AUSE01Z01MA - V1 THE AUSTRALIAN, SATURDAY, FEBRUARY 15, 2020 theaustralian.com.au/wealth THE WEEKEND AUSTRALIAN, FEBRUARY 15-16, 2020 28 theaustralian.com.au/wealth WEEKENDWEALTH 28 Caught out: judge’s ruling on short attack may embarrass super funds

Big Bet: Top shorted ASX 200 stocks* stock to the super fund and pock- been a short-sellers paradise since The ‘short attack’ Rural Funds Management has not Bonitas researchers had never JAMES KIRBY ets the profit). Percentage of shares held short 19.3% the original attacker, Glaucus, gone quite so smoothly. visited Australia and they were WEALTH EDITOR But how short funds actually Galaxy Resources came in some years ago and made where there is a On Wednesday, Justice David sure the laws of the US would pro- work in practice is another matter Syrah Resources 17 a fortune with a masterpiece short concerted effort to Hammerschlag in the NSW Su- tect them should Rural Funds be altogether: a court judgment this Inghams 13.4 attack on sandalwood plantation preme Court gave Bonitas a beat- so presumptuous as to try to de- 13.3 damage a company week would seem to confirm our Orocobre group TFS and followed it with an with a blitz of ing around the ears that was fend itself. worst fears about shorts and how Speedcast 13 even bigger trophy, the Blue Sky something to behold. Bonitas kept blazing away after they operate in practice. GWA Group 11.5 group. In both cases, the compan- negative reports Hammerschlag said the Boni- the legal loss this week, suggesting Many investors don’t like their Costa 11.1 ies literally crumbled and Glaucus coupled with tas report on Rural Funds was the court judgment was “proce- super funds lending to shorters be- Nearmap 11 made a fortune. strong publicity is a “materially misleading” and then durally and substantively infirm”. cause they worry it can be unethi- JB Hi-Fi 11 In fact, there has always been relatively new he hit them between the eyes with Meanwhile, Rural Funds’ share cal: they find it hard to see why Bega Cheese 10.8 shorting in the local market, gen- this: “They (Bonitas) never took price — at $2.05 — has recovered Big super funds that finance short- their own super fund wants to Webjet 10.6 erally as part of long/short strat- development the trouble to check with or in- to a point close to where it was the selling — especially industry funds finance an activity that can be try- Metcash 10.2 egies at leading funds that use the quire as to any material which they day Bonitas launched its attack. that strive to take the higher ing to “short” the very same shares *As of Feb 14 Source: Shortman.com.au/ASIC big super funds to supply stock for broadcast … I have no difficulty in Hammerschlag will announce ground in ethical investing — they probably own. a fee. concluding that they did not care his decision on damages in the must surely be wincing at a re- For example, it is beyond doubt to maximise profits, etc. But we lian business, branding it as At any given time, there are age a company with a blitz of nega- whether what they were saying case on March 6. That decision markable story in the courts this our major super funds over the last now have a window into what can “worthless”. hundreds of stocks being shorted tive reports coupled with strong was false.” won’t just be news in our market, it week surrounding one of the nasti- year would have been holding JB be a decidedly unsavoury business Now in our volatile and over- — over the last week among the publicity, is a relatively new devel- So it turns out that apart from will be read by ever short-selling er “short attacks” we have ever Hi-Fi while also lending to shorts after a plucky decision by Rural heated sharemarket, a report like top 10 most shorted were JB Hi-Fi, opment. the issues highlighted in that last outfit around the world. seen in Australia. who were betting the JB Hi-Fi Funds Management to take its that spreads like wildfire and other the Inghams group and tech fav- Nowadays Glaucus has many statement from Hammerschlag, If the Rural Funds exercise In principle, shorting keeps the share price would fall (JB Hi-Fi has enemy — a US short-selling investors don’t wait around to see ourite Nearmap. imitators: in fact, Bonitas CEO the self-described “activist short- ends up costing Bonitas big money sharemarket healthy. It spots been consistently among the most specialist called Bonitas Research if Bonitas has played by the rules or The most shorted stock in the Matthew Wiechert was a co-foun- seller” released a scathing report in damages, it will change the weakness and, at its best, forces shorted stocks in the market). — to court. not — many investors simply sold entire market is miner Galaxy Re- der of Glaucus. (You may have to start a short attack on an ASX- numbers for anyone considering a companies to clean up their act. There has always been ru- Rural Funds management