MB Fund August performance

Apologies for the lateness of this report, we are still getting reporting systems ironed out with our portfolio provider – you will be hearing from us much earlier for the next monthly report.

While some of the key trends that we are positioning the portfolio for moved against us last month (bonds and the Australian dollar in particular), stock selection came to the rescue, and all our portfolios outperformed their benchmarks over August except the income portfolio:

Monthly Nucleus portfolio performance

Source: Linear, Factset

The returns above include fees and trading costs on a $500,000 portfolio.  The benchmark returns do not include fees. Note that individual client performance will vary based on the amount invested, ethical overlays and the date of purchase. 

The Way Forward

Looking forward the key issues facing the portfolios at the moment are:

  1. China: Rebalancing is occurring, the question is how fast Chinese authorities allow it to occur
  2. Trump: Taxes are the next key decision point, and after failures in healthcare he is looking for a win. We are expecting there to be 2 facets – tax cuts and encouraging companies to bring back cash. Both are USD bullish.
  3. Europe: Grinding recovery. We are not expecting great things, but note that the number of political risks has reduced in recent months. The major long-term issue is still the significant imbalances between Germany and most of the rest of the Eurozone, but no real flashpoints at the moment.


Our base view remains that a rebalancing is required. China has been running capex at levels far greater than any economy has run before, and a normalisation of those capex levels is required.

Rebalancing will have significant ramifications for the Australian economy. We saw a preview of this in 2012-2015 when commodity prices declined significantly, as did the Australian dollar.

But this all changed in 2016. The rebalancing process stalled as lending increased significantly and commodity prices jumped significantly. This is not sustainable – as the latest IMF forecasts show:

It is our view that the Chinese economy will continue to slow over the coming years – Japanese style lost decades, and low inflation/deflation remain more likely than a dramatic bust, which means a grind lower for commodities and the Australian dollar.

There is considerable uncertainty over the timing, the actions following the communist party national congress in October will be key – especially growth in Chinese credit.

Our portfolio positioning on this basis remains:

  1. considerably underweight Australian stocks from an asset allocation perspective
  2. underweight resource stocks within equity portfolios

Trump Stimulus

Trump and the Republican party are having a difficult time passing legislation despite holding a majority of seats in both the House and the Senate. After a number of failures to get healthcare measures passed, tax reform is now moving to the forefront.

Our core position is that Trump is trying to engineer a boom. It will not be sustainable and will likely be followed by a bust that leaves the US economy in a worse position but that is a future problem – positioning the portfolio for the boom is the current issue.

The proposed tax cuts are badly targeted by giving most of the benefit to the rich and to companies, trickle down is unlikely to work, the tax cuts are unsustainable, and they are only a short-term “sugar hit” for the US economy, I understand all the negatives.  But if it is anywhere near Trump’s promise then it’s going to be such a huge stimulus that you don’t want to stand in the way of it as an investor.

There are three parts, we don’t know which will be in the final package, but we expect at least some of the measures to pass:

  • Company Tax cuts, currently proposed to be cutting the company tax rate from 35% to 20%. While this is a big change, many US companies already pay less than 35% in practice, and so we expect the effect on earnings will likely be around 5-10%% in year one and probably 1-2% stronger for a few years as companies restructure tax structures
  • Personal tax cuts. Lots of simplification, the net outcome being largish tax cuts for higher income individuals, smallish tax cuts for low income. Badly targeted, but still a stimulus for the economy.
  • This involves incentivising US companies to bring back cash currently held internationally. In simple terms, US companies can defer tax on international profits by holding the money offshore. Trump is proposing tax incentives to bring this money back. This is a one-off increase in tax revenue, and likely a one-off increase in buybacks and dividends. Both of these are USD bullish. This is a short-termism at its best – sacrifice the future to juice current economic activity.

The playbook (subject to being able to find stocks at the right price) is:

Round 1: Buy US stocks for the sugar hit, plus exporters in non-trade pact countries

The US will go deeper into debt – a good thing for global demand.

This means the end of the rate cycle (although the upswing may not last that long). The US dollar is likely to be strong, and I suspect that the US dollar will offset a lot of the benefit for the US – i.e. US demand increases, but a decent amount of that benefits the rest of the world through increased exports to the US.

