Monday, 20 April 2015

Five things I've been looking at since the last blog

1. Hedge Funds

I've been doing some work on some new hedge funds in the last two weeks. I usually like to concentrate on volatility or "quant" style funds because these seem to be the most under-represented here in Australia. Having said that I was contacted last week by a Japanese long/short fund based in Singapore. Normally I wouldn't have spent much time on them, but a couple of things caught my eye:
  • They have a track record going back to March 2006. This means they've come through the GFC and survived. That's good, and it also gives me enough data to look safely at their correlation to various indices and events. 
  • The returns are good and show positive asymmetry. Their worst month was down just under 6% while their best month was up over 20%. A US investor once said to me: "Mike, I prefer not to invest in people who eat like birds and shit like elephants."
  • The team has been stable. That means no major blow-ups and no significant style drift. I hate it when a fund reinvents itself and doesn't make it clear on their track record.

Elsewhere I'm still trying to help a volatility fund and a start-up fund of ethical investments.

2. Start-ups and Investing in Businesses

Last week I met up with what I'm calling a modified incubator. Essentially they take large equity stakes in businesses or ideas very early in the process. Their main hook is the management wrapper. I'm not sure what to make of it though I'll give them A+ for openness. They invited me to spend some time working out of their office so I could get a feel for the place.

This week I have a BBY Disruptive Lunch and a slightly off-piste function looking at the sporting goods space.

3. Cycling

The battle continues to stay fit. When you're not a 65kg jockey sized cycling god, you're going to be putting a lot of stress on your equipment. Lots of high-end stuff comes with a rider plus bike weight limit. I heard of a chap much larger than me who suffered a carbon wheel brake failure and got busted up quite badly last week. If you and your bike weigh more than 110kgs, you need to check your equipment limits.

My equipment is starting to see signs of needing replacement. I've rebuilt the front wheel of my Fulcrum Racing Zero wheels due to the brake track getting worn down. The original rebuild didn't last long, and I swapped wheel builders to get a different result.

My Mavic Cosmic Carbone SLR's have also seen better days. Followers of the blog know I rebuilt the freehub because of the wear I'd exerted on the main wheel hub over the last three years. The "exalith" brake track is also wearing down and rather than flirt with death I'll be replacing the wheels in the coming weeks with the new Mavic Cosmic Carbone 40's.

If all that wasn't bad enough I suffered my first flat on by Campagnolo Bora tubulars since leaving Switzerland. I rode these quite a bit over the summer when I was rebuilding my green Cannondale and was riding the Pinarello Dogma 60.1.

I knew they were going, and usually I'm good at having new tyres glued on before incurring the wrath of the cycling gods. All I can say is that Vittoria Pitstop "latex goop" and a CO2 cartridge got me home without the indignity of having to ask for a lift. 

4. Rugby

People close to me know that for many years I was a rugby tragic. I lost touch with the sport after returning from the UK and moved to Singapore in 2006. Somehow watching rugby in a tropical environment didn't feel right. Also, a health scare got me into the gym and for many years I avoided any events that required sitting, eating and drinking alcohol for hours at a time. Just lately, I've gone to a couple of Super XV games here in Sydney thanks to some tickets from a friend.

I have this feeling that the game has lost its way though I'm not sure if that's because the local team seem somewhat unlovable, or whether the atmosphere their half full stadium is somewhat lifeless. I used to hate being an Aussie at Twickenham, but the crowd at least had some spirit in them.

5. Europe

Readers know that I've lately been advising a higher weight in Southern European investments. My thesis has been simple. Low growth and budget balancing would see interest rates lower for longer in the region. As the over-hand of real estate looks to sort itself out, I'd expect better returns in the region. The more I look at things, the more it reminds me of Japan post the real estate crash in the early 90's. It took forever for the banks to work themselves out of their property portfolios, and Europe is following a similar trajectory. Investors should never underestimate the value of Chapter 11 bankruptcy in the US. The ability to go through a cleansing process in an orderly fashion is good for investors and debtors. Take for example GE.