out. sources, with nearly a fifth of its seen Wiechert in The China Hus- listed company, then instantly short attack on Australian com- (Shorting is where an investor bor- mours that short-sellers play vari- CEO David Bryant woke up one Rural Funds endured a 42 per entire market capitalisation held tle, a terrific documentary about bunkered down in Texas. panies. Or, to be precise it will rows stock for a fee, then waits for ous tricks: using media leaks as morning last August to find the cent fall in its share price in the by shorts. fraud in China in which Wiechert As a precautionary measure, change how shorters behave in the stock to drop, sells the stock for part of shorting campaigns, exag- Texas-based short fund had issued aftermath of the report release. But the “short attack”, where did some useful investigative Bonitas fired off an email to their our market — and that would be a much cheaper price, returns the gerating weaknesses of the target a damning report on the Austra- Why? Because Australia has there is a concerted effort to dam- work.) But Wiechert’s plan for Australian target that revealed the no bad thing. Star picks THE from profit COACH season continue the trends of increasing There are sectors pressure on revenue growth and declining net interest margins. and stocks to watch Costs will continue to grow as I am extremely concerned about my exposure for earnings increases in compliance and regu- to the sharemarket. Is now the right time to be latory costs more than offset invested in shares? ROGER MONTGOMERY efficiency savings in the core oper- ating cost base. Delinquencies have been increasing slowly for a In a volatile market it is often difficult to stay on while, despite bad debt provisions track with your investment strategy. remaining at cyclical lows. Bad If you are investing for the long term, you debt provisions should present a may do more damage trying to time your exit headwind to profit growth. and entry to the market. Investors who park The backdrop for the reporting their assets in cash often fail to recognise the season is soft: the raw national re- time to get back in the market. tail sales figures reveal a soft Aus- If you are worrying about your money, your The reporting season is now under tralian retail sector. appetite for risk may have changed. It could be way amid bush fires and a corona- December raw retail sales grew your time frame for investing is now shorter, virus pandemic. 2.4 per cent annualised and, while your circumstances have changed or there has The environment is ripe for this has been portrayed as solid, it been a change in market outlook. Assess if your more surprises than we have seen, is in fact a decline on November’s change is permanent or a response to short-term perhaps since the global financial 3.4 per cent and October’s 2.7 per factors such as markets volatility or valuation. crisis. And that’s before we add in cent. If your investment time frame has changed, the fact that the ASX 200 indus- Non-discretionary food, which do you have the time for your investments to trial index, excluding financials, is drives 30 per cent of retail sales, recover through the cycle? All markets run in trading on a record multiple of rose an annualised 3.8 per cent in cycles, some are short-term corrections, some 28.5 times earnings — even higher November. However, in Decem- are medium-term business cycles of three to five than before the GFC. With valua- ber growth slumped by nearly half years and others can be long-term secular tions generally stretched, the to just 2 per cent annualised. swings of 20 years. Make sure your portfolio can potential impact on prices from Important for retailers of weather a cycle and ensure you have sufficient profit and outlook surprises could course is volume, and retail sales time to allow your portfolio to recover. have a greater impact on inves- volume growth reversed in the Assess the quality of the assets within your tors’ portfolios than at any time September quarter for the first portfolio. If they are direct equities, consider the since the GFC. time since the 1991 recession. short and longer-term prospects of the company. Over the past few days we saw While December growth im- If you invest in managed funds, ensure you the first batch of results, which proved marginally, the annualised are comfortable with the investment approach of brought solid returns from market growth rate is zero. the managers. Monitor where they invest, assess leaders such as CBA and CSL, but With the coronavirus drama in holds have chosen to pay down demonstration of scale, reporting those trends to also be experi- if they have been true to their philosophy and there is a long way to go before we China, businesses with fast inven- debt rather than consume. Percentage gain so far this year season is viewed closely for vali- enced by companies here in