questions to be answered!, page-15

@ThereAbouts:

Thanks for the reply. Yes absolutely, I agree 100% - the reason we all invest in LICs is in the hope that the underlying fund manager has investment skill and can generate Alpha (excess returns above and beyond that provided by the market). In this regard, ALF is no different from any other LIC be it WAM or any other. Their is much literature on the persistence of fund manager performance (or lack thereof!) and indeed there is a case to be made to just stay in index funds such as vanguard, but that is a discussion for another thread for another day.

I guess the point I was attempting to make (not sure how successfully!) was that ALF has a somewhat more complicated structure that is critical to understand when determining whether it is suitable to you as an investment (I am not providing financial advice, merely wanting to add to the discussion with some factual information should this be of use to others). Furthermore, and this is arguably the even more important point, due to some of the published material on the fund being what I would consider 'unclear' about the details, it provides for much confusion. Then when the share price does what it has been doing it almost provides for a perfect storm to cause unnecessary worry - beyond what should otherwise be there as any investor should always be on their toes ensuring their investments are continually suitable for their situation.

I don't post on here that often but I will often read through other posts with interest. I could see others, who in their own right seem highly knowledgeable and made great posts, but they seemed to be somewhat confused with ALF - especially considering this mix - (i) company says its bearish on the market and so is positioned accordingly, (ii) net exposure of the fund has been around 30% and as been trending lower, (iii) market sells of ALF NTA falls / market rallies ALF NTA falls, (iv) share price moves from 1.70's to low 1.30s in an almost consistent pattern in recent times... I mean what the hell right!

I am not attempting to make excuses for Justin and co and I would be front of line with the rest of the holders asking questions. As I currently hold I will be watching the performance over the course of 2015 very closely and make judgements as to its suitability in my portfolio accordingly.

What I am trying to do is have others understand what they have bought into or what they may buy into. As with most LICs, there is a need to give it time. Indeed, I would say one should have a 3 to 5 year holding period minimum to let short term fluctuations play out. The other thing to keep in mind with LISTED LICs is that the NTA is driven by the stock selection ability of the manager...however the share price is driven by the market. The two are clearly correlated, however, they can certainly become disconnected..something I think occurred with ALF - arguably due to the 'search for yield' crowd owing to SMSFs and the like driving the price north over a consistent period (but admittedly on the back of strong underlying fund performance).

Now some will say they only buy when an LIC trades at a discount to avoid such potential issues. That can and has worked. The only caveat I would place on that is this...there are LICs that for valid reasons never trade at a discount and if one was to wait until it did, they would never hold a position and potentially miss out on strong returns. Likewise, their are LICs that always trade at a discount, and one may take a position but never see strong price appreciation (and most of the gains would be through the income component of the investment). Of course, then there are many LICs that move around (above and below) NTA. It can be tricky to navigate and one of the best tools is simply spending the time to research and find out the reasons behind its trading behaviour, the quality of management and sustainability of income.

Buying an LIC at a premium, in and of itself, does not automatically mean one has made a bad investment decision. Its always the details beyond the shares trading behaviour that matter. Indeed, some investors prefer unlisted LICs for this reason...you buy in at NTA and daily mark-to-market valuations of your position is based on NTA.

Something else I would point you too is the last page of ALFs most recent Investment Update and NTA Report. If you look at the top chart that depicts Net Equity Exposure (which is given as the orange line) what you will notice is that the periods in which the orange line rises is driven by the dark bars increasing in size. Basically, all this means is that the value of the long positions are outperforming the short positions. Look at April 2009, and September 2012 as the clearest examples. Why this is important to note is that the way ALF works is that even though they have long and short positions, their NET exposure will always be above 0% - and what this means is that they NEED their long positions to outperform the shorts - or in other words the value of the shares they have deemed undervalued need to increase by more than the decrease in value predicted for those shares they have deemed overvalued.

If this happens, then NTA, all else equal, will increase. Where a fund can have a less than 0% equtiy exposure then it would make money if the shorts outperformed the longs. But that is not ALF - they have invested capital which effectively sits in cash earning interest and they sell shares to fund purchases. If they are really bullish they may add to their longs with the invested capital. If they are bearish then they will hold effectively all their invested seed capital as cash and their longs will be funded with their shorts.

So in recent times one can see that their long exposure has fallen more than their short exposure (but this has also fallen). So that it why NTA has been falling to such an extent..we are experiencing the double whammy of shorts not performing AND longs not performing. If those 'short' bars had remained somewhat constant but those 'long' bars had increased like they did in April 2009 for example, then NTA would have been rising and ALF would probalby be at $2!!!