In aggregate, this is a buy US equities story, probably go light on US exporters or companies that are import exposed as the US dollar strength is going to hurt them the most. In other markets, try to avoid exporters who will be hit by trade sanctions (Mexico, Canada, China) and look for those that might fly under the radar and benefit from US demand (UK, Europe, maybe even Japan). Increased demand puts a floor under a lot of commodity prices; some will rise.

Keep in mind that some of this is already priced in.

Round 2: Reduced world trade, increased protectionism

Say hello to higher costs in the US. Net/net the average Trump voter will probably give back from a higher currency and increased inflation any gains from (increasingly unlikely) protectionism.

Will a US/China trade war break out or will it just be lots of noise and posturing while in the background the increased US demand benefits the Chinese economy? Hard to tell, but we are leaning towards noise and posturing rather than tangible measures – especially as Trump needs China to help with North Korea. Also, Republicans are generally protrade, and anti-trade measures are less likely to get support.

US companies will struggle with profit growth due to higher costs (with the higher USD), fading stimulus.

Round 3: Unsustainability become apparent

If you don’t believe in trickle down (I don’t) then at some stage the debt becomes unsustainable, and taxes need to be lifted. Hopefully, it’s not too close to the time that the Chinese debt becomes unsustainable…  Anyway, that is a future problem – probably 2-3 years away at least, maybe 5 years away, at which time the US is in a worse position than today, the core problem of too much inequality/lack of demand still exists (probably gets worse).

Maybe it is the Euro falling apart, maybe it is another external shock, but the core thesis of a lack of demand largely driven by inequality remains, and in 3-5 years we are back where we started – but with a much higher US debt balance.

So, we should play the boom but keep a sharp eye on the bust.

Tactical Asset Allocation Portfolio Positioning

In our tactical portfolios, we own cash, bonds, international shares and Australian shares.

The broad sweep of our asset allocation over the last 12 months was to ride the Trump Boom, switch into Europe in March / April as the US became overvalued and then switch back into the US as the Euro rallied and the USD fell.

We remain underweight shares in aggregate, but that headline view hides the underlying exposure – we are significantly overweight international equities and significantly underweight Australian.

Over / Underweight positions by portfolio

Nucleus Tactical Asset Allocation

Source: Nucleus Wealth

We made no changes to the allocation during August, the earlier this month we continued to switch European stocks for US stocks to take advantage of the rally in both the Euro and European stocks.

International Equities

In our direct international portfolio, markets are expensive, returns look low, and risks are building. So, for the most part putting together our international portfolio, it has been about finding novel ways to get the exposure that we want.

Region Allocation

Based on growth and relative valuations, we are country agnostic at this point, if the USD keeps falling we will be looking to pick up more US stocks  – that is the market where the growth remains the highest.

International weights by region

While “technically” we are underweight the US, many of the stocks we own in other markets have significant exposure to the US. Basically, we are finding stocks listed in the US to be relatively expensive, and so we have been looking to other markets to find stocks that are exposed to the US at a cheaper price. For example, Unilever is a UK listed stock, but Unilever’s actual sales exposure to the UK is only a little over 5% – its biggest markets are actually the US and China. Vestas Wind is listed in Denmark, but the US is its biggest market.

We have been hunting for value in non-Euro European markets in particular.

The UK is one of the cheapest markets, burdened by Brexit fears, but we are also finding a number of quality multinationals in markets like Finland or Denmark that look better value than similar stocks listed in the US. We are mainly looking for multinationals rather than domestic stocks.

Some of the names include Unilever (household products), Imperial Brands (tobacco), Kone (Finland listed elevator manufacturer), Roche (Switzerland listed healthcare company) and Vestas Wind (Denmark listed but mainly US sales of wind turbines and parts). Most of these stocks have significant US sales, and trade at lower multiples than equivalent stocks in the US.

Industry Allocation

Defensives are expensive. REITs, Utilities, Telcos and Infrastructure are the usual places to look for defensive exposure but (just as the central banks intend) lower risk investors continue to “shuffle up the risk spectrum”, and they have bid the price of traditional defensive sectors to levels that make investment difficult.

