been a profitable use of time and money.
• Remember, although the long portfolio had returned circa 30% at the end of the last calendar year, exceeding the MSCI and S&P which averaged about 25%, unsurprisingly the shorts detracted over 10% from returns, leaving a net gain of only 20%, thus sadly underperforming the benchmarks on the way up and yet again.
VG1 Price at posting:
$1.75 Sentiment: Hold Disclosure: Held
(20min delay)