Why does the MB Fund own some banks and miners?

I’ve had a number of discussions with investors over the last few weeks about investing in the Macrobusiness fund versus “do it yourself” investing and thought it worth aggregating the discussions into a post.

Part of what I want to do with the MacroBusiness fund is to de-mystify portfolio investing. Many parts of investing are the equivalent of changing a light globe – you can do it yourself for very little and hiring a professional to do it for you will be expensive. Other parts are more like electrical rewiring – it is entirely possible to do yourself but a professional can (usually!) do the work to a better standard, faster, and with greatly reduced possibility of electrocution.

Keep in mind that I’m talking about a broad-based, diversified portfolio solution here – not about trading in speculative stocks.

So, let’s look at how to do it yourself – then you can decide whether to call in the professionals or not.

There are two key decisions that an investor needs to make:

  • Asset Selection: How are you going to choose which individual stocks or bonds to own within classes.
  • Asset Allocation: How are you going to decide to allocate between different classes of assets like cash, bonds, shares or other assets

DIY Asset Selection

I’ve put this one first because it has an easy DIY option – an index fund or exchange-traded fund. These will deliver the index performance less fees – and the fees are usually relatively low. So, you will get slightly below index performance – you will never outperform the index but you won’t underperform by much either.

The downside is that you get everything in the index, at index weights. If you don’t like a sector or have a problem with a particular stock, bad luck. Fees are around 0.2%, lower for the US, higher for other markets.

Another way is to invest in individual stocks/bonds and build up a portfolio. The benefit is you can customise the portfolio to your investment outlook, risk preferences and you don’t incur any fees. There are often tax benefits to owning shares directly. However, if you want to do this yourself, be prepared to spend a lot of time. You’ll need at least 20-30 stocks, plus bonds, and if you are looking at a global portfolio then probably double that (at least). You need access to research, trading capabilities and risk systems. Say you have $200,000 and you own 70 securities. You have some larger holdings, some smaller. The smaller holdings will probably have $2,000 or less in them. You still need to research, trade and manage the risk for each stock – but it’s a lot of work for each stock for what is a small investment. This is not an easy option for most investors.  With a round trip (buy and sell) cost of >$100 for international stocks the hurdles are high for outperformance.

Another way is to go to a broker and get them to help you by doing a lot of the research and trading for you. This is usually the highest cost option, and only barely fits the definition of DIY. Most brokers have a vested interest in you trading more often, which often doesn’t make for the best investment outcome.

Finally, you can move to a core / satellite solution. Choose a lower risk fund manager or an index fund to put most of your funds into (the core) and then surround that with a few stocks or higher risk funds that you choose yourself (the satellite).

DIY Asset Allocation

This is the hard one. For asset selection you can choose some form of index that will deliver similar returns, but for asset allocation there is no index.

Some people recommend a “strategic” allocation where you basically take long term risk / return numbers and create a portfolio based on these strategic weights. This is an admission that asset allocation is hard and essentially avoids making a decision by using long term weights. Which is fine. If you don’t mind waiting for 20 years for averages to re-assert themselves.

The other problem that you get is that assets that are in a bubble (by definition) have a great performance history, and so strategic asset allocation at the end of a 20 year bull run in Asset Class A will usually recommend buying lots of Asset Class A just before it crashes.

Your other option is “tactical” asset allocation, where you buy or sell classes of assets based on something else. Some rely on systematic (computer driven) models, others are discretionary, trying to avoid risks in one asset class or gain exposure to the upside in another.  Valuation should play some part in your decision.

If you are going to do it yourself, then there is no “default” answer on Asset Allocation, you’ll have to decide what works for you.

How does MacroBusiness fit into the above picture?

Many of your fellow readers use the MacroBusiness website to help with their tactical asset allocation decisions already. We didn’t start the fund to stop people doing that, we started the fund to help them do more of it. In particular we want to:

  1. To provide an asset allocation solution for investors who agree with many of the Macrobusiness themes but don’t want to do it all themselves.
  2. To provide core portfolios for investors who want to run a core/satellite strategy (presumably using MB commentary and views as an input into their decisions)

On the asset selection side we have a team with considerable expertise in stock picking combing over a global portfolio of stocks.

