Making money while giving to charity

The aneurysm-inducing volatility of global markets has accelerated in 2015. Fickle investors have had to grapple with the full spectrum of frights.

US equities have slumped more than 3 per cent in the first 15 days with Aussie shares not far behind. Oil prices have plunged a further 13 per cent over the same period, bringing total losses since August 2014 (when oil was trading at US$107.6 per barrel) to a stunning 57 per cent. The World Bank has downgraded its global growth forecast, which contributed to a flash-crash in copper prices during the week.

Aussie government bond yields have dropped to levels not seen since the crisis in 2009 and imply an astonishingly low 2 per cent Reserve Bank of Australia cash rate over the next three years. Only four months ago bond traders were betting on a 3 per cent cash rate. Other sovereign government bond yields are likewise at or near their all-time nadir, which normally signals Armageddon is afoot.

Then consider the geopolitical jolts. The oil cartel in the Middle East is waging war against the US shale industry by promoting supply in the hope that prices will fall below the highly leveraged shale companies’ cost of production. (I warned about shale in May 2013.) Russia’s economy is on the brink of insolvency with many of its heavily indebted firms struggling to service foreign currency debts as the rouble’s purchasing power has halved since June 2014. While declining oil prices result in a net transfer of wealth from producers to a much larger number of consumers, and should be stimulatory overall, traders will not look past their Bloomberg terminals. When I put the positive case to one, he bluntly retorts, “But what if Putin goes to war?”

To book-end this turbulence we’ve had terrorist attacks in France, serious cyber-skirmishes between the US and North Korea, and even the obligatory Ibrahim family shooting.

Gerard Satur, Australian founder of the macro hedge fund MST Capital, posits that perhaps markets are “losing faith in the central bankers’ ‘put option'”. He’s referring to the policymakers’ reflex to bail out traders with interest rate cuts and government purchases of privately traded assets whenever markets get the yips. Susan Buckley, managing director of investment firm QIC, worries that sovereign bond prices are way above credible estimates of fair value. The US housing bubble may have been superseded by an even bigger government bond bubble.

Is paying down debt the answer?

After my final column last year a senior official suggests that one of the smartest things punters could do is pay down debt – given they are profiting from the cheapest money in history – and invest in bank deposits protected by government guarantees. While there is merit to this, retirees cannot survive on deposit rates that do not cover inflation after tax. And banks are chiselling savings rates further to pre-emptively expand their net interest margins in anticipation of having to carry more equity capital (and less leverage), which will crimp shareholder returns.

My advice is that long-horizon investors should ignore the day-to-day fluctuations in their portfolio and focus on realised multi-year returns after fees. The challenge is to decode the true trend amidst the chatter. But with real interest rates negative after inflation, how do you earn decent returns while minimising the risk of capital loss?

One innovative solution recently launched by a cauliflower-eared, former rugby-player, Geoff Wilson, is the Future Generation Investment Fund. For those that don’t know this rangy, dome-headed character, he’s the founder of the eponymous listed investment company (LIC) provider, Wilson Asset Management, which runs over $880 million across three funds.

Wilson says the research shows LICs tend to outperform unlisted managed funds because they are closed pools of capital. “Money often flows into funds at the top of a market and rushes out at the bottom,” he says. “All else being equal, this compels managers to pick up stocks when they’re expensive and sell them when they’re cheap. In contrast, LIC’s facilitate a longer-term view because you have more committed capital.”

After planning to only raise $50 million, Wilson established the oversubscribed Future Generation Investment Fund in November with $200 million in backing from luminaries like the Victor Smorgon Group, Solomon Lew and Twiggy Forrest, who invested $10 million each.

And there’s nothing quite like it. Future Generation is a listed “fund-of-funds” that serves two important purposes. It gives you access to a carefully selected and well-diversified collection of Australia’s top equities managers. “I wanted to pick the best investors I could find,” Wilson says. This includes leading long-only and market-neutral funds like Regal, Bennelong, Optimal, Watermark, Paradice, and Cooper. A number of the managers were closed to new investors.

Managing your money for free

The twist is that these talented investors manage your money for free. In fact, it’s better than that. The average annual management fee and performance fee charged by Future Generation’s 15 different funds is 1.3 per cent and 13 per cent, respectively.

Wilson has convinced the managers to gift all these fees, which ordinarily amount to more than 2 per cent annually, to Future Generation. In return, Future Generation commits to pay 1 per cent of its assets each year (currently $2 million) to 14 childrens’ charities.

If you own more than one million shares in Future Generation you get to donate your 1 per cent to any registered Australian charity you want. “It’s the highest quality funding for charities,” Wilson exclaims, “because it’s consistent and does not cost them anything”. Wilson says neither he nor his business, which is one of the 15 funds, make any money out of Future Generation.

Any excess manager fees beyond the 1 per cent donations are reflected in the LIC’s net asset value and therefore benefit its investors.

Wilson emphasises that the managers also invest Future Generation’s capital in their main funds, not as separate (and potentially neglected) accounts that could suffer inferior performance.

So Future Generation is a highly efficient, multi-manager equities product that allows you to regularly contribute to charities while tapping Australia’s best fundies for free, including some you would never have access to.

Performance to date has been consistent with Wilson’s aim of “flattening out the equity market’s volatility”. “In November when the market fell 3.2 per cent and the Small Ordinaries was off 3.8 per cent, Future Generation was down only 0.6 per cent,” Wilson highlights.

Wilson may raise more money for this dual-purpose philanthropy and thinks total capacity could be as much as $2 billion. Prospective investors can buy its shares on the exchange or wait for a placement. With banks and traders on the nose right now for allegedly manipulating markets, Future Generation represents finance at its very best.

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