Absolute Return Funds and the Holstein Friesian - Truth & BS... Which is Which??

It’s interesting when you look at it, the experiences you gain through life that are completely disparate but nonetheless evidence synchronicity.

My father wouldn’t have known absolute return if it jumped up and bit him on the bum, yet he was an expert at it. He would have revelled in the ‘new world’ of Absolute Return.

I’m afraid any fund manager who takes comfort in the fact that their fund/portfolio is performing well because they beat the index by 4, when the index is down 12, is a fool looking for an audience who cares. Fund managers, money managers, investment managers are paid money [and generally a not an inconsequential amount of it] to make money. Not to lose a little less than someone else. Explain that logic to a self funded retiree watching their life's earnings being frittered away.

When I went to school, minus 8 was minus 8. It was a number less than zero—that meant a loss. Not a positive because it wasn't as bad as some others at minus 9. Although I’m sure there’s a smart-phone app that's bound to prove me wrong.

In today’s world of potentially extended periods of minimal to low capital growth and volatile markets, return on investment, that’s real 'absolute return' on investment, is the only currency. Anything else is tomorrow’s chip wrapping.

It’s fair to say that all this only has relevance if you subscribe to the notion of absolute return. But when push comes to shove [as it is often want to do in the world of money and the hip pocket nerve] the ONLY thing that has any resonance, relevance, or even the remotest relationship to investment—is absolute return. Not a notional figure boosted by a supposed increase in capital value, that requires the asset to be sold to generate anything looking like a return.

Asset values can, and in recent times have, gone up and down all over the place, tracing a path reminiscent of an alpine skyline. If asset value/capital growth occurs, fantastic. But you can't eat capital growth. You can eat interest, rent, dividends, disbursements, royalties. At the end of the day—it's all about cashflow.

When your net asset position, generates sufficient 'absolute return', less holding costs and charges, to replace personal exertion income [in part or in full], that's when you can chose to turn up to work on Monday—or not. Because you choose to, not because you have to.

But back to the cows.

In the old days, in the middle of New Zealand’s South Waikato, farming was simple. Milk cows with a high butter fat content [think really creamy milk = Jersey cows], separate the milk, send the cream off to the butter factory and feed the remaining milk to pigs to fatten them. What else are you going to do with it. Besides they love milk.

The cream gets made into only one variety of butter [remember it’s New Zealand in the mid-50’s] and shedloads of it are shipped off to the UK – they loved it there.

Now that’s an economic model I can get my head around. I mean after all we’re part of the empire [albeit about as far as one could get from the ‘old country’ on the other side of the world].

So what you really wanted were lots of cows that could produce milk with a really high butterfat content. Our herd was mostly Jerseys. Meanwhile the pigs get fat on the milk and ‘it’s all good’.

Then Sir Alec D-H and Harold Wilson and the team came along to spoil the party.

Tariffs, gluts, EEC… what’s that all about??

But my Dad quickly worked out that the best option for a consistent earn, was town supply. That’s where all of the milk gets sent off the milk factory, turned into drinking milk, put in bottles and delivered to the people in town for drinking. And you get paid on volume not butter fat content… and you get to sell milk all year round.

For our milk at home, however, we did the same old thing we'd always done. We filled the milk bucket up straight out of the vat, took it home and put it in the fridge. If only I’d known that we were drinking free range, bio dynamic, grass fed, unpasteurised, whole milk straight from the cow!! We were so far ahead of our time it wasn’t funny. We just didn't know it.

I digress, back to absolute return.

When you move from wanting lots of cream for butter [remember butter fat content] to wanting lots of milk for town supply [think volume] you need different cows. Enter the Holstein Friesian. Big black and white cows built for volume and speed. Boy could they make milk.

But when you get down to it, all the cows come into the shed line up and get milked ten at a time, at least in the latest hi-tech herringbone cowshed of the day. Which means you have to wait for the last one to finish before you can let them out and get the next lot in. It makes efficient sense, therefore, to try and get them all producing lots of milk in around the same time. Milk is milk after all—you just want lots of it.

Now you’re getting paid by the gallon [in the days when 'litre' was some French word] so now it’s all about volume. Big cows… lots of milk… milk ‘em fast.

Experts could pontificate over the nuance of higher butter fat versus lower, lactose levels, milking rates, calf sizes… the reality and the economics was quite simple.

Could the cows provide good quality milk and produce lots of it? Welcome to the herd. If not—on the next truck out of Dodge. It's called 'culling'. Keeping assets that provide the optimum desired return and jettisoning those that don't.

How could you produce the greatest amount of milk of the right quality every single day of the year, for the least amount of effort and cost.

That was the measure. And he watched it like a hawk. Cows that didn't measure up were pensioned off and replaced.

He didn’t travel the district measuring up how he was going against other farmers and brag about the fact that while their production might be down, his wasn’t down quite as much. There was no 'Friesian Milking Index' to make you feel like reduced production was okay measured against the long term trend. There was only one index that mattered—cash. Were you makin' it?

The ONLY thing that mattered, was what was in the vat each morning for the milk tanker to collect and how many cows [assets x holding costs] it took to produce it.

Fund managers take note... the ONLY thing that matters to a self funded retiree, is cashflow. A continuing supply of it. That's what you get the big bucks for. If I here another "...index plus 3 points...", I'll spontaneously combust!!

My Dad was a genius at absolute return investing. He was way ahead of his time. I really ought to have paid more attention.