Think Different

It is always good to have variety in life. Years ago I studied the coffee industry for six weeks out of curiosity. It is worthy of learning, as it has been the second largest commodity next to oil.

Variety in reading and knowledge helps in discerning underlying value. Being a generalist is good. Having inclinations toward certain interests helps an investor invest.

Reading is an excellent way to absorb facts and information to optimize thinking through whether a company of any kind is worthy of an investment.

The following is an article of interest for coffee lovers and those who may simply enjoy science.

“How Does Caffeine Wake You Up?:”

Sasol is Great

Sasol is one of the most creative companies in the world with regard to international energy and chemical products and services. Which other company takes coal and converts it into petrol and diesel?

Sasol for a while had in the United Arab Emirates (U. A. E.) region a joint-venture with Chevron on a large energy project. In recent years Sasol started the development of a Louisiana, U. S. A.-based operation.

What can hold a candle to Sasol’s South African burning flame in Sasolburg, Secunda and other locations, such as Rosebank head offices? It is a crown jewel for the republic helping build and maintain the nation.

Sasol’s coal to energy production is cleverly engineered beyond compare. When the world relied on oil and gas, South Africa turned to its wealth in coal. Rich in coal, South Africa produces diesel, petrol and energy.

Diversifying beyond energy products, Sasol has a wide array of product lines. Specialty chemicals are a part of its make. The variety of products are listed on the company’s site:

Albeit South Africa’s domestic economy buys much of its products, Sasol does sell across borders. Sasol well manages and serves its home-base first and far beyond. Pricing is marked at international rates.

Sasol’s stock was beaten down due to problems with costs and cash constraints in Louisiana coupled with political unrest, pandemic circumstances and questionable management decisions made in South Africa.

The underlying intrinsic value of Sasol’s stock remained in parallel to its prior glory days. In recent days the stock price has gradually and then significantly rebounded in part due to global energy demand.

Sasol is a company worthy of following. Buying on a dip in the stock price and indefinitely holding the shares could be to anyone’s advantage. Keep eyes on Sasol. When the stock price drops, it may be a worthy buy.

Three Ways to Consider Worthiness of Investing in a Company Share

The following are three (3) different ways of considering whether an equity investment is worthy.

When combining all three ways, there could be greater worthiness of the prospective equity investment.

I. The Greenblatt Way
  • Third, does the company have a history of dividends over 5 years? If yes, it may be worthy.

II. The Graham Way
  • Third, ensure the current ratio > 2.

The above screening tactics look for margins of safety.

III. The Tweedy Browne Way

Reduced Alphas

The alphas of the stock exchanges are lesser in movement, and hedge fund managers are not being able to see as clearly on the horizon to apply their prior logical investment principles to earn capital gains and other cash flows. “Hedge funds are losing their ‘secret sauce’” by Laurence Fletcher. Published in Financial Times on 1 May 2021.

Saturday, 1 May 2021

Hedge funds are losing their ‘secret sauce’

By Laurence Fletcher

Hedge funds have posted their best start to a calendar year since before the financial crisis. But, behind the strong headline numbers, managers are struggling to cope with some confusing moves in markets.

Funds gained a tidy 6 per cent in the first quarter, according to data group HFR, helped by rising stock markets and a sharp rally in beaten-down so-called “value” areas of the equity and credit markets that some funds favour.

Some returns have been eye-popping. Senvest, helped by a well-timed position in GameStop, has gained 67 per cent.

Crispin Odey’s Odey European fund, one of the sector’s most volatile funds, is up 56 per cent, and Lee Ainslie’s Maverick Capital, which latched on to the value rally, is up more than 40 per cent.

But, those figures aside, most investors in hedge funds have not enjoyed such strong gains, and many managers’ returns have been far more mundane.

For instance, equity hedge funds gained 7.1 per cent in the first quarter, based on performance averaged by the number of funds. But that figure is skewed by strong gains from smaller funds. When performance is weighted by assets instead, then funds were up a more modest 2.8 per cent on average.

