Spooked by a “housing calamity,” banks, overvalued stocks, and China.
Philip Parker, chairman and chief investment officer of Sydney-based Altair Asset Management, and “proud to have beaten the relevant benchmarks since inception,” decided it’s time to throw in the towel. With 30 years in the industry, he has seen a few cycles, and the “overvalued and dangerous time in this cycle” has spooked him. In light of “the impending crash” that will “assist investors to take stock of the excessive valuations,” he decided to sell everything.
His firm will hand the money back to investors. This includes returning an advisory contract for “over $2 billion for one of Australia’s largest financial planning companies.”
There are “just too many risks at present,” he wrote in The Australian. “I cannot justify charging our clients fees when there are so many early warning lead indicators of clear and present danger in property and equity markets now.” Among the “more obvious reasons to exit the riskier asset markets of shares and property” are:
- The “Australian property market bubble” that reminds him of the “housing calamity” of the early 1990s
- “China property and debt issues later this year”
- “The overvalued Australian equity markets”
- “Oversized geopolitical risks”
- And the “unpredictable US political environment.”
He’s not just talking about “sell everything,” as other fund managers have done.
Famously, at the end of July last year, Jeffrey Gundlach, CEO of DoubleLine Capital, told Reuters in an interview that stock investors have entered a “world of uber complacency.” As economic growth looks weak and corporate earnings stagnate, “the stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.” In referring to a word painting by artist Christopher Wool, that says “Sell the house, sell the car, sell the kids,” he mused: “That’s exactly how I feel – sell everything. Nothing here looks good.”
Gundlach didn’t “sell everything.” But Parker’s Altair Asset Management is in the process of actually doing it. And it wasn’t an easy decision:
“Giving up management and performance fees and handing back cash from investments managed by us is a seminal decision, however preserving client’s assets is what all fund managers should put before their own interests.”
His clients were advised of the decision on May 15. Investors in the firm’s managed funds would get the cash proceeds from the asset sales. Investors in managed discretionary accounts (MDA) would get a choice: either transfer the shares to other fund management firms or have Altair sell the shares and return the cash to investors – and this is what happened next:
“Interestingly, 95 percent of our MDA clients took the latter decision to cash up,” Parker wrote. It seems clients weren’t interested in toughing out an “impending crash” or a “housing calamity” and what that might do to the banks.
Parker goes on:
Lack of upside in our models of course leaves an active manager little alternatives but to hand back cash at such an overvalued and dangerous time in this cycle. From a bottom-up perspective Altair’s analysts’ valuations were indicating sells above their target levels or were at best were severely overstretched even after we upgraded our targets several times this year and late last year.
Members of the Altair investment team, including Parker, “have been warning of the overvalued property and financial markets for at least six months.” The firm’s monthly Altair Insights has been warning about an impending housing market downturn since mid-2016. He writes that the sign posts out there – the “specific identifiers that are extremely recognizable” – are reminiscent of the “late eighties and early nineties housing calamity” in Australia.
Parker is among a number of other Australian fund managers to get spooked. Roger Montgomery, chief investment officer of Montgomery Investment Management warned in December of a potential “property implosion” and its impact on jobs and the overall Australian economy, which has become so dependent on the housing bubble [ “A Warning for Property Investors in Australia”].
So why not just ride out that coming crash and calamity and collect the fees at every step along the way, which is the classic approach other fund managers are following? Well, turns out, Parker has developed a novel concept, that “preserving client’s assets is what all fund managers should always put before their own interests.”
He is going to let the markets and the property sector do their thing, and without any client money at risk, he’s going to watch the spectacle, and as he says, “if my thesis is correct and value indeed reappears as it always does after major corrections,” and when he thinks “there to be real value again,” he might re-enter the markets in some way.
So this would be another case of waiting for the next crash and to then plow back into the markets to benefit from the surge following that crash. The “smart money” is preparing for this opportunity. For example, hedge fund manager Paul Singer just raised $5 billion in 24 hours for this event, as “all hell will break loose,” after which he wants “to take advantage of it.” But all this money piling up with the plan to deploy it during the next crash will impact the market itself. Read… Why I think Stocks Won’t Crash Spectacularly but May Zigzag Lower in Agonizing Ups-and-Downs, Possibly for Decades