It’s Not Our Kind of Business

Subscribers and other people we meet often ask us why we don’t start an investment fund.

Our simple reply is that it seems to us like a whole lot of effort and risk for limited relative reward.

That doesn’t mean it’s a bad business. But the effort expended…oh boy…no thanks.

According to its latest annual report, Platinum Asset Management Ltd [ASX:PTM] had revenue of $360.4 million for 2015. From that, it made a profit of $213.5 million.

That’s good. Scratch that. That’s great.

But in order to generate that return for the company’s owners, it needs $24 billion in funds under management. That’s a margin of less than 1% of funds under management.

In other words, we compare the funds management industry to other high volume, low margin businesses — such as the airline and auto industries.

Granted, funds management is different in that they can still make money in a downturn. That’s because they charge a fixed percentage fee, regardless of performance.

But the idea of raising that much capital? Call us lazy, but it just seems like a lot of hard work. We prefer the financial newsletter publishing business.

And we definitely prefer the financial newsletter publishing business over another type of funds business, hedge funds. As Bloomberg reports, it’s not looking like a good year for those poor fellows:

The $2.9 trillion hedge-fund industry may lose about a quarter of its value in the next year as performance slumps, said Tony James, Blackstone Group LP’s billionaire president.

“It’s kind of a day of reckoning that we face here,” James said Wednesday in an interview with Bloomberg TV Canada’s Pamela Ritchie at a conference in Toronto. “There will be a shrinkage in the industry and it will be painful. That’s going to be pretty painful for an awful lot of places.”

Shrinkage in any place is always painful. We recommend avoiding it where possible.

Of course, it’s always hard to feel pity for someone when the article talks about the ‘billionaire president’ of a company.

But it has been tough for hedge funds. Mostly because, from our view, they’re no longer really ‘hedge funds’.

The concept of a hedge fund is that investors and fund managers should use them as a way to ‘hedge’ their exposure to other investments.

But in reality, most hedge funds are actually ‘absolute return funds’. That means they’re not really hedging anything. They’re looking to make a big gain, using big bets on the market.

After all, if hedge funds were really doing their job, you’d think they should be living the high life. Global markets have risen and fallen enough for hedged investors to make some money one way or the other.

China’s CSI 300 index is down 18.5% this year. Brazil’s IBovespa index is up 14.1% in local currency terms, or 26% in US dollar terms.

What about the oil price? Commodities are a traditional investment of choice for the hedge fund industry. Even after the recent rally, crude oil is down 51% since 2011. But it’s up 35% since the start of this year.

Is there any point to this? Not really. We tried to think of one as we tapped this out. But we’ve come to a dead end. Our only conclusion is that, rightly or wrongly, we don’t think much of the funds management industry.

It can be lucrative, but it’s just not our thing.

Speaking of…

‘Like’ your way to a loan

For longer than we care to remember, we’ve written to you about debt and credit, and what our company’s founder, Bill Bonner says will be the ‘final reckoning’ when the current money system collapses.

But until then, companies around the world are looking for innovative ways to make as much money from providing credit, without necessarily increasing risks.

Whether they succeed in that goal is another matter. We have our doubts…big doubts.

However, an interesting note dropped into our email inbox this morning. It came from none other than the inventor of the ‘Daniel Rule’, one of our in-house marketing specialists, Dan.

Dan wrote this to me and our tech expert, Sam Volkering:

What happens when your credit score isn’t just based on loans and credit card history?

(The following information is from the internet of all places, there are links here…but it’s the internet so take it all with a grain of salt.)

Allegedly the credit systems being developed by Alibaba and Tencent will be looked at for the future of China’s “credit score”.

Your purchase history goes to impact your ‘Credit’ with Alibaba. Alibaba reportedly offers bonuses for people with higher scores: Being more easily found by potential partners on a dating site, faster check-ins at hotels, Priority taxi bookings.

“Offering promotions for people with high credit scores, including access to a high-speed VIP check-in at Beijing’s Capital International Airport.”

Your social media posts and links you share can impact your Tencent “Credit”.