And for every chart-topping manager, there is a fund languishing deep in the red. HFR data shows the gap between the best and worst-performing funds is higher than at any point in the two years before the coronavirus crisis.

“Hedge fund performance in the first quarter has been like the [equity] market — the indices are very good but some underlying strategies, or sectors, have underperformed,” said Cedric Vuignier, head of liquid alternative managed funds and research at Syz Capital.

A major problem for many managers is that markets are not really functioning in the way they would normally expect them to. Trillions of dollars of central bank stimulus, as well as the surge in retail investor activity during the pandemic, have broken some of the tried and trusted relationships between news and price movements that managers have based their systems on.

Take London-based Sandbar Asset Management, which has lost 3.9 per cent in its $2.4bn Global Equity Market Neutral fund this year. It highlights the relationship between share prices and changes in earnings expectations.

Normally, and intuitively, an improvement in expectations about a company’s earnings should mean that its share price rises while greater pessimism should send the shares lower.

Instead, this correlation has dropped sharply in recent months “to levels not seen in the last decade”, Sandbar said in a presentation to investors. And in sectors such as aerospace it has turned negative, meaning that improving earnings expectations have actually pushed share prices lower.

Swedish hedge fund firm IPM has been another victim of a change in market relationships. Once regarded as one of Europe’s best computer-driven macro managers trading currencies, bonds and stocks, it has fallen foul of a change in the market correlations that it relies on. Its assets have slumped from $8bn to $1bn and the firm, owned by finance group Catella, is now shutting down, noting that the investing environment has been tough “for strategies focusing on economic fundamentals”.

What this all adds up to is a loss of what industry insiders call “alpha” — jargon for the industry’s “secret sauce”, or the highly prized extra value that managers supposedly add through their bets on stocks and other securities.

Alpha matters because it is the main justification hedge funds use for charging clients their high fees. Beating markets is hard and therefore alpha is scarce and valuable. If a hedge fund’s returns just come from the market’s gains, rather than from a manager’s skill, then why not just buy a cheap index tracker instead?

Sandbar, which admitted its own alpha has been “poor”, cites data from Morgan Stanley showing large negative alpha among its global equity long-short hedge fund clients this year. In other words, making these highly researched bets lost them money.

The data also shows that funds’ alpha in the first quarter was far below the average generated over the past decade and well below difficult years for hedge funds’ bets such as 2016 and 2018.

Hedge funds performed well in 2020’s chaos and are still on average in the black this year. But some managers will be worried. If they cannot convincingly show that their well-researched and carefully placed bets add any value, then clients will question why they need to be invested with them at all.




The following outline includes hyperlinks to pages of explanations with regard to the terminology.

Conservative Investing

Primary focus: Listed securities for simplicity of buying and holding

Conservative benchmark

25% cash and cash equivalents ready for deployment

25% bonds for positive free cash flows with interest

Dollar cost average in and hold long*

12.5% index funds

12.5% blue chip companies

12.5% mid cap companies

Assertive investing: Buy low, sell high, aim for capital gains

12.5% small cap, distressed-turnaround options, private securities and international options

* Dollar cost averaging

‘Lloyds was about to die’

António Horta-Osório

Lunch with the FT António Horta-Osório

‘Lloyds was about to die’

He led Britain’s biggest high street bank back to health — but at considerable cost to his own. Over Dover sole in Mayfair, the incoming Credit Suisse chief talks to

Patrick Jenkins about his battles in finance, his tabloid troubles — and why Rafael Nadal is his idol

Next week, after a successful 15-year spell in the UK, António Horta-Osório will board a plane to Zurich hoping to make a similar impact in Switzerland.

