The entrepreneur, who runs the portfolio for himself and family and friends from Sydney’s Neutral Bay, is fiercely critical of professional fund managers who are set to report 40 to 50 per cent in capital losses to investors this month.
“All the [virus] data was there. If I can work it out, why can’t a professional fund manager with 10 years’ more experience than me? Every manager doing their job should have taken a lot of risk off mid-Feb on the basis of exponential growth of the virus in China only, at that point.
Spenceley’s chart suggests Australia is heading for 3,500+ plus cases and an Italian-style lockdown this weekend. James Spenceley
“They just failed at risk management. So many people missed this and screwed up, but if you did the work it was all there. This was way too obvious with only a little bit of work and incredibly obvious when doing a lot of work.
“Its clear from how many [funds] are down so much that they’re incredible at valuing companies, but not even focused on risk management.”
An underlying problem, according to Spenceley (who previously run Mhor Funds Management) is that fund managers’ performance fee structures discourage managing downside risk to protect investors’ capital.
In particular, high-water marks on performance fees (often linked to personal bonuses) mean only capital gains above prior highs are subject to performance fees. Inevitably bonus-boosting performance fees are largely only earned in bull markets when a fund consistently beats its high-water marks.
“They didnt mis-underestimate the risk, they ignored it in the never-ending search for index outperformance,” Spenceley says.
“In a long-running bull market they have all the incentive to put as much money and risk to work so they can outperform the index. There’s no incentive for them to put risk management on and take sizeable positions off.
“If they do take positions off and the market drops and they outperform on the way down, they don’t earn fees. The structure of relative value funds management is broken and you are seeing that in real time in their results.”
Devastation ahead
Having called the virus’s spread and stockmarket crash in real time on his Twitter feed, Spenceley (who also chairs ASX-listed Airtasker) is using the data to draw horrendous conclusions on the outlook for capital markets.
He thinks that Australia is likely to go into mandatory lockdown this weekend or early next week, on his projections based on current data. Australian infection numbers will then be comparable to Italy when it went into compulsory lockdown.
“My current model suggests after lockdown periods, eight to 12 weeks, to get the cases down to a manageable level globally we will have to open back up to keep the economy somewhat alive, but with the stronger testing and tracking measures.”
According to the entrepreneur, monetary policy is exhausted and the economic downturn is going to become worse than anyone expects.
“People who are predicting that we have a bad quarter of GDP and then it returns to normal levels have clearly never run a business.
“Next news flow is going to be global big-brand bankruptcies, huge small business bankruptcies, unprecedented in our lifetime unemployment rates, depression-era comparable, all faster than its ever happened before.”
Globally, Spenceley thinks numerous fund managers will fail, or shutdown, with a real risk of banks going bankrupt. An Italian debt default could trigger another eurozone crisis.
“If you honestly think you can call stocks cheap before all of that, you’re kidding yourself.”
Moreover, the market is still ignoring the extreme likelihood of new outbreaks, says Spenceley, who predicts different countries worldwide will be in some form of lockdown until there’s a vaccine. In turn, global travel is all but finished for a year, with interstate travel in Australia potentially limited.
Race against exponential growth
The investor says the basic principle of exponential growth and obviousness of undetected Australian virus cases means the government should have already moved to a compulsory lockdown. It should also have moved to test everyone, whether symptomatic or not.
“Unfortunately the current plan of waiting to see the numbers before taking action to control the numbers means we start with a far more severe problem than we could.
“Severity of the problem is fairly linear to the amount of time you need to lockdown. You have to get the numbers down to a manageable level while preparing to implement significant tracking, measuring, and testing once you open back up.”
He expects Italian case growth will start to slow in nine days or so, while the US will soon have the most cases in the world, taking two to three weeks before a drop.
According to Spenceley, a national lockdown greatly reduces the number of cases and enables the elderly and sick to be isolated. Once contagion is stabilised, economic activity can increase in sync with stringent checking and testing.
“Every office block, shopping mall, street corner should have an official or volunteer checking temps, checking your status and moving you immediately. We should be educating people to take their own temps daily, there is so much more we need to be doing.”
He predicts the Australian government’s lack of downside risk management is going to prove a great calamity, with global gross domestic product unlikely to recover for two to three years.
Buying stocks now is out of the question for Spenceley, with capital preservation the top priority as the market starts to price in the second-order disasters to come.
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