Sarah Shaw

Developments in the United States with Biden’s presidency, and the status of the COVID-19 vaccine globally, will have a key influence on markets in 2021, and there is quiet optimism with long-term investment themes and insights remaining intact, according to Bennelong boutiques Kardinia Capital, 4D Infrastructure and Quay Global Investors.

Kardinia Capital portfolio manager, Kristiaan Rehder, says he is optimistic on the outlook for the Australian market, with a few provisos.

“As we know, markets don’t move in a straight line and there are a number of things we are keeping our eyes on.

“First are events in the US following the presidential election. In the lead-up to the election there was a huge amount of uncertainty which saw money come out of the market. This was more due to the desire for a clear outcome, rather than views on who would win the election. While the incumbent is still challenging the outcome, markets have looked through this and we are seeing a lot of cash coming back into the market.

“A significant development has been US President elect Joe Biden’s announcement of his COVID-19 advisory panel. Several of the members are already talking quite openly about the potential for state-by-state lockdowns, which is a risk factor for markets to consider.

“Secondly, we are watching investor sentiment which is currently elevated. History has shown us that when sentiment is high, it’s a good time to take a more cautious stance.

“Third is the vaccine development. Recent announcements on this front have clearly been great news, but we are keeping in mind the huge effort that will need to be made from a manufacturing and logistical supply chain viewpoint, before any vaccine will have an impact. It will take time.”

But he says jurisdictional responses to the unprecedented economic impact of COVID-19 have been strong.

“Central bank support, including QE, will certainly underpin markets going forward

“We are also starting to see markets and companies open up. Despite the issues in Europe with a second or even third wave, countries such as Germany are using a much more targeted approach than they did during the first phase of the pandemic. There is increasing momentum to open up, and this will continue to provide a tailwind for stocks locally that will benefit, such as Qantas, Flight Centre and Star Entertainment.”

4D Infrastructure’s Sarah Shaw remains positive on the opportunity for global listed infrastructure in 2021 and beyond.

“While the pandemic will likely prevail longer than was hoped, we believe the global economy will ultimately emerge stronger for the experience. The pace of recovery was always going to be dependent on the policies undertaken during the crisis. Fortunately, the economic response from governments and central banks around the world has been massive and continues to grow, which is supportive of a recovery. 

“The huge amount of fiscal and monetary stimulus is still to be fully felt in economic terms, with a big chunk of that spending focused on badly needed infrastructure investment around the globe, including the energy transition. In fact, once we move past the worst impacts of the virus and the world’s economy returns to a more stable environment, infrastructure in all its forms will be essential to the global economic recovery and returning society to a ‘new normal’.

“We believe there is no global growth recovery without roads, railways, pipelines, power transmission networks, communication infrastructure, ports and airports.”

In the meantime, she says, infrastructure can be positioned to capitalise on the prevailing environment.

“Infrastructure has two distinct and economically diverse sub-sectors – User Pays and Essential Services (or utilities). Active management of these two sub-sectors allows you to position an infrastructure portfolio for all stages of the macro and market cycle. Essential Services are a fundamental safe haven in weak economic environments (like 2020), while User Pay assets are correlated to growth with an inflation hedge (the recovery).”

Looking beyond COVID-19, she says the long-term infrastructure growth thematic remains intact and has actually been enhanced by COVID-19.

“Quite separately to the COVID-19 response, replacement spend, population growth, environmental considerations and demographic trends (especially the emergence of the middle class in emerging markets) will all drive infrastructure spend over coming decades.

“COVID-19 has not changed this, but rather has enhanced the opportunity – government stimulus programs are fast-tracking infrastructure investment, increasingly stretched government balance sheets will see a greater reliance on private sector capital, and a currently low interest rate environment is supportive of infrastructure investment and valuations.

“But for equities to continue to rally we need to see a COVID-19 vaccine approved and effectively deployed around the world. This remains a risk to equity market recovery. Another risk is that governments and central banks prematurely take their feet off the ‘Go’ pedal before the global economy has the opportunity to properly get back on its feet.

“Regardless, significant value has emerged across the infrastructure universe. The COVID-19 ‘event’ will, we believe, prove to be a huge buying opportunity sector wide and the market will recover strongly once contained.”

