Chris Cuffe in Eureka Report

Chris Cuffe, one of Australia’s best known and well respected investment wealth creators, has made some positive public comments on the Technical Investing Absolute Return Fund (TIARF).

Chris’s comments were contained in an interview with the Eureka Report. The article is below.

Search on “Technical” if you don’t want to read the entire article.

ASX overvalued? ‘Not by a long shot’

By James Frost February 12, 2010 [Eureka Report]

PORTFOLIO POINT: Chris Cuffe says the ASX is below its long-term average and certainly not overvalued.

One of the architects of modern day wealth management in Australia, Chris Cuffe, does not think the market is wildly overvalued right now. If anything, he thinks it is undervalued.

That’s a massive vote of confidence from Cuffe (pictured), whose experience includes building Colonial First State’s funds management business from a start up to about $70 billion in funds under management. His optimistic view should prove extremely welcome for investors who are still a little wary after watching their wealth implode during the global financial crisis.

These days Cuffe has moved on from the world of institutionalised funds management and is concentrating his efforts on a boutique offering called Third Link Investment Managers, a fund of funds that donates all of its fees, minus expenses, to a non-profit that works with charity organisations to improve their overall strategy, governance and relationships with corporate Australia.

After 30 years in the business, Cuffe has managed to leverage of the expertise of some of the best in the industry for Third Link, including David Paradice of Paradice Investment Management, Don Williams of Platypus Asset Management and Ben Griffiths of Eley Griffiths, to name just a few.

He has also managed to access a wide range of wholesale funds, including funds from Magellan Group and a slightly mysterious alternative manager known as Technical Investing, which is currently long lithium and short Brazil.

Funds like these usually have prohibitively high minimum investment amounts, some starting at $500,000 but usually $2 million. Then there are the hedge fund style fees to worry about. But in most cases Cuffe has persuaded the managers to waive both upfront and outperformance fees, making Third Link’s minimum investment amount of $20,000 and its MER of 1.4% seem like a bargain.

Capitalised at $33.6 million, the fund is small but ambitious. The fund has beaten its benchmark, the Morningstar Multi-Sector Growth Index, consistently and since inception in March 2008 has outperformed by 8.5%. Which is a fair exchange for a fee that you know is being well invested.

The interview

James Frost: Your portfolio updates indicate your exposure to international equities increased quite a bit late last year. Was that a tactical decision or the result of growth in those positions?

Chris Cuffe: Bit of both, but more tactical. I do like the exposure to emerging markets, and during that period I put more money in the emerging markets. When I look at the overall international exposure at the end of January, again it’s around 20%, and around half of that is in the emerging markets through three particular funds.

What did you like about them especially?

At least three of the four managers I have in those areas have peculiarities about them that I quite like. One of them is the Magellan Group. I invest through their Global Equity Fund, which is really about trying to invest in quite mainstream companies in the world, where a good part of their revenue is coming from the emerging markets. Because when you’ve got companies like Johnson & Johnson or Kraft that have good governance, then quite often the performance is more reliable. A lot of global companies in this particular fund are very cheap at the moment with great exposure to the developing world.

Has the onset of volatility made you consider unwinding these positions?

Other than letting the cash build up, which I’ve been doing since December, I haven’t made any moves. The fact that we’re having a bit of a pull-back doesn’t surprise me but I certainly haven’t been redeeming many investments either, mainly because I don’t think things aren’t wildly overvalued. In terms of valuations, the question I always ask is how markets stand in relation to the standard deviation. If you look at the Australian market at the moment, it’s in a range that is only a bit below its long-term average, so it’s not overvalued by a long shot. In terms of the dayto- day sentiment, I’m just like anybody else and I don’t think it’s worth paying undue attention to. So while the market is still in reasonable territory, I’m loath to try to duck in and out.

That’s an interesting point because if you look at the four-year moving average for the ASX 200, it’s roughly around 4750 or about 250 points above where we are now. That would suggest that if anything the market is slightly undervalued.

I think that’s spot on. Statistically speaking, where we are right now is where the market sits 35% of the time. If you look to when things were pretty tough in March last year, the level of the market was three standard deviations away from the long-term norm; and if you look on the reverse side, where markets were at their peak around November 2007, they were more than two standard deviations above the long-term norm. So there were clear signals there, and I like the use of standard deviations to look for the long-run signals.