When the Portuguese banker made Britain his home in 2006, he was a relative unknown, dispatched by Spain’s Banco Santander to run its new UK arm, the former Abbey National. But in the years that followed he has become a pillar of the British establishment, as few foreign bankers have: he was picked by the chancellor of the exchequer to bring the part-nationalised Lloyds Bank back from near-death; he was granted a plum role on the governing Court of the Bank of England; and from day one he has played tennis at that sporting icon of the ruling class, Queen’s Club in West Kensington.

Along the way, he bought a £4m house in Chelsea, was appointed chair of the Wallace Collection of fine art and, much to his delight, has become a British citizen. He has also worked so hard and in such stressful circumstances that on one occasion he had to be signed off work — and he has experienced the full force of the tabloids turning their attention on his private life.

Appropriately enough, we are having lunch at Scott’s in Mayfair, the acclaimed seafood restaurant that has quickly drawn back its pre-pandemic mix of high financiers and look-at-me celebrities. It is a chilly but sunny day and one of the first since the mid-April lockdown easing that allowed outdoor dining to resume. The exuberance of the liberated guests on Scott’s terrace seems to have infected the 57-year-old and famously suave Horta-Osório, prompting an outpouring of affection for the home he will soon leave.

“When I was appointed to the Court of the Bank of England, I felt people here had adopted me. I felt very much part of you, part of London, part of the UK.”

As if to prove the point he has ordered a staple of the Scott’s menu, dressed crab, to start, followed by Dover sole and a side order of spinach — austere in comparison with my steamed asparagus, plus mushroom risotto.

Only last year, Mervyn King, the former BoE governor and a fellow tennis fanatic, hailed Horta-Osório’s achievement at having turned Lloyds “from a liability to the taxpayer into an asset for the country”. Though Lloyds’ share price trails below the level of a decade ago, thanks in large part to the economic challenges posed by Brexit and Covid-19, Britain’s biggest high street bank looks safe and well run, when once it teetered on the brink of collapse. In 2009, the government had taken a 43 per cent stake in exchange for more than £20bn of rescue financing.

Asked to identify the high point of his time in charge, Horta-Osório pinpoints the final act of reprivatisation after eight long years. “It was an unforgettable moment when I got the call from [senior Treasury official] Charles Roxburgh on May 17 2017 saying: ‘Antonio, we’ve sold the final shares.’ It was 4.40 in the afternoon.” By 5pm the bank’s ninth-floor conference room was packed with staff to hear the news. “I said: ‘Look guys, we did it. We gave the taxpayers’ money back. And it’s a great tribute to you.’ We made a toast. It was a really good moment.”

I decide to ruin the recollection. While Horta-Osório is a success story par excellence in establishment circles, his tenure has attracted controversy in other areas. Later, over our main courses, we will discuss some of his more contentious business wranglings. But for now I want to focus on whether his sense of being adopted by British society wasn’t shattered by the only time he featured on the front page of The Sun newspaper.

For Sun readers at least, Horta-Osório will forever be associated with “Lloyds Bonk”, the classic tabloid headline over the story of how the boss of the UK’s biggest high street bank had been caught on camera conducting an extramarital affair while on a business trip to Singapore.

Did a tabloid sting not darken his view of the UK? “Everyone makes mistakes in life,” he begins in lowered tones. I have known him for many years and have met his wife and children. But for all the many exchanges we’ve had about everything from bank branches to topspin backhands, I’ve never known him stray into such deeply personal territory. I had half-expected him to stonewall, betray a flash of anger or at least insist we go off the record, as he often likes to do when discussing other banks and bankers.

Instead, he channels his religious upbringing. “Do you know the story of when a group of men were going to stone Mary Magdalene to death? And Jesus came, put his arms around her and said: ‘Those of you that never sinned, throw the first stones.’ And they all left.”

I mutter recognition, but he wants to conjure another hero. “As Nelson Mandela said, the point isn’t not to fall, it’s to rise every time, learn your lessons and always be better and do better.”