On the asset allocation side, David and Leith’s view on asset allocation are publicly available for years on the MB site. I’m adding on-the-ground investment experience to deliver portfolios that put their thoughts into action.

Side note on the Foundation portfolio

The “Tactical Funds” provide investors with “the works” – asset allocation and stock selection, customized to your risk profile, income needs and ethical choices.

The goal of the “Foundation Fund” is to provide investors with smaller balances an opportunity to take advantage of the asset allocation. It only has a small amount of stock selection in it, because unfortunately you can’t buy half an Alphabet (Google) share – i.e. to get a broadly diversified portfolio, owning direct shares is not an option if you have a small balance. This is why we use exchange traded index funds for international.

For the Australian exposure, instead of using an exchange traded index fund (which will have banks and resources at full weight) we have used an ASX 20 and reweighted it to be underweight (but not zero-weight) banks and resources. Yes, MB doesn’t like banks or resources at current prices, and so we express that in two ways: (1) we are very underweight Australia, (2) we are underweight banks and resources within Australia. But the portfolio is a core holding, not a hedge fund and so we need to construct a portfolio that is diversified which means that given banks and resources are 50% of the ASX20 we need to own some of them.

Follow me
Latest posts by Damien Klassen (see all)


  1. We are all Japan now……endless low growth and growing debt…….with eternal stimulus in fits and starts for the current political darlings when we can afford it. We cannot afford big stimuli many more times.

    This means you have to be nimble and be prepared to take profits when they are offered. Most Australians have forgotten how to sell and take this profit… they see no need……it is a mystery to me now that transaction costs are so low.

    • >(…)We cannot afford big stimuli many more times.
      In more prosaic terms, once you’ve lopped it off and gave it to the dog, no amount of fluffing will get it to stand up.

  2. GeordieMEMBER

    I did years of research and built virtual stock portfolios before becoming part owner of my first Australian listed company. I read paper after paper which have examined individual investor performance versus buying low fee index funds. I’m still only about 20 to 30 percent the way towards being able to confidently describe a companies current position and value relative to their peers from their market updates and periodic reports.

    My conclusion is, now four or five years in, that I am probably fooling myself to think I can beat the market (i.e. the index fund). All the available evidence points toward this being the case, and I’ll fail like 95%+ people who try. The only thing stopping me from going to index or MB or similar fund route is that after two years and four months of being fully in control of my own investments, is that I’m four and a half percentage points ahead of the XNT index. (This includes making material losses experimenting with put options)

    If my performance does not improve, I’d rather spend the time I put into market research and educating myself with my family and business opportunities, and gladly had my cash over to a fund that can do the hard work for me.

    One caveat: If I’m not paying attention, direct investment or fund alike, I will not know when to liquidate all relevant positions should I believe market risk be too high and sitting 100% cash (for that market) to avoid or minimise loss of capital during significant corrections. There is no hands off approach than ensures your capital will be preserved when you need to access it; you have to some level of responsibility.

    • GeordieMEMBER

      “In theory, investors hold well diversified portfolios and trade infrequently so as to minimize taxes and other investment costs. In practice, investors behave differently. They trade frequently and have perverse stock selection ability, incurring unnecessary investment costs and return losses. They tend to sell their winners and hold their losers, generating unnecessary tax liabilities. Many hold poorly diversified portfolios, resulting in unnecessarily high levels of diversifiable risk, and many are
      unduly influenced by media and past experience. Individual investors who ignore the prescriptive advice to buy and hold low-fee, well-diversified portfolios, generally do so to their detriment.”

      The Behavior of Individual Investors – Barber and Odean

  3. Damien

    Great explanation for the issue’s I had yesterday. Please let me know when the low cost hedge fund is ready.