“The Internet giant, which owns popular instant messaging app mobile QQ and WeChat, is a firm believer that birds of a feather flock together. By analyzing the “quality” of people’s social networks, combined with each individual’s online behavior, such as whether or not to pay bills on time, Tencent said it can provide useful information to help financial institutions know their potential debtors better.”

China’s government-mandated credit system is separate but will be looking at Tencent and Alibaba (as well as 6 other companies in the pilot project) for ideas on the state run algorithm.

It’s expected to be implemented and mandatory by 2020, according to the State Council planning document.

It’s clear from the text that Chinese authorities don’t want a credit system that’s completely focused on finances; rather they paint the new system as a way of rewarding “sincerity” (and punishing insincerity) throughout society.

“On the basis of the general requirement to ‘strengthen sincerity in government affairs, commercial sincerity, social sincerity and judicial credibility construction’ as put forward by the 18th Party Congress, ‘establish and complete a social credit system, commend sincerity and punish insincerity’ as put forward by the 3rd Plenum of the 18th Party Congress, ‘establish and complete a social credit system’ as put forward in the ‘CCP Central Committee and State Council Opinions concerning Strengthening and Innovating Social Management’, as well as ‘accelerate the construction of a social credit system’ as put forward in the ‘12th Five-Year Planning Outline of the Economic and Social Development of the People’s Republic of China’ (hereafter simply named the ‘12th Five-Year Plan’), this Planning outline has been formulated. The planning period is 2014-2020.

Here’s a video talking about it that confuses and kind of combines all three separate “Credit Score” systems… however we haven’t actually seen China’s “official” one so we don’t know if they will be pulling private data FROM these private companies.

It’s an interesting thought on what a “Social Score” from the government could lead to and all the ways companies are looking to use BIG DATA to encourage their customer base into certain behaviours. (Share pictures of our products and receive discounts in the future, etc).



PS: You’d better hope that these companies have good data security.

Who says the Chinese can’t innovate?

In the future, it seems that if you want to borrow money, you better be nice. In that case, your editor had better borrow as much as we can now. We’ve got no chance of getting a loan in the future.

Maybe that’s a good thing.

Feds investigate

Saying that, Alibaba may have other things to contend with. As the Wall Street Journal reports:

Federal regulators are investigating the accounting practices of Alibaba Group Holding Ltd., the e-commerce giant whose blockbuster U.S. stock-market debut helped win a wide following for Chinese tech firms.

The company disclosed Tuesday that the Securities and Exchange Commission asked Alibaba to provide details of its accounting for a delivery affiliate, its operating data for the largest online shopping day of the year, and “related party transactions in general.”

We’ve got no idea what that means. But it’s probably not good.

The article also fails to note that, since reaching a peak in November 2014, above US$120, the stock has fallen 36%. It’s now trading at US$75.59.

That’s still above the IPO price of US$68.

How have they done it?

The other thing we often write about is Australia’s ballooning federal government debt. Our view is that it will just keep growing and growing. The larger it gets, the more difficult it will be for the government to ever repay it.

In that case, how come the Kiwi’s now appear to be heading back in the right direction?

As Bloomberg reports:

New Zealand’s government has left the door open to dangling tax cuts at next year’s election after projecting larger and growing surpluses in its latest budget.

The operating surplus will be NZ$719 million in the year ending June 30, 2017, compared to the NZ$356 million projection made in December, Finance Minister Bill English said Thursday in Wellington. Surpluses in 2018 and 2019 will also be larger than projected less than six months ago as the economy grows faster than expected.

English, who delivered the first surplus in seven years in 2015, has said the government is less concerned with “minor overs and unders” in the budget balance and more focused on repaying debt. Core government debt will fall to 24.9 percent of GDP in the year ending June 30, less than the 26.9 percent projected in December.

The government borrowed heavily to maintain public services and welfare payments after the global financial crisis, then to fund the recovery from devastating earthquakes that hit Christchurch in 2010-11. Debt has climbed from as low as 5.5 percent of GDP in 2008.

Well, there’s a potential poke in the eye for folks like your editor who say there’s no turning back after the build-up of giant debts.

The experiences of our New Zealand friends deserve further investigation. We shall report back when we have news to tell.


Kris Sayce,
Publisher, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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