My crisp asparagus has a pleasantly bitter tang, offset by a creamy hollandaise. Horta-Osório declares his crab as “one of the best I know of”.

For all his philosophising, friends say the incident may have scuppered his chance of a knighthood or other honour, while a shot at the leadership of HSBC also evaporated.

That the financier should acknowledge failure or weakness — let alone open up about an example of it in his personal life — would have been unthinkable a few years ago. When he was appointed chief executive of Lloyds in early 2011, he knew he faced a big job — the bank had been part-nationalised after a botched government-encouraged rescue of rival HBOS. But by the autumn, as the eurozone crisis threatened to freeze funding markets again as had happened in 2008, Horta-Osório began to realise the challenge might be unmanageable.

“Lloyds was about to die,” he recalls as he cuts precisely into his sole and forks a neat square. This, he acknowledges, was the low point of his professional life: faced with the stress of knowing that £200bn of short-term funding might not be refinanceable, and that the only way out would have been to go cap in hand to chancellor George Osborne for another bailout, he collapsed. Having appeared glassy-eyed and unable to focus for months, he was diagnosed that October with stress-related exhaustion and sent to the Priory clinic to recover.

“The reason why I really stopped sleeping is because I could see that the bank could die. I could not share this with anyone. I took it really to heart as my responsibility to save it.”

Even now he is wary about talking so frankly on the record. At the time, honesty was impossible. “You can’t share these things, because if you share, the confidence in the bank evaporates and you’re dead. So, it was very personal. I felt it very heavily.” As time has passed, however, Horta-Osório has begun speaking out. Lloyds now supports the charity Mental Health UK, and has made help available for staff experiencing stress and anxiety.

His sense of duty and self-reliance, as with his biblical defence of human frailty over his affair, traces back, he says, to his early years in the Jesuit school in Lisbon. “I have been educated to help others, to serve others. [It is] a moral obligation.” PR guff? Many may roll their eyes at a banker making such high-minded claims. But in Horta-Osório, it is hard to deny a depth of feeling. “What drives me always through my life is a constant obsessive impulse to try to do better: to make society better, to make banks better, to make people better.”

The improvement mission underlines his reputation for a command-and-control management style. But, in his telling at least, it also explained an early consumer-friendly decision — to break with the banking industry’s ranks, which until 2011 had resisted accusations that payment protection insurance policies had been endemically mis-sold to millions.

When the new Lloyds boss set aside £3.2bn to compensate mis-selling victims in early 2011, he made enemies of every other bank boss, many of whom had been determined to fight the issue in the courts. He also thought he was being conservative relative to regulators’ estimates of a potential £4.5bn industry-wide bill. It was a “matter of principle, not a matter of money”, he insists. He goes further, claiming a second even grander motive: to force reform on banks that had relied on selling large volumes of bad products to mask inefficient cost management.

“I thought this would make the UK banks focus on the customers, as they should, and reduce costs in the right way and become efficient.” To some degree that has happened — at Lloyds more than most. But it was an expensive punt: Lloyds’ final bill for PPI mis-selling has actually run to £22bn, not far off its entire market capitalisation.

What of other Jesuitical instincts, I ask, relishing my nutty risotto, with salty spongiform wild mushrooms. Shouldn’t the mission to do good and be better extend to how you treat your customers? The PPI mis-selling predated Horta-Osório’s tenure. So did the fraud at HBOS Reading that left nearly 200 business owners destitute or at least out of pocket, but that scandal festered for years when he was in charge. Even after recent efforts to step up compensation payouts and conduct inquiries into mistakes, the bank has been slammed for being offhand at best and callous at worst.

Unruffled, he insists his legal advice was that the suspension of a regulatory probe while police investigated meant the bank could not continue its own detective work. He concedes one point: “We could and should have been more empathetic with customer complaints.”

