Japan tenet update

Japan tenet update (March 2016)

Japan tenet update

Japan update (January 2015)

Fund Positioning 17_04_2013

Japan tenet update

Feb 2013 Japan

Semgroup

Semgroup

Fund update

Fund Positioning 30_06_2011

Fund Update

Since our last fund update of 28 February, the S&P/ASX200 has declined nearly 6%, the US S&P500 5% and the German DAX 10%.

While there has been some changes at the margin, our overall positioning has not changed materially. The main activity was in early March where we bought more out of the money put options on an Australian bank which we considered a broad market hedge – in recent days we have taken some profits on this position.

Over the past couple of weeks, several of our US and European holdings have reported full year 2010 results. These results have largely met our expectations. If weakness continues it may provide the opportunity to build on our core positions.

As at 16 March the fund is 33.7% long and 2.6% short. We also have positions in Australian bank put options (as referenced above), IAG call options and Yen put options. The fund’s large cash position leaves it well placed to take advantage of opportunities as they arise.

Unsustainable structures

Part of our analysis includes the evaluation of the longer term sustainability of corporate structures – we want to understand any inherent bias in these structures and their consequences over time. Our preference is to avoid contrived structures which disadvantage a particular party. Our view is that at times of stress or over the longer term such structures will come under pressure. The evolution of the MLP structure in the US is an interesting example.

Master Limited Partnerships (MLPs) have been an important vehicle to encourage the development of pipelines, processing facilities and related infrastructure in the US, including in  relation to shale gas. MLPs provide a tax efficient vehicle for infrastructure development and are typically structured as two entities – a general partner (effectively, the manager) and a limited partner (effectively, the asset owner). The asset owner compensates the manager through an increasing proportion of the cashflow it generates – while the proportion starts low it typically rises to 50% of the incremental cashflow generated by the asset owner. Over time this increasing proportion of cashflow being paid to the manager is a material drain on the asset owner’s cashflow. While this is very beneficial to the manager (they capture up to 50% of the incremental cashflow with limited capital contribution), it makes future investment opportunities by the asset owner difficult to justify.

The MLP structure has been very lucrative to the managers / general partners. However, the structure outlives its usefulness once the asset owner matures as the increasing cashflow leakage “forces” the asset owner to buy back the manager (or restructure the partnership terms). These are large transactions – in some cases the capitalisation of the manager is approaching that of the asset owner.

While the MLP structure has worked successfully for many entities in the US, the longer term implications have become particularly apparent over the last 12 months with a number of MLPs reorganising their partnership arrangements.

Essence of our mandate offering

“There are times when the burden of taking other people’s money forces you to be active when you don’t really have conviction. Its gives a sense of pressure and expectation. When it’s your own money you don’t have to do anything.” (Tony James, President of Blackstone, commenting on Stanley Druckenmiller’s decision to wind up his hedge fund. As reported in The Financial Times).

We’re born like that

A couple of weeks ago I saw a notice in the newspaper titled “We’re born like that”. It was from The University of Adelaide promoting a lecture by a staff member. Last night I attended the lecture. It described some research that shows males and females approach risk taking differently even in utero.

The research shows that the human fetus is able to deliberately slow and modify its development in response to a stressful or sub-optimal environment. This increases its chance of survival. However, only female fetuses use this ability. Males instead attempt to continue to grow at their normal rate, which places them at greater risk in event of further complications. In essense, males are happy to “roll the dice”, while females are about trying to survive.

As an organisation that weighs risk and return everyday, we found this interesting. It also highlighted the high quality of research being undertaken in Australian academic institutions.