So, again we have positioned the portfolio to benefit differently. We are looking for a mix of the more stable industrial, consumer staples and healthcare stocks to get a similar defensive exposure without having to pay the nosebleed prices in the traditional defensive portfolios. Healthcare was helpful in this regard over the month – a number of our best performers have been in the healthcare sector.

Our biggest call is underweight energy. In particular oil producers. We have blogged a lot about the oil price, (see this post, in particular) but the thumbnail sketch of the sector is that:

  • the short term is not positive for the sector with oversupply and OPEC needing to cut production to try to prop up the oil price.
  • the long term is not positive with increasing electrification of cars and falling battery prices limiting the upside
  • the mid-term might be good if an undersupply emerges and before electric cars put a dent in oil demand and assuming US shale costs don’t keep falling

Meanwhile, oil stocks are pricing $60-$70 oil prices in perpetuity. The mid-term is going to have to be spectacular to justify current share prices, let alone getting any share price growth.

Having said that, it is a big risk to our portfolio being underweight energy. If there are geo-political ructions, particularly in the Middle East, we would probably underperform. September has seen a significant rise in the oil price, but we remain comfortable with our holding and expect much of this to be a short-term issue.

We are underweight financials – mainly as we can’t find US financials that are cheap enough to justify purchasing. We have been trawling the European banks for value.

We have a reasonable tech / IT exposure. Apple isn’t too expensive, but there are growth concerns – Apple was one of our best performers in August but has given most of the gains back in September. Google we can just squeeze into our model as very high quality but expensive.

There are a number of smaller tech stocks that we own, in particular, a range of semiconductor stocks where we like the growth outlook. In particular, its worth noting that part of the reason for Apple increasing the price of its latest phone is an increase in memory and components. This is a positive for semi-conductor stocks more generally, especially if a “feature war” breaks out in the smartphone space. We current hold a range of stocks that should be helped by this trend (Lam, Applied Materials, Skyworks, and to a lesser extent Cisco).

The retail sector in the US was the greatest source of volatility in our portfolio over the month – basically, US retailers fall into one of three camps:

  1. Retailers that are “Amazon proof”: these are retail businesses that are high touch or heavily service driven – broadly thought to be relatively safe from competition from Amazon (or other on-line sites). They generally trade on relatively expensive multiples, 20-25 times earnings.
  2. Retailers that are “Amazon exposed”: these are retail businesses with weak or negative sales growth that are losing out to online competitors. They trade at multiples of about half of stocks in the above category.
  3. Retailers that are Amazon. Amazon is expensive trading on a P/E multiple in the hundreds. The valuation argument is that a typical retailer will make 6% margin, while Amazon makes a 2% margin. However, the expectation is that one day Amazon will stop chasing growth and charge a higher price. If Amazons margins increase to 4%, then Amazon is just really expensive, at 6% margins you can mount an argument (assuming lots of growth) that Amazon is reasonable At $450b in market cap, and with sales growth still above 20% per annum, Amazon is the sector behemoth that everyone is worried about.
Divergence in valuation in US retail

We have a few retail stocks in the low P/E category where we believe the downside has been overestimated. The holdings included:

  • Signet Jewelers: with the view that many jewellery purchases will need to be done in person
  • Footlocker: constantly changing designs will mean that many people will still want to try on athletic shoes
  • Michael Kors and Christian Dior: status purchases we suspect are more likely to be made in person.

Footlocker was the biggest detractor (-25%) from our portfolio falling on the back of concerns about online competition from Nike/Adidas. This was counter-balanced by increases in Michael Kors & Christian Dior (up 16% & 10%) and the “there and back again” performance of Signet which fell 15% intramonth but finished up 4% for the month.

(click for full chart)

Heatmap of Portfolio performance

Australian Shares

Our best performing portfolio for the month was ironically Australia Shares where our weights are the lowest. The Australian market fell in August, but our underweights to resources and banks and our overweights to internationally exposed industrials saw the portfolio up 1.4% vs a market that fell 0.3%.

We are underweight both banks and resources, and given the highly concentrated characteristics of the Australian market, we are overweight just about everything else.