What, too, about bankers’ pay? Shouldn’t the austerity drive extend to that? Horta-Osório has earned an aggregate £60m during his time at Lloyds. I ask whether on this count he admires his old friend and rival Andrea Orcel, just appointed as chief executive of Italy’s UniCredit, more than Jean Pierre Mustier, whom he replaced. Mustier famously took a large pay cut in recognition of UniCredit’s lacklustre performance and to align his remuneration more closely with stakeholders’; Orcel recently secured narrow shareholder backing for a €7.5m annual pay deal, one of the most generous for any European bank boss.

Skewering the last of his fish (“perhaps the best sole in the world, even better than in Portugal”), and following up with a token mouthful of spinach, Horta-Osório dodges the “people question”. I suspect he thinks Orcel was hard done-by when Santander backtracked on a deal to hire him as chief executive — triggering an ongoing €112m courtroom showdown. He smiles enigmatically as I muse that the UniCredit package may already feel like victory to Orcel: it is set to be worth more than Santander chair Ana Botín’s, after she agreed last year to donate a large chunk of her pay to back a Covid-19 response initiative, leaving her with only €6.8m.

Predictably, Horta-Osório declines the offer of pudding, leaving me to feel indulgent for ordering a plate of fruit. As our espressos arrive — Horta-Osório’s first concession to anything beyond fine but frugal sustenance — I return the conversation to the topic that had occupied our exchange for the first 10 minutes, following my breathless arrival by bike: fitness.

Again the Jesuitical discipline is on display. “I have been running 5km early mornings, four times a week, together with intermittent fasting. No breakfast four times a week.” He lost 3kg that he had wanted to lose for years and says the exercise and diet routine sharpened his mind.

Does he fear that his new job, as chair of Credit Suisse, will be a repeat of the stressful early years at Lloyds? Since he agreed to take the role, the Swiss bank has become embroiled in scandals relating to collapsed lender Greensill Capital and family office Archegos. It has taken a SFr4.4bn writedown and announced a SFr1.7bn capital raising.

We opt for a second round of hot drinks — a signature green tea for the banker, a mint tea for the journalist — as Horta-Osório insists he feels none of the dread that plagued him a decade ago. He refuses to engage in discussion of Greensill or Archegos, other than to say he has a clear idea of what needs to happen and to imply support for the current leadership.

“They have an outstanding franchise, contrary to what happened with Lloyds 10 years ago . . . and outstanding macro trends,” he says, alluding to the bank’s strong presence in Asia and wealth management. “That’s very different from Lloyds being about to die before the eurozone crisis.”

When Horta-Osório left Santander, much was made of the resultant rupture with the Spanish bank’s revered chair, Emilio Botín. Yes, the relationship was difficult for a while, Horta-Osório concedes, but they ended up corresponding by letter right up to his death seven years ago. So will Botín’s style of chairmanship — obsessed with detail of the bank’s risks, while also granting autonomy to managers around the world — be a template for him at Credit Suisse?

Yes, he says. “Emilio Botín was by far the best executive chair I have ever met.” What made him great? “The capacity to allow great people around him, [something] many [bosses] are afraid of. And he always paid his people better than himself, which I thought was a great example.”

Had Horta-Osório fulfilled an alternative destiny, he might be in the top job at Santander in Spain — with an opportunity to pursue a sideline ambition of meeting, and even pitching for a game, with tennis player Rafael Nadal. “From a competitive point of view, Nadal is my idol: I have never seen somebody that really excels so much through effort.” (Aside from his much-trumpeted sense of duty, brute competitiveness is crucial to who Horta-Osório is: he can’t resist pointing out that during his 10-year tenure at Lloyds, Barclays, RBS and HSBC have each got through three chief executives. He puts it down to his father, a champion table tennis player.)

Zurich is hardly a bad option on the tennis front, too. By good fortune, Nadal’s arch-rival Roger Federer is sponsored by Credit Suisse. For Horta-Osório, another challenge beckons.

Patrick Jenkins is deputy editor of the Financial Times