Chris Bedingfield from Quay Global Investors says that while listed real estate had been particularly negatively affected by the COVID-19 outbreak and lockdowns, there are already signs that the headwinds are being reversed.

“Real estate companies were impacted not just by the lockdowns, but also by being asked by governments to shoulder some of the burden of the economic impact – such as cutting rents to affected businesses.

“A successful vaccine should help to reverse some of these headwinds, and we are already starting to see this priced in to some sectors.

“In addition, there have been some winners during 2020 from the lockdown, such as data centres, self-storage, industrial property and single family homes, although some of these sectors aren’t as common in Australia.

“Our view is that the real estate sector is under-priced and there will be good opportunities in 2021.”

He also flags the importance of the monetary and fiscal stimulus program efforts from governments and central banks.

“This is providing a permanent repairing of household balance sheets, which will reverberate long beyond 2020. Effectively the stimulus packages are setting up consumers for the next few years.

“We are already seeing the effect of this in house prices, which have been holding up extremely well – not just in Australia, but also in the US and UK. We will also see this flow through to the retail sector.”

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Kristiaan Rehder (left) and Mark Burgess.

With winter in full swing, investors are going on a yield hunt.

Central banks are increasingly controlling volumes and prices as they attempt to set the shape of yield curves.

In the US, investment grade 10-year corporate bonds typically offer more than a 2% yield, significantly higher than the 10-year Treasury yield of approximately 70bps. It was therefore a curious move by the US Federal Reserve to target corporate bonds. What is the Fed seeing that spooked it to take such action? Restoring liquidity to credit markets was one cited reason, but regardless of the motivation the end outcome is clear – corporate bond yields are going to fall, potentially closing off an additional asset class offering income to ever-hungry investors.

It’s a similar theme at home, where the Reserve Bank of Australia (RBA) has pushed interest rates so low that as an asset class, term deposits are no longer an option for investors requiring income.

In response to COVID-19, on 19 March 2020 the RBA announced a cut in the overnight cash rate target to a record low of 0.25%. In fact, the RBA went one step further and announced it would also target a yield on three-year Australian Government bonds of 0.25%, purchasing across the yield curve to achieve the target.

This unconventional measure is set to remain in place until progress is made towards the RBA’s goals of full employment and the inflation target (2-3% on average, over time).

Given the spike in unemployment due to COVID-19 and the risks of further increases once the government’s stimulus measures (JobKeeper and JobSeeker) are wound back, as well as the RBA undershooting its 2-3% inflation target for more than four years, this does not appear likely anytime soon. In fact, at the ANU Crawford Leadership Forum on 22 June 2020, RBA Governor Philip Lowe said that due to the pandemic and an excess of global savings relative to investments, interest rates would remain at their current record lows for years to come.

To us at Kardinia, yield-producing equities are increasingly looking like the last asset class standing. We believe investors will continue to move capital into equities to chase yield in a world seemingly devoid of such opportunities. The need for income is a powerful force – particularly for those transitioning to or already in retirement. At some point, we believe this need will tip bond investors into the equities market. Consequently, we have increased our exposure to this thematic.

Share trading at an all-time high

At a time when investors are grappling with unprecedented uncertainty, a new phenomenon is taking hold in equity markets which is causing quite a stir. Retail investors are setting up accounts and trading securities with enormous enthusiasm. A range of online trading platforms, such as Robinhood, are being embraced by a new generation of retail investors and the impact on markets has been noted.

Populist investment forums are encouraging investors to participate and with a lack of sport, gambling and other entertainment options available, combined with increased free time, many have turned to share trading. The Australian Securities and Investment Commission’s recent report, Retail investor trading during COVID-19 volatility, highlights the doubling of average daily securities market turnover by retail brokers; between 24 February 2020 (the first trading day after the market peak) and 3 April 2020, it rose from $1.6 billion to $3.3 billion.

Whether this retail trend has truly divorced fundaments from asset prices, or whether the professional investment community is clutching at explanations for the recent market moves, is open to much debate. Either way, Kardinia believes central bank actions remain the most powerful driving force behind market returns.