We are only just managing to keep a number of the international stocks in our portfolio – on a valuation basis Treasury Wines, CSL, Cochlear are all getting expensive after performing well in August, and we sold half of our Amcor holding after it rose 5% over the month. We are struggling to find viable replacements.

(click for full chart)


In summary, our view continues to be that Australian investors are better off holding international investments at this point in the cycle.

Our intention is that our portfolio is positioned to take advantage of our key themes but minimise risk in the event that our themes take longer than expected to resolve themselves.

We usually find that big picture macro themes take a long time to resolve themselves in financial markets, but when macro themes resolve themselves they do so quickly – usually too quickly to reposition your portfolio if you are not already invested.

As an example, September month to date has been more friendly to our core themes, and the international portfolio and the growth portfolio have reflected that.

Note that these are indicative performance numbers only on our portfolios and don’t yet include investment fees for the month – official numbers to come out after month end:

Unofficial performance MTD

Source: Linear Asset Management 

Tactical Growth:

Unofficial performance MTD
Source: Linear Asset Management

Damien Klassen is Chief Investment Officer at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.


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  1. very good commentary on where you are positioned.
    In a one sentance description is the management style… Top down macro, benchmark unaware, concentrated high conviction???

    • More like top down macro, benchmark unaware in the tactical funds but aware in pure stock funds, diversified with large spread of stocks but conviction in the asset allocations vis stock, sector and asset class moving together.

    • Perhaps in time. Risk management means we use a big spread of stocks and buying international means a goodly commitment otherwise you’re buying, like, one Google share per investor and you get killed by brokerage.

      The Foundation portfolio is out best attempt to bridge the problem.

      • Just wondering, which broker are you using to manage your clients, especially for international shares?

        Brokerage shouldn’t be a problem at all, even for low amount for money invested, if you are using an advisory account from Interactive Brokers and even on a simple fixed commission structure, it’s minimum USD $1 per order or USD $0.005 per share. It is very likely you can take advantage of their tiered commission structure, again using an advisory account trading for clients, with the amount of volume you could be doing.

        Don’t get why people would use an Aussie based broker for trading international shares / ETF. It’s so much cheaper via IB broker.

      • Temjin – Thanks for the suggestion but we use a separately managed account structure, not just a broker. They combine trades to get our brokerage down to pretty remarkable levels, and look after all the tax reporting etc.

      • Thanks Tim. I’m more interested in your International Equities portfolio but put off by the 70k minimum commitment. I’m not sure how many shares are in that portfolio, but if there aren’t any penny shares and you aren’t trading or rebalance very frequently, I can use my own existing IB account to trade them with a lower amount and wouldn’t get killed by brokerage fee. In most cases, it would still be USD $1 per trade for me.

        Perhaps offer a service where you issue out what shares you recommend on your international equities portfolio but your clients trade them on their own accord. (with frequent updates on rebalancing or new shares)


  2. We usually find that big picture macro themes take a long time to resolve themselves in financial markets, but when macro themes resolve themselves they do so quickly – usually too quickly to reposition your portfolio if you are not already invested.

    My ethos to a T.

  3. The thing you miss about Amazon is the Amazon Web Services business – which is a much higher margin business in the cloud infrastructure/services sector which has plenty of growth left.

  4. “But if it is anywhere near Trump’s promise then it’s going to be such a huge stimulus that you don’t want to stand in the way of it as an investor.”

    If this is what you believe would it therefore not be unreasonable to assume there is scope for Fed to continue on its path of increasing rates (and as a consequence the RBA will eventually be forced to follow as stated in their recent speech)??

      • “A rise in global interest rates has no automatic implications for us here in Australia. Notwithstanding this, an increase in global interest rates would, over time, be expected to flow through to us, just as the lower interest rates have. Our flexible exchange rate though gives us considerable independence regarding the timing as to when this might happen.”

        Unless my comprehension is wrong I would have thought this is quite explicit in stating that rates will eventually follow global interest rates, though they have some scope to delay the timing due to “our flexible exchange rate”. (The key word being “would”, rather than “may” or “could”)

  5. Once the road show’s done are you going to do a few topical features from it? Your bullet point themes would all be good touchstones to further understand your stance & a possible funnel point I would imagine.