Last week GE announced that they were going to exit the last of their finance businesses. Remember this business began when Jack Welch and the team started financing capital equipment leases. First it was aircraft engines and later it was MBS's. I don't blame GE; the returns were sensational, and the regulatory requirement was minimal. The trouble is when you wake up one day, and you're the seventh largest bank in America someone is going to notice. It also helps if the market doesn't collapse. Well, soon they'll be back to being a capital goods company. If you're lucky enough not to be a bank saddled with the title of "too big to fail", it's more than likely that you'll be able to buy a piece of  what GE is selling, apply less equity to it and immediately show an accretion in both your EBIT and your RoE. Happy days are here again.


Tuesday, 7 April 2015

Nexus Notes, Free is Better and Money Place: BBY's Disruptive Lunch series continues.

At Sydney University, the first course in the Faculty of Law that I was  required to complete was entitled "Legal Institutions". It was a bit of misnomer because it was a combination of Constitutional Law, legal philosophy, and Australian court structures. It was an absolute pig of a course.  To get through it, you needed a map, a compass, and a sherpa guide. The few who had a lawyer in the family might have been lucky enough to get some help that shed light onto its sprawling curriculum. If you didn't, it took every ounce of student diligence and cunning you could muster to get through to year two.

At last Wednesday's BBY Disruptive Lunch, one company gave hope to students everywhere.

Nexus Notes allows the confused, the time poor, or (yes) the plain lazy the chance to acquire the course notes of top quartile students for  a mere $US35. For that, you get anything from a complete years worth of notes to a pre-exam outline. If nothing else you get the chance to see what's required to get through what at times might seem impossible. You can browse the available library and get a free 10% sample of each of the available offerings before you buy.

Some of the notes I've looked at are amazing. If I knew a 2015 freshman, I'd give them a set of notes from a successful student to show them just what it takes to get those elusive "A's". For example, if someone had given me "masonzhang1221's" Administrative Law notes I'm pretty sure that the second year of law would not have been such a grind.

The 1000 page case book, the lethargically paced textbook; the memories are still with me. I passed this course, so I know what I'm talking about when looking at these notes.

So what does the author get? 50% of all the fees that they generate. It's that simple. Maybe they get the altruistic sense of helping others? I doubt that's why students and graduates put their notes up for sale. No, it's 99% about the money. Their top author is up about $3000 so far.

Co-Founder's Hugh Minson (CEO) and Richard Hordern-Gibbings (COO) presented as upbeat, energetic and relentlessly logical. Their Advisory Board has plenty of familiar names and reeks with success.

I got a quick five minutes with the guys before the presentations started, and they immediately batted back my questions on plagiarism, etc. They rightly pointed out that students can't plagiarise notes because universities don't mark notes. In fact, universities are supporting Nexus Notes. The team has been smart enough to hire "promoters' or "brand managers" at a number of universities to get the word out.

Nexus Notes are already getting some love internationally. They have a foothold in New Zealand and are starting to roll-out their offerings at The University of Texas (Austin).  It makes sense, as the university experience is almost universal.

It would be easy to get too far ahead of yourself on this one because the model does have some problems, the most glaring of which is scalability. At present, the approval process is 90%+ manual. You sign up and submit your course notes for approval. You can choose to submit your academic record with your notes. They say:

"The file you attach is hidden from the public but your notes will become verified - represented by a visible blue shield. A digital version, scanned copy, or screenshot of your academic transcript will do."

Then the team goes through the approval process manually. I should have asked more about this because I assume Nexus isn't checking the notes for the content, but rather is looking at the format.  It sounds somewhat laborious and will need work.  Imagine if this takes off at the University Texas with its 17 colleges and schools, and more than 50,000 students? The guys hinted at some automation based not only on academic transcripts but also social media type algorithms, but that is still to come. I'm positive this could be a great add-on to a social media site. Remember Facebook started as an attempt to link students at Harvard. It's not hard but will cost money and time.

As I've been a portfolio manager, I'm used to ranking companies. Tech start-ups are no different. It's a numbers game as much as anything else. The more you see, the more you can pick the quality ideas or people from the fakers. Education is a key theme in the "disruptive" world at the moment. Nexus Notes has a solid chance to be a winner in a growing segment. Investors could do worse than spend some time tracking this company's progress.

If $35 seemed like a bargain for quality course notes, then Free is Better has even greater resonance. Take some marketing and advertising energy and stick it onto a basic product like a bottle of water. Give it away for nothing. "Thirsty? Want a free bottle of water? Did you know about the new Mini Cooper S?"

