Why Cash is Bailing on These Funds


We’re going to party like it’s 1999.

That’s what crossed my mind after reading about the Aussie fund managers watching their clients walk out the door.

What’s going on?   

The Australian cites several notable active managers with ‘value-based strategies’ that have not matched the epic run in the Aussie market this year.1

That means their clients are paying fees but they’re not getting any outperformance. They’re not even getting the market return.

And these clients are voting with their feet — by taking their money elsewhere.

What’s working right now is momentum.

The report goes as far as to say the funds industry now faces ‘a crisis of confidence’.

Is this me criticising active fund managers?

Not at all. I understand their predicament entirely.

It’s also a perfect example of where I see the market going over the next 12 months…

Here’s the reality of the market: Different strategies work at different times.

If you could do the same thing over and over and make a motza every time, they’d certainly be no street sweepers, would there?

The question to ask is: Why are value funds underperforming now?

They’ve steered clear of high prices being paid for so-called ‘growth’ stocks…and their judgement says to be wary of where the economy is placed right now.

They’re holding high levels of cash. This cash acts as a drag on the money they could be making.

But the market has ripped up this year based off low interest rates and a stabilising property market.

Some of the recommendations on my Small Cap Alpha buy list reflect this current dynamic.

For example, one is a profitable business and the price simply will not budge. Another loses money every quarter and has soared.

This is the way of the market.

You have to be nimble and go with things as they are now.

But you need to be ready to change when it flips back the other way…

Retail buyers could drive market to new highs

Indeed, that’s the luxury you have as an independent investor…total flexibility.

It makes me think of a comment I saw a few weeks ago.

There was a quote from a market analyst (I regrettably didn’t put it aside to give it to you directly) saying that managers would be feeling pressure if they were underperforming.

Why do we care?

This could draw further money into the market as these guys concede their ground or watch their business whither.

This is a possibility, not a guarantee.  

But it could be part of what drives the Aussie market higher if the bull run continues.

I also alluded to 1999 earlier. I did this deliberately.

Think back to the years leading up to 2000. Even a man with the prestige of Warren Buffett came under investor pressure to buy the hot market at the time.

His strategy appeared to be no longer working.

Hindsight shows it didn’t work in 1999, but it worked in many years afterwards. You just had to stick around and trust him. Many didn’t.

Warren Buffett may be the greatest investor of all time. These bad patches exclude no one.

The intriguing thing to note about all this is the shift in psychology of the market.

2018 was mostly a dud. There was hardly any momentum last year.

Now look at the following in today’s Australian Financial Review about a recent business survey

The shift happening in minds across the country

Here it is…

Business conditions have recovered strongly in response to the Morrison government’s $158 billion tax cut package and stability in the housing market, a poll of 251 chief executive finds.

‘…The mindset of a typical owner-operator is “if the property market’s doing well, the economy’s doing well,”.

It seems to me that the average Aussie investor will keep feeding money into the stock market for the time being. They believe things to be improving.

I could be wrong, of course. But for now, it means staying long the market (short-term trades and retracements aside) and riding this wave for as long as it lasts.

Note that Wall Street closed at all-time highs last night.

There’s every possibility US stocks keep rising, signalling to investors there’s less to worry about than previously.

As I’ve indicated before, I believe the market is much more likely to finish in a blow-off top (1999) than a slow whimper away.

But this party isn’t going to last forever. That means you need to be taking advantage of it now.

Otherwise, like value investors currently, you’ll be left behind.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

1 ‘Active managers face a ‘crisis of confidence’…’The Australian, July 16, 2019.