Aus- invested where they said they would. get a full picture of the results sea- tory turnover could be most at risk While risks obviously exist, our 20% dation of those growth forecasts. tralia, including Next DC, Appen, Diversify your portfolio into a range of son — we won’t have a complete if they are unable to source from small-cap team have run the ruler Investors have been willing to Megaport and EML Payments. sectors, companies and regions. Consider how picture until March. alternatives suppliers to China. over the retailers and currently 15 trade losses and lower profits Locally, expect further evi- concentrated your portfolio is to the Australian Among the banks, CBA pre- With retail sales slowing, and prefer Adairs, City Chic and Prem- today for faster growth in the dence that some fintechs are market and particular sectors such as banking. sented a decline in half-on-half annualised personal credit growth ier in the retail space. future. Stocks that deliver the for- growing fast at the expense of the Recognise that market volatility can create profits of 4 per cent and an un- deeply negative as consumers pay In the resources sector, the 10 mer without the latter will be pun- big banks (albeit not huge ex- attractive opportunities. A stockmarket changed dividend. down debt, I generally expect soft miners should report generally ished, while faster than expected pense), and taking advantage of correction can be a good time to invest in In the days ahead, Bendigo results from retailers and very positive results for the December 5 growth will be cheered. demand for personal and business equities, but do not presume a “hot” stock that Bank will report its half-yearly re- cautious outlook statements from half as it coincided, for example, Market valuations for techno- finance where the banks are with- falls in value is now cheap and will recover. sults, while Westpac, ANZ and listed retailers. with a period of relative strength logy companies have strength- drawing. Also, we expect contin- Over the long term, equity risk is usually 0 NAB will release quarterly num- Some retailers have already in iron ore. The strong expected ened, particularly in areas where ued growth where innovation is rewarded. Empirical studies have shown the bers and/or pillar III statements. downgraded, including Super Re- earnings should help major min- structural global growth is evident disrupting traditional or conven- value in long-term compounding returns and We don’t expect many big surpris- tail, Mosaic Brands (formerly ers BHP, Rio and Fortescue con- Jan 2020 Feb such as in payments, cloud and AI tional revenue models, such as the the benefits of investing regularly in a portfolio es, with underlying conditions re- Noni B), Beacon Lighting, PAS tinue with near record dividends. Source: Bloomberg toolsets. buy-now-pay-later space. regardless of whether markets are rising or maining tough and the outlook Group and Kogan.com. The outlook for resources may US earnings season for mega- falling. The best way to navigate a choppy expected to remain subdued. Keep in mind that despite ad- not be as rosy, as resource com- supply, so any slowdown can have cap technology companies such as Roger Montgomery is founder and market is to have a good long-term plan and a With national household cre- ditional stimulus from tax cuts panies face the uncertainty of a significantly negative impact on Microsoft, Alphabet and Amazon chief investment officer of the well-diversified portfolio. But sticking to the dit growth — both housing and and interest rate reductions, plus China’s slowdown. China is, by far, short and medium-term prices. as well as others in the tech “food Montgomery Fund. fundamentals is sometimes easier said than personal — declining, the report- recently improved capital city the dominant consumer of iron In technology, where expecta- chain” have demonstrated contin- done. Seek advice from a qualified professional. ing season for the banks is likely to house prices, the banks say house- ore at over 70 per cent of global tions are built on growth and the ued strong growth and I expect www.montinvest.com How do I determine my investment risk profile? A risk profile is an assessment of your willingness and ability to take risk with your Hybrids are popular for their cashflows — but be aware of the risks portfolio. The process of risk-profiling builds a framework to determine what investment asset classes you should consider and avoid. investment returns that deliver in- 2019 were a $1.87bn issue by NAB fixed-income securities, instead of definitely defer making interest they may find it difficult to find a Your risk profile is built upon three primary TONY KAYE come without increasing ex- in March, paying an interest rate paying a lump sum principal pay- payments. buyer willing to pay a high enough considerations — tolerance for risk, risk you