  4. Sounds like MB has gone over to the dark side,.”Forced” to own banks and miners, “forced” to buy the index like everyone else in this dumbass country.

      • Apparently not – unless you run your own SMSF.

        “But the portfolio is a core holding, not a hedge fund and so we need to construct a portfolio that is diversified which means that given banks and resources are 50% of the ASX20 we need to own some of them.”

        Is a “core holding” a legal/regulatory term? Sounds to me like basically everyone in Australia without an SMSF is forced to own banks and resources, under this definition. Unless they all collapse and get dropped from the index, by which time it will be too late.

        I wonder what an ethical fund that didn’t want to own coal miners would do?

      • You can own direct shares without an SMSF. Saying that the holdings are unavoidable because index isn’t good enough – I’m saying that the holdings are an active investment decision and everyone is responsible for the decisions they make.

      • innocent bystanderMEMBER

        Yes. MB Fund is saying they choose to invest directly in Australian Banks.
        The Foundation Fund says it buys direct shares for Aust. exposure. (also the Tactical Fund)

        I don’t get it:

        For the Australian exposure, instead of using an exchange traded index fund (which will have banks and resources at full weight) we have used an ASX 20 and reweighted it to be underweight (but not zero-weight) banks and resources. Yes, MB doesn’t like banks or resources at current prices, and so we express that in two ways: (1) we are very underweight Australia, (2) we are underweight banks and resources within Australia. But the portfolio is a core holding, not a hedge fund and so we need to construct a portfolio that is diversified which means that given banks and resources are 50% of the ASX20 we need to own some of them.

    • Damien KlassenMEMBER

      I understand the confusion and was hoping the post would clear it up… obviously we need to work on it a little more.

      If we were running a hedge fund that people were going to tip a small amount of their overall wealth into then we could take much larger risks and we could be short sectors at various points of the cycle.

      We have chosen to go with a lower risk fund (at much lower cost than a hedge fund) that people can put more money into – we want to provide a real alternative for people to invest a significant part of their wealth or superannuation rather than the typical Australian fund.

      Part of doing this entails acknowledging the risks involved in any investment view and that we are dealing with people’s life savings. If we had 100% certainty that every investment decision that we make will be correct, then we could ignore 50% of Australia that is banks and resources. But we don’t. There are a broad range of tail risks that could see banks or resources outperform. We don’t believe these are likely, but they are definitely possible – it would be foolish for me to suggest otherwise.

      If we invested all the money offshore, then we would open investors up to significant currency risk. We are comfortable taking on a reasonable amount of currency risk, but when we are talking about people’s life savings we need to acknowledge the risks.

      Further, the foundation fund is for lower balance investors to get access to asset allocation. We could have chosen to buy an Australian ETF and then we probably wouldn’t be having this conversation. Instead we chose to take the ASX 20 and reweight it to reduce the weight to banks. Its the tough thing about transparency – and I’m sure that being transparent will expose us to plenty more criticism that wouldn’t happen if we hid what was going on at the portfolio level, most people don’t want to see the sausage being made! The MB philosphy though is that you put it all on the table, the good, the bad and the indifferent.

      There are lots of subscribers who wish this was a hedge fund. But it is not. It is a fund where (at the moment) you get a 10-15% weight to Aussie banks and resources vs a 40-50% weight in most Australian equity funds.

      The tactical funds for larger balances can be (and usually are) more aggressive because we can buy more stocks to diversify risk. For the Foundation though, with low balances we can’t buy many stocks. But we can give you the asset allocation.

      I think though you are missing the point of the post. If you want to take the risk and be zero weight or short banks, I have shown you a number of ways to do it yourself – I don’t want to charge you fees for something you can do yourself.

      If you want to run your own asset allocation and are looking for an international portfolio to complement it, then we have created an international fund that may be suitable (read the PDS and all the documentation!).

      But I won’t be apologizing for delivering a diversified portfolio for people with small balances.