    • Great minds Colin. We are working through a few suggestions from the tour regarding summising some key themes of the blog to help new visitors get up to speed. Stay tuned.

  6. I really hope that participants understand and appreciate the enormity of your MB Fund endeavours. To go out there, publicly, and enounce a strategy, then have the self-confidence and discipline to enact it, is immensely tough and brave, and speaks volumes about transparency, intent and macro-level thinking.

    I sincerely hope that members and investors are sufficiently sophisticated as regards reasonable expectations from investment positioning for the future = investments and strategy is a risk, and that investments can go up and down ; in this regard, please, insert a disclaimer to that effect at the end of each of these type of articles as well as the rider/reminder about past experience / modeling not being an indicator of future performance.

    I truly wish you all of the very best … this is not an easy profession at all, the funds management business.

    • Even StevenMEMBER

      Lazarus makes a good point around ‘realistic expectations’. The smartest of people can still be wrong (and underperform) for considerable periods. Hope all are aware to avoid the recrimination game.

    • My thoughts exactly. It takes a lot of balls to put their and this blogs reputation on the line with a fund like this. Unlike some of our drive-by commenters that make outlandish stock/forex calls then slink off into the night when they are wrong, only to come back horns blaring when the market tips in their direction.

    • Timmeh: I really hear what you say, however, without detracting at all from the wisdom of your comment, please note the following:

      Please, allow for the fact that many/most of these said ‘ drive-by commentators ‘ are booted-off – being leaners and offering *unacceptable/unfavourable* opinions. So, they don’t actually, by choice, often slink off into the night … lets be fair.

      • Merging big data with small data.
        Damien Klassen on the latest in quantitative techniques to select stocks, where the pitfalls are and his thoughts on when the fundamental analyst is destined for the glue factory. How does that fit into the current investment environment?
        Piqued my interest Damien But I can’t attend. Perhaps a page sometime?

    • Even StevenMEMBER

      I think there will be some tax matters you’ll need to consider. MB might be able to steer you in the right direction for info (I’m sure they’re not permitted to provide advice).

      This is NOT advice, but I *think* the following occurs from bits and pieces I’ve gathered over the years:
      Any capital gains on shares WILL NOT be taxable by Australian authorities, but will be taxable in your own country of residence (according to whatever tax rules you have there).
      Any dividend income from the share portfolio WILL be subject to withholding tax by Australian authorities (may vary from 15%-30%). You *should* be able to claim recognition of this tax paid in your own country to reduce your tax bill. Not sure what happens if the withholding tax rate is greater than the tax rate in your own country – you might ‘lose’ the difference.

      • Even, I believe that citizens of the USA are taxed on the basis of citizenship not residency ( Eritrea as well ).

    • Hi Wasabinator – send me through your contact details to Tim at nucleuswealth.com. Happy to discuss your options. TF

  7. Is there an option to exclude specific shares like is done with the ethical overlays but more targeted? I work for an ASX50 company and there are trading rules which mean I can only buy and sell in windows. Seems like it could be an issue because even though the portfolio is managed all the shares are held in the investor’s name.

    • No, it does not ‘seem’ like it could be an issue … why would you think that? … you did not place the order to buy/sell.. it’s that simple.

      • Is that legal advice? Precaution not warranted in that I assume there will be registry records listing changes in my ownership?

      • Ryan, yes that’s legal advice. Changes in registry ownership in the circumstances does equate to breach of rules … remember the issue with Blind Trusts and the PM = similar/same = beneficial owner did not institute the deal. A breach is when the beneficial owner knew of the limitations to deal, and then personally deliberately dealt in the assets; the significant element is “personally” dealt = placed the order; you are not placing orders.

    • Even StevenMEMBER

      Ryan – what is ok will depend upon the rules of the company you work for. However it would be highly unusual for a company to ban shareholdings where the decisions are being made a) by an independent third party over which you have little/no control and b) the shareholding is merely part of a diversified share portfolio.

      My current employer also has what I consider to be strict rules on owning shares in companies, but the arrangement you’re talking about certainly sounds ok. Bottom line: check with your employer.