Why I’ve changed my mind on CGF, and some thoughts on sell discipline, page-10

I will assume that this information is correct. so what is driving the share price up ? As I see it a market correct will not hurt CGF financials however the share price will be hit if the market falls.

CGF shareholder Lowe either way??

@greed is good

I’m afraid I don’t understand your question. An equity market correction can affect CGF’s cash earnings in two ways:

a) As the Funds Management Division’s fee revenue is a direct percentage of the underlying AUM, the corresponding earnings will decline, to the extent that said AUM is positively correlated with the broader market.

b) As part of Life’s Cash Earnings consists of performance-dependent cash distributions from Absolute Return Funds, that portion of earnings will decline, to the extent that the performance of said funds is positively correlated with the broader market.

The fact that the underlying equity funds underperformed in a bull market does not necessarily imply that they will outperform in a correction (or in a bear market).

Regarding the hedging overlay (Equity Collar strategy) it is worth emphasising that:

i) It is only a partial hedge, on ~30% of the total Life Equity Portfolio asset value.

ii) It consists of out-of-the-money options; in other words, the underlying equity index needs to drop by a minimum percentage amount before the put options start paying something out.

iii) it is only a “proxy” hedge, therefore it is not necessarily effective; if the index underlying the options rallies, and the Equity Portfolio loses value (which is exactly what happened in FY19), it is entirely possible that the Collar strategy will end up increasing the Portfolio loss, instead of offsetting it.

But do not take my word for it, nor assume that anything written on this thread is correct. Please read the Company’s financial statements and presentations and form your own view of things.

Cheers