Free is Better is the brainchild of Melbourne based marketing tyro Alex Chen. The idea is that you connect your product to consumers by linking your marketing campaign with free water. They don't just hire a team of kids and drop them off anywhere to hand out the bottles; instead they target districts, and precincts they determine have a high concentration of demographically compatible consumers.

Why water? Chen rightly suggests that the bottled water market is only differentiated by fashion. It could be the colour or shape of the bottle, or it might be the name itself. The Free is Better bottle goes for that clean "google-like" look. The austerity neutralises any social cache down to the statement itself. That makes it firstly inoffensive and secondly a statement that you're smarter than someone paying $2 for something that you can get for free at a public water fountain. There's smugness factor at work here. The price you pay is that on the other side of the label you have some advertising.

The company has gone through a two year gestation period. Now they aim at running limited edition campaigns of one month duration. Each effort sees 20,000 bottle of water handed out and so far they've had mini cars and Levis jeans amongst their product placements. The cost is about $1 per bottle delivered to distribution points, and they essentially charge another dollar for the distribution and marketing know-how to their clients.

Free is Better is only in Melbourne currently. The key is the product placement, and we didn't get a good look at the modelling process behind identifying geographies. I hope it's more scientific then just saying this space looks hot right now. In fact, that's a bit disingenuous because the team hinted at social media analysis as being core to this process. Obviously to roll this out elsewhere and make it worthwhile to investors you'll need to make sure that the underlying processes are robust, quantifiable and somewhat proprietary. If the science isn't right, I can't see the investment case for the product. The wall around the business just won't be high enough.

The team has plans to roll-out vending machines that can be unlocked from a smartphone app. While I'm not sure that this adds to or subtracts from the "fashion factor", it at least shows that Chen and the crew are looking for more data on who is getting the bottles. That is key for them selling the idea to clients.

As an investor, I'm somewhat unsure whether this has legs. The business model seems niche and undefendable without some "secret sauce". At this stage, I think I'd be more an observer than equity buyer. I like the enrgy and thought involved, I just need to see the engine in action.

The last business to cover from the lunch is another peer to peer lender: Money Place. I think Stuart Stoyan (CEO) got unnerved by the presence in the room of some of his competitors. That gave me the feeling he shut up shop in regard to presenting what differentiated his business model from others. Instead, we got the usual arguments as to why peer to peer lending was going to be big in Australia. We didn't get why Money Place was likely to be one of the winners.

I'm fast becoming a peer to peer sceptic. Readers of the blog know that I liked the offering of Society One when it was first presented because of the well thought out smartphone portfolio monitoring tool for lenders. That to me differentiated the business. Others agreed because they've been the market darling, raising capital from the big players in town. Having said that my sources indicate that even with the support that they've garnered the growth of the loan book has been disappointing. That also suggests to me that the marketing campaign needed for the industry to take off may cost more and require a greater gestation period than originally suggested.

How does Money Place compete? Well, the answer is we don't know from this presentation. Given Society One's loan book is still less than $30m, after the support they've had, then Money Place will need to have something special up its collective sleeves.

Stoyan was asked about peer to peer competing with banks in the long run. If you look around the room and make a statement that Australia hasn't seen a downturn for a long time, and "I doubt anyone here has seen one" you want to stop and look at your audience a little more closely. I know I looked around and saw quite a few people who'd had to put up with double digit mortgage rates, bankruptcies and a finance minister who said we (Australia) were in danger of becoming a banana republic. The super liquid monetary conditions we've had recently are not the norm in economic history, so you better have a better set of answers or thoughts when challenged about the industry's sensitivity to interest rates.

When Society One presented at BBY last year, they suggested that average rates of return to lenders was in double figures. Money Place is now saying it's closer to 8%. What happened? Well, the chase for yield in smaller packages is part of the answer. To me, 8% is closer to investing in a second mortgage, not in a fully unsecured personal loan. The problem, of course, is that second mortgages require more funds and longer duration thinking. But this is unsecured and unlike Society One we got no behind the scenes look at recovery processes.

So as an investor what would I do in peer to peer lending in Australia? I want to say that Society One is going to be the big winner, but remain somewhat concerned at their loan book growth. Money Place and others in the field are being given an opportunity to bridge the gap. If it were me, I'd try and get a one on one with Stoyan to see what he and the team have to offer. On the evidence of this presentation, the jury is out and needs to ask the judge for further directions