If I can turn to results for a moment, how important do you think it is that yesterday CBA really only chose to lift its dividend by a modest amount, taking into account that it looks like its going to be a bumper year for profits for the bank?

It doesn’t surprise me at all and you saw BHP doing much the same. Normally what happens when you go through economic downturn is that companies are quick to cut their dividends but they’re much slower to increase them because you’re never quite sure of the pace of economic recovery.

And considering these are some of our biggest and most well-managed companies, it would appear that the chances of their rivals following suit is slim. They’re either going to maintain their dividends or quite possibly reduce them.

I just think generally everybody is very aware of the cost of capital right now. After the credit crunch, the cost of capital has gone up significantly. So if you’re a large company, you’re probably still getting access to capital, even though the cost of it is greater, but many smaller companies will find it hard to get access, full stop. So smaller companies will be even more inclined to preserve capital and put dividend reinvestment programs on ice and I think that’s quite normal

I note with some interest the fund has an allocation to property of zero.

Yes.

Do you think there’s going to be a time when you look to add property to the asset mix?

I did have it at one stage, and then I baled out. If you remember when the fallout began, the first sector to go was the REITs. By July 2008, I started investing in that sector, but it was clear that there was far more bad news to come, so I baled out. The main thing I’d want to see there is a bit more stability in the valuation because there’s been a lack of transactions and until you get a lot of them it’s hard to know what the real value is.

Until you know the real value then it’s the same old issue again: are the REITs comfortable in their debt levels, their covenant levels, their payout, the distributions they’re making and the like. I think we really have to see a little more there. It still wouldn’t surprise me that there could be further pain, particularly on the mid to smaller REITs. I think the mainstream REITs that were pretty lucky to be big enough to raise capital fairly quickly; again, the Westfields, Stocklands and the like, they look in pretty good shape.

I would have thought though that maybe your fund wasn’t just restricted to listed entities, that there might be a possibility that your fund could actually buy its own commercial property asset?

Look, it could one day; we’re allowed under the PDS to have up to 20% in unlisted assets, but I’m unlikely to do it in the near term because I feel the fund size is too small for that.

The fund also holds alternative assets. Who have you got managing that for you?

Well, I’m just in one fund only these days, and it’s a fund run by a group called Technical Investing. It’s a very unusual fund, but I’ve come to know them pretty well and quite like what they do. It’s quite a high volatility fund but the type of investing they do there is very interesting.

Is that accessible for retail investors?

No it’s not. In fact, that’s one of the advantages of my fund: I can get into some things that retail people wouldn’t be able to. The minimum for investing with Technical Investing is half a million and with many others it’s even more than that. So by investing in Third Link people get access to things they wouldn’t normally. The other interesting thing is that the Technical Investing Group’s fee they normally charge is a performance fee of 25%. Now that whole 25% is waived, so investors are coming through this fund, effectively paying 1.4% for exposure to a fund that they otherwise, if it did well, would be paying a much greater amount in fees.

Given your extensive background in wealth management, how do you feel about the latest developments in the sector, which may likely see AXA disappear of the face of earth?

I think that what you are seeing is the continuation of a trend whereby the big are continuing to get bigger, the middle ground kind of disappears and lots of small or boutique players, if you will, are entering the market regularly. It’s very hard for a mid-tier fund manager. One of the downsides to getting bigger, despite what people say, is that the bigger you are the more your ability to generate alpha diminishes, there’s no doubt about that. Those players that are left worked that out pretty quickly that they were distributors and not investment managers … which is why the share of the wealth management market held by the major banks is massive: they are the distributors.

Do they have too much of an advantage?

They all paid up for those businesses. None of them acquired those businesses for free and there were some pretty big sums of money paid for the likes of BT, Colonial and ING and so forth. They have a distinctive advantage in that they have mainstream brands, but these days there are plenty of financial planners that aren’t beholden to just one bank and they can cast their net a lot wider. I think one of the key developments in the industry was the emergence of wrap platforms that corralled investors very efficiently, where before your portfolio could be a lot more fragmented. You’d have to say that none of that could have happened without the PC so we have to thank Bill Gates for that.