To conclude (somewhat), and to call back to something I mentioned earlier about being really important to understand ... net exposure of 0% DOES NOT MEAN the fund is hedged to market moves. It means at that point in time the value of the longs equals the value of the shorts. If the longs sell of or the shorts rally, then the net exposure will change and the NTA will change accordingly. Whereas an example of a hedged position would be going long the ASX 200 index and then short the ASX 200 index to an equal amount at the same time on the same day so the executed prices are based on the same index value at that moment. That is HEDGED.

What I think has happened is that certain people have been confused about how ALF works combined with the poor positioning and have seen the deterioration in the NTA, not understood why, are worried about the dividend and are selling out. Looking at the register one can see it is comprised of many SMSFs who have sizable positions. One or two of those selling, would see the price do what it has been doing. But likewise the price can rise just as easy.

As I said, I am not wanting to make excuses for Justin and co, merely provide some insight. For what it is worth, I am very disappointed with the performance of their positions and it should not continue in a similar manner for another 6 to 12 months as that would be a worry. But at the same time, I will give them time to adjust and set a new course which can take time...in the meantime, from what they have said, enjoy the next two dividends.

Great job with WAX btw, I don't hold but that is a nice juicy dividend.

@joewolf:

Very well said. Any foray into assets denominated in other currencies introduces FX risk. I do not have any insight into how exactly they will undertake this investment so cant comment in that regard - but will be looking into this when further information comes to hand.

My take as soon as I read that release was that they are finding it difficult to come up with highly profitable trades within the Australian market. Somewhat like my line above in regards to persistence in fund manager returns being a topic for another thread for another day...likewise the future of the Australian market and what opportunities it may (or may not) provide over the next 5, 10, 15 years is an interesting topic within the industry - but for another thread another day. I remember that beginning several years ago, along with where the AUD was at, many were moving money offshore to (i) make use of the high currency but also (ii) they were finding better opportunities vis-a-vis what is available here.
It would be surprising if they fully hedge their exposure into offshore markets, but we will have to see. Often a majority, if not equal share, of the composition of returns from foreign investments comes from the FX component. Further, think about it this way, if you buy a USD asset, but hedge the currency and the asset moves only 5%...you have gone to all this trouble for 5%..on a risk adjusted basis it hardly seems worth it.

I agree with you that further colour on what has been going on WOULD BE VERY WELCOMED AND APPRECIATED. I will also understand if we never hear anything as fund managers tend not want to disclose anything more than they legally have to.
You are spot on in regards to many funds suffering from bad performance of late. In fact, I looked the other-day and was surprised to see that the ASX 200 index (not accumulation just the capital index) was up just over 1% for 2014...so the index really didn't do much end to end - however there were swings during the year. The accumulation index was up over 6%...but again only 6% - considering the cash rate is 2.5% and online savings accounts pay upwards of 4%, a 2% equity risk premium is too small for my liking. So unless, a manager has some unique plays that really payed off, 2014 was not going to be a stella year for those did capture those sharp turnaround plays.

So yes, in many ways the risks with international shares are just the same with any share...can ALF assess value 'correctly' and go long in those undervalued companies and short in those overvalued companies. The FX risk, depending on how they handle it will be an important issue. They have said that it will only ever represent 20% of the fund as I understand, so they are limiting themselves to not just move all operations to offshore markets.

They seem to be a smart outfit, and in terms of research capabilities how these things tend to work is either they will employ new staff to specialise in offshore markets OR to save on wages, they will move some of the current resources who look at Australian Financials, for example, to look at offshore markets.

Now, some markets, especially emerging markets can take years to develop a real feel for. But I suspect ALF will probably stick to the major developed markets at least initially - and whilst they still have some complexities to over come in understanding (for example legal and regulatory frameworks etc)...any smart analyst will (or rather should!!) look at GE or Microsoft in an analogous manner as CBA or QBE.

The other main risk though with some of the large foreign markets is that there is so much more money flowing into and out of those markets and so the chance of 'unexplained market moves' does increase. We see these types of moves occurring in all markets all the time, in Australia as well, its just with larger markets there is a higher probability of this occurring. I would not want to overplay this particular risk, but it is technically there.

In terms of other investments, despite taking a keen interest in all things finance, I am a rather conservative style investor that likes a slow and steady approach. I like Vanguard funds (like VHY for their high yield option) and another company I have followed for some years is FET - they have been paying a quarterly dividend for a long time. WAM have a good record as does the 800 pound gorilla that is ARG.