posure to excessive capital risk. of 4.9 per cent, a $1.65bn issue by ment at maturity, investors’ capi- Liquidation risk: Further- price, or in a stressed market scen- would be required to take to generate sufficient One alternative investment Commonwealth Bank in Novem- tal is instead usually converted more, in terms of recouping funds ario may not be able to redeem return and your capacity for risk. option on the table is hybrids, ber, paying a rate of 3.93 per cent, into the underlying shares of the in the advent of a company default their capital. Risk tolerance is the level of risk you feel which pay regular fixed or floating and a $905.5m issue by Macquarie issuer at a specified conversion and subsequent liquidation, hy- In short, hybrids may be con- comfortable with. As we get older it is common interest payments to investors, Group, also in March, paying a date. brids rank below senior and subor- sidered to be defensive, but their for our tolerance for risk to diminish. A risk generally on a quarterly basis. rate of 5.04 per cent. Conversion risk: Hybrids in- dinated debt (bonds), although attached equity components and tolerance questionnaire will identify your Australia’s major banks, other On the surface, especially vestors take on the risk that share investors do have priority over other inherent risks, some of them responses to a range of scenarios which will financial institutions, and even given the fact that Australia’s price volatility near the date of the common stock holders. quite substantial, must be under- include your level of experience as an investor, some corporations have been major banks make up the bulk of conversion into equity could sig- Interest rate risk: There is also stood clearly. They represent one your understanding of investment markets, your Interest rates are already at record active in rolling out hybrid issues the issues that can be invested in, nificantly affect the value of the interest rate risk in hybrids, which way of stretching for yield, but for confidence in making investment decisions and lows, and there’s the strong pros- over many years, because they use hybrids could be construed as a hybrid security. Most hybrids are exists for holders of both fixed and some they could become a yield how you feel when markets rise and fall. pect of further easings in monet- them as a way of meeting their safe investment avenue to capture structured to allow the issuer to floating rate payment hybrid stretch too far if equity market Risk required is the level of investment risk ary policy this year as central regulatory obligations to have regular income payments. force a conversion to shares at its securities. conditions worsen. In past market you would need to take to achieve your goals. If banks around the world endeav- minimum levels of capital avail- Yet, it’s very important for in- discretion, irrespective of the in- For fixed rate hybrids, the in- downturns, because of their in- you require a return of 6 per cent long term to our to stimulate economic growth. able on their balance sheets to vestors to understand what’s be- itial prescribed maturity date. verse price/interest rate relation- built equity characteristics, hy- achieve your objective, you will need exposure to For investors, and particularly cover potential financial shocks. neath the hybrids surface and the If the issuer’s share price has ship will mean that when rates brids have often been poor growth assets to achieve the goal. retirees reliant on stable income More than $5bn of new hybrid capital risks they may entail in the fallen at the conversion date since rise, prices fall; and when rates fall, performers for investors. You can apply different risk profiles based on streams, the challenge of securing issues hit the Australian Securities future. To do that, the first point to the time of the initial investment, prices rise. The level of interest your specific financial goals. and maintaining reliable cash Exchange last year, taking the realise is that hybrids is an um- investors will in effect take a capi- rate sensitivity will depend on the Tony Kaye is senior personal flows will be exacerbated by even total number of listed hybrid brella term used to describe an tal loss. duration of the security. finance writer for Vanguard Andrew Heaven is an AMP financial planner at lower interest rates. issues to 54, worth a combined array of highly complex products Deferral risk: Another factor Liquidity risk: For some hybrid Investments Australia. WealthPartners Financial Solutions. So, the biggest conundrum for $45.7bn. that blend fixed income and equi- with hybrids is deferral risk, security holders who wish to sell, a many investors will be sourcing The biggest hybrids listings of ty characteristics. Unlike other whereby issuers can choose to in- lack of market liquidity means www.vanguard.com.au [email protected]