Sometimes on a Friday Hedge Clippings wonders what on earth we're going to write about. Then you get days like today where there is plenty. I guess it's either a feast or famine.

So where to start? Well, it looks as if Donald Trump is going to be upping the ante by confirming his $200 billion trade wall (that was supposed to be "war", but I guess "wall" will do just as well) with China. It is yet to be determined whether this is going to develop from a significant skirmish into a full-blown battle, and also, depending on one's point of view, whether the damage will hit the Chinese or the American economy the most.

The current view is China the most, but the answer is quite possibly both, and of course, the rest of the world will suffer serious collateral damage. However, irrespective of one's view of Trump's rhetoric, it is unlikely to be empty as he tries to prevent what he sees as China's domination of, if not the world economy, at least that of most emerging markets. Depending on whether you are American or Chinese will no doubt determine which side of the fence you sit.

Overnight Trump received an unexpected vote of confidence, or reference if you like, from Kim Jong-un who is reportedly aiming at denuclearising North Korea before the end of the Donald's first term. China's President Xi Jinping may not be so easy.

Back home in Australia ASIC seems to have been encouraged by the Hayne Royal Commission, announcing legal action against NAB for charging customers fees for no service. Expect more of the same as ASIC moves from a policy of behind doors negotiation and penalties, through to putting perpetrators in court, even before the end of the HRC. The difficulties of getting an actual conviction however, and what the court may or may not decide as retribution for any proven wrongdoing, remain to be seen.

As predicted in last week's Hedge Clippings, two other big banks played catch up with the rate rise from Westpac, and adding a couple of bps for good measure, while the RBA kept interest rates on hold as expected on Tuesday, signalling that the economy was in good shape. By Wednesday it was evident just how good a shape the economy was in, with revised numbers lifting GDP by 3.4% over the year to June. There doesn't appear to be a negative cloud on the domestic economic horizon at the moment (unlike the political one) unless the slowdown in the housing market, which the RBA has been seeking for some time, accelerates further and overly damages consumer confidence.

Finally, there were warnings regarding the dangers of passive investing. We would have to declare a vested interest in this regard as we specialise in the actively managed fund sector. Whilst we can certainly see the benefits of passive investing as a way of reducing investment costs, it can distort valuations, particularly in rising markets, based on the premise of "a rising tide lifting all ships".

The risk of passive investing however comes as markets turn downwards, when index and passive funds will see indiscriminate outflows. Just as the rising tide lifts all ships, so too it lowers them when it falls. That's when actively managed and hedge funds come to the fore, (and thus justifying their fees) by protecting capital and hopefully without adding to the outflows.

While on the subject of performance, we frequently normally keep fund performance updates to a fairly dry commentary. However, the Bennelong Long Short Equity Management's (BLSEM) August performance of 10.59% (see report) was something special, even if the manager was at pains to point out that it should not be taken as normal. We can safely mention this fund as it is closed to new investors, but it is a terrific example of how a well-managed hedge fund can work. The fund has returned 16.77% annualised after all fees over 16 years since its inception in February 2002.

An important measure of a fund's risk is the Down Capture Ratio or DCR - in BLSEM's case of minus 201%. For those not familiar with the Down Capture Ratio, a DCR of 100% indicates that the fund falls in line with the market in negative months. A figure of less than 100% indicates that the fund falls less than the market. A negative number indicates that the fund rises when the market goes down. Negative Down Capture Ratios are rare but not unknown, and one of -201% is extraordinary, particularly over a period of 16 years. This was no flash in the pan!

INSYNC GLOBAL CAPITAL AWARE FUND

Attached is our most recently updated Fund Review on the Insync Global Capital Aware Fund.

We would like to highlight the following:

• The Global Capital Aware Fund invests in a concentrated portfolio of 15-30 stocks, targeting exceptional, large cap global companies with a strong focus on dividend growth and downside protection.

• Portfolio selection is driven by a core strategy of investing in companies with sustainable growth in dividends, high returns on capital, positive free cash flows and strong balance sheets.

• Emphasis on limiting downside risk is through extensive company research, the ability to hold cash and long protective index put options.

For further details on the Fund, please do not hesitate to contact us.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - July 2018 (pdf format)

There was plenty of teeth gnashing this week over Westpac's "out of cycle" mortgage rate rise, including from the new PM and his equally new treasurer. It's always amazing how banks are to blame when rates rise, while the politicians of the day (ok, they last a little longer than a day, but you never know) take the credit when rates fall.

While banks are fair game when they misbehave, mislead ASIC (ok that was NAB and AMP, but same, same), charge clients fees for no service etc., what is essential is that their basic operations - i.e. the margin between their cost of funding and the rate they charge their customers - are profitable. Note we didn't say fair and reasonable!

So if their funding costs (particularly offshore) are increasing, the obvious result is that mortgage rates will rise as well. We're in a global village, and the banks' offshore funding sources - estimated to be 35% - are global as well.

Given that rates have been so low for so long, and that we've seen US rates rise (and about to do so again), there should be no surprise that eventually they will increase. There have been plenty of warnings. The problem is that while rates may be moving up, and lending practices have been tightening over the past 12 months, the banks have been falling over themselves for the previous 8-10 years to shovel credit onto the willing consumer, thereby driving up household debt to record levels, and helping to fire the furnace under residential property.

Of course consumers should shop around, but that won't help them much, simply because the other banks and lenders will follow suit sooner rather than later. And while the RBA cash rate may not shift off its current floor of 1.5% for a while, with US rates tipped to rise as soon as next month the only way from here is up.

Meanwhile back to the Hayne Royal Commission: Amidst all the drama and revelations from the HRC over the past six months, what has been amazing is the sheer volume of intelligence that the Commissioner and his Counsel seemed to have lined up to skewer some hapless witness or another.

It stands to reason that much, if not most of this would have been sourced from the regulators - ASIC and APRA, and the FOS. Which begs a question: If the regulators had the information, why weren't they able to line the naughty boys and girls up themselves?

Was it the system, the regulations, a lack of resources, a lack of intention, or what?

Hedge Clippings' most likely answer is that many in the financial services sector treat ASIC and APRA, the corporate cops, the way most motorists treat the highway patrol (until they need them).  There would seem to be an attitude of "get away with what you can, when you can, and hope you don't get caught". Australians have a long history - dating back to the earliest days of the first fleet - of having a well-honed disregard for regulations and authority. Maybe it's all just a game to see how far you can go.

That's worked up until now.  The HRC should lead to some miscreants facing criminal prosecutions - and the resulting time in the sin bin that may well follow!