Kardinia’s strategy

Since inception over 14 years ago, Kardinia has deliberately restricted its maximum net exposure to the market (that is, long positions minus short positions) at 75%. This ceiling has proven itself time and time again in its ability to limit the drawdown of the fund. This has been the case again this year during the COVID-19 pandemic, when the fund’s drawdown was 3.93% versus the market drawdown of 36.17%.

The true value of this key structural element of the Kardinia fund comes to fruition when markets fall. Drawdowns of more than 5% in the Australian market tend to occur at least once every year, and our capital protection is invaluable during these periods. As the current swift rally in the market takes hold, the chances of a sell off will only increase with time. With volatility likely to remain elevated, we truly believe the Kardinia fund is a strategy for the times.

Kardinia Capital is a boutique asset manager investing in Australian equities via an absolute return, variable beta, long/short strategy which was incepted in 2006. Kardinia aims to generate consistent positive returns through an investment cycle, and not lose money in falling markets. Rather than trying to generate the highest possible returns which tends to result in heightened risk and volatility, the team strives to provide growth via superior risk-adjusted returns.

By Kristiaan Rehder, Portfolio manager 

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Kardinia was formed in 2011 by Mark Burgess and Kristiaan Rehder in partnership with Bennelong Funds Management to manage the Fund’s strategy. The Bennelong Kardinia Absolute Return Fund aims to achieve absolute returns in excess of 10% per annum over the long-term.

Zenith considers the investment team “to be of a high calibre and was recently bolstered by the addition of Senior Analyst, Stuart Larke, in January 2016”.

Zenith reports “Kardinia maintains an equal focus on meeting its performance objectives and capital preservation”. Zenith has confidence in the ability of the Fund to deliver on its performance objectives given “the attractiveness of the underlying investment philosophy and process”.

Zenith’s report also highlights the Fund is among the more dynamic variable beta strategies available to investors, able to preserve capital in falling markets by materially lowering its net equity exposure.

Kardinia’s Fund is available on an extensive list of platforms and has recently been added to CFS FirstWrap.

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Previously, Peter was Executive Director – Head of Melbourne Institutional Sales with Nomura Australia, where he played a key role in establishing their Australian equities business. He also worked for boutique fund manager AR Capital Management as a portfolio manager for their absolute return hedge fund. Peter’s professional history also encompasses a variety of analyst roles in Australia and London with HSBC, Credit Lyonnais Securities, Hill Samuel Merchant Bank and Barclays Bank.

Mark and Kristiaan said they were delighted with the addition of Peter to the team. “Peter brings with him a wealth of investment markets experience, which will further strengthen the team’s analytical capabilities,” said Mark.

Kardinia was established by Mark Burgess and Kristiaan Rehder, in partnership with Bennelong Funds Management, in August 2011. The team manages the Bennelong Kardinia Absolute Return Fund, a long/short Australian equity product with the long-term objective of achieving double-digit annual rates of return without compromising on capital protection.

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Kristiaan Rehder

Kardinia Capital has won the ‘Australian equities – alternative strategies’ Manager of the Year in the Professional Planner/Zenith Fund Awards.

Kardinia beat Perpetual and Zurich to win the 2013 industry award, announced at a ceremony in Sydney on 11 October.

Last year, Kardinia took home the Professional Planner/Zenith ‘Australian equities – long/short’ Manager Award.

“The Professional Planner/Zenith Awards are a significant industry acknowledgement so we are really proud of the win. It’s great recognition for the team and our investment strategy,” said Kristiaan Rehder, Portfolio Manager of the Bennelong Kardinia Absolute Return Fund.

Kardinia was established by Mark Burgess and Kristiaan Rehder, in partnership with Bennelong Funds Management, in August 2011

The Fund is a long/short Australian equity product with the long-term objective of achieving double-digit annual rates of return without compromising on capital protection.

The Bennelong Kardinia Absolute Return Fund has delivered investors 14% p.a. over seven years. This ‘variable beta’ strategy (which means the manager has the flexibility to adjust the Fund’s exposure to the underlying market) has ensured a positive return in every calendar year since inception in 2006. This includes the heart of the Global Financial Crisis in 2008, when the Fund returned positive 0.30% whilst the market fell close to 40%

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