Will the Bear market be back?
The big news in the fund management sector this week was when Altair Asset Management made the highly unusual move of liquidating their Australian Share funds and returning the money to its investors. The decision was announced by Philip Parker, a 30-year veteran of the funds management industry, who serves as Altair’s chairman and chief investment officer.
Parker said he was cashing out and returning “hundreds of millions” of dollars to his clients and also advised Altair to return an advisory contract for an Australian financial planning company worth $2 billion.
Parker penned an open letter to the market earlier this week outlining why he made the controversial decision, and later added he could not he could not in good conscience keep charging clients for management fees when the market is so volatile. “Giving up management and performance fees and handing back cash from investments managed by us is a seminal decision however preserving client’s assets is what all fund managers should always put before their own interests” he said.
The main reason behind the contrarian decision, as outlined in his letter was the “Australian East coast property bubble and the impending correction”. According to Parker, the overheated local property market is the clearest and most present danger. He was strident in his view of the state of the property market.
“When you speak to people candidly in the banks, they'll tell you very specifically that they are extraordinarily worried about the over-leverage of the Australian population in general," he said.
On the significance of the decision Parker said "Let me tell you I've never been more certain of anything in my life…I am absolutely certain we are in a bubble in this property market.”
"Mortgage fraud is endemic, it's systemic, it's just terrible what's going on. When you've got 30-year-olds, who have never seen a property downturn before, borrowing up to 80 per cent to buy three and four apartments, it's a bubble." He continued "To me there are specific identifiers that are extremely recognisable that remind me of the late eighties and early nineties housing calamity."
Other factors that contributed to the decision were:
- Concerns over Chinese property and debt issues that could cause major problems for Australia later this year;
- Oversized geopolitical risk, particularly the unpredictable US political environment and;
- An overvalued Australian equity market.
Speaking of the potential value available in the Australian market, Parker was equally bearish. "Valuations are stretched, property is massively overstretched and most of the companies that we follow are at our one-year rolling returns targets – and that's after we've ticked them up over the past year." "Now we are asking 'is there any more juice in these companies valuations?' and the answer is stridently, and with very few exceptions, 'no there isn't'."
There has been suggestions Mr Parker was moved by factors other than a pure investment decision, particularly with him being a defendant in an impeding court case brought on by his mother regarding an entity with ties to Mr Parker. Parker denied any personal issues had contributed to the decision and restated it was solely a business call but added he would enjoy a few months off before re-engaging with his business."I've never had more than five weeks off in a row. I'm probably going to have four months in a row, and if something happens in between, I'll think about it. Otherwise I'll enjoy the time off."
The reaction to the Altair decision has been somewhat pensive, with some saying Parker is just making a call based on his reading of the current situation and acting accordingly, which is his job. On the merits of the decision however, there is more conjecture.
Investors Mutual director Anton Tagliaferro said "There are a lot of uncertain things at the moment - Donald Trump, China, you can quote a list of ten or twenty uncertainties". "I think if you go back five years, you'll find another list of uncertainties," he added, citing the Greece debt crisis as an example.
Geoff Wilson, of Wilson's Asset Management said “if you're going to sell out, knowing when to do so is a fraught business…the thing is, you can never pick the top or the bottom of the market."
Sirius Fund Management member Kieran Kelly says Parker should be complimented from going from being fully invested to fully in cash. ‘He didn't just sit there on the cash and say "I'll manage it until times are better", he gave it back. On his morals and his ethics, I can't fault him.' Mr Kelly said. However, he added 'I have a problem with people making big bets.'
'He's being very logical and I agree with everything he says, the problem is the stock market at its core is not logical.'
Marshall Brentnall, Director and Personal Financial Adviser at Evalesco Financial Services was circumspect about Altair’s move, saying “the decision by Philip is an interesting one, and whilst I am not familiar with his circumstances, I can't help but think that this decision is both personal and business in nature, and that just maybe he needed to step away for a year or two to recharge and refocus”. On the rationale of Altair’s decision to sell out, Brentnall said “whilst share and property markets can be volatile in the short term, over the medium to long term investors are rewarded by growing dividend and rental incomes with some possible upside by way of capital appreciation”.
Brentnall added “to mitigate the potential short-term impact of a fall, at Evalesco we encourage our clients to ensure that they have between three months (accumulators) and three years (retirees) of living expenses in cash and defensive assets. This approach provides peace of mind that they always have enough to fall back on in the case of a market correction and that their personal economy is in order. This strategy, along with minimising borrowings and always investing in good quality assets is as relevant today as it was in the GFC.
It would be interesting to see what other advisers might say to their clients if they were asked about Altair’s decision. We’d like to invite any advisers reading this to leave a comment below.