      • No, I have definitely not lost the point of the post. Thanks
        Refer your : On the asset selection side we have a team with considerable expertise in stock picking combing over a global portfolio of stocks.

      • Hmmm. Different definition of risk I guess. If I believe a stock is going to fall I don’t want to hold even a small amount of it for the sake of “diversification”, unless I have no confidence in my own ability. Also I tend to think of asset allocation as being between uncorrelated asset classes (especially fixed income) rather than between stocks which tend to be highly correlated.

        “”diversification is protection against ignorance. It makes little sense if you know what you are doing.” Warren Buffett

      • innocent bystanderMEMBER

        thanks for that Damien. appreciated.
        couple of points:
        1) I guess people were expecting investments to be made according to the MB themes espoused here over time, eg no banks.
        2) whereforeartthou this PDS and documentation you speak of? I pre-registered but have never received anything, like others, not even an acknowledgement email.
        3) someone might invest $35k or $200k but you would not know whether that is there life savings or 10% of what they have to invest. This goes back to point 1 – I think people were looking for a fund with MB investment themes.

      • Yep there’s a brand integrity issue here. There’s a mandate to be aggressive and bearish that’s what people would expect based on the site content. Also there’s a major dearth of funds in Australia that allocate heavily to bonds maybe that is where you should focus. Its one way of expressing equity bearishness without actually being short, while continuing to provide income.

    • What an ethical fund that doesn’t own banks would do – is when they decide they need banks because everyone else has them, they will make a counter argument that even though a certain bank lends to coal mines said bank lends more to low cost housing therefore offsetting the fact they lend to coal miners.
      This is the same as when they say they don’t invest in companies that test products on animals – except that they leave out the part that is okay to test on rabbits etc as they have “less of a sense of self awareness than a monkey”.
      In the end they will just make an argument to justify their agenda as to where they want the funds invested

  5. Please help me understand this: ” Yes, MB doesn’t like banks or resources at current prices” ….. ” need to construct a portfolio that is diversified which means that given banks and resources are 50% of the ASX20 we need to own some of them.”

    If I don’t like a sector, I simply do not invest in it. I obtain diversification by other means that specifically excludes investing in sectors that are not appealing ‘at current prices’.

    • This is the reason we have so many asset bubbles around the place. We have forced saving via compulsory super, then massive concentration in a few big stocks (masquerading as “diversification”) via passive index buying.

      Personally if I don’t like a sector – I short it, though well aware downside is limited by the tide of dumb super money forced to buy day in, day out.

    • Dan – no. It reeks of convenience/laziness to first research and then invest, as DK has indicated they would. That is, rather than do the necessary research around beta’s and the like [ to obtain some idea of correlations ] and then identify other shares that can provide the diversification, one can take the easy route and just ‘buy some banks and miners’, even if you of the view that they’re not attractive. Definitely not a compelling proposition.

      I really don’t like what I’ve heard in relation to this aspect, from DK = taken further, where does conveninence end and proper research begin, in other issues of their fund management.

      • Probably some of the “herding” thing going on too. You get into small cap territory quite quickly if you look outside the top few on ASX. Small cap research expensive, so you need enough AUM to pay for it, but not so much it limits your options. And then you are less likely to have your performance stats bouyed by the unrelenting tide of dumb money.

    • Damien KlassenMEMBER

      Thanks for the comment – that was exactly the point of the article, if you want to do something yourself then do it!

      See question response to Dan/Steven above for a longer discussion about what this portfolio is and what it isn’t.

      Don’t buy this fund if you want something that takes big risks and shorts sectors. That is not what it is designed to do.

  6. One quibble is that investing in international stocks only costs >$100 per trade (in and out) if you allow yourself to be fleeced by one of the big 4 banks.

    I use a US based broker, and it costs about Usd$10 each way. To get money in and out, I use an international bank (Citibank in my case) that doesn’t charge for international wire transfers. It ends up actually being slightly cheaper for me to buy and sell overseas stocks than Australian stocks.