The current investment landscape reminds me a lot of the Kilauea volcano - eruptions and disruptions always on the horizon. Translate that volatile geography across to the world of finance and all too often we see the potential for the financial lava that flows from these macro events consuming traditional investment strategies. 

National Geographic reports that Kilauea has been erupting almost constantly for the past 35 years ... and, in the process, has been changing the physical shape of Hawaii. We now live and work in the era of the 'new normal' with its volcanic volatility changing the shape of investment practice. Add to this some more climate change factors - think Trump, think trade wars, think Brexit or, for that matter, any macro geo-political or economic event you care to choose from the smorgasbord that besets our planet.

With this changed investment climate upon us - and I think most pundits believe that the 'new normal' is most certainly the ongoing investment environment - then how do we optimise investment outcomes? Ahh, diversification I hear you say. Absolutely, but in my view, we need to re-cast the parameters of diversification in the pursuit of optimal outcomes.

In doing so, it is always prudent to take lessons from the smartest people in the business and, in this case, I am talking about the organisations that manage their funds in a fiduciary-centric way to be 'all weather.'

They embrace strategies which are true diversifiers and which complement their overall investment approach. So, let's interrogate this through the prism of two world class portfolios - our own Future Fund here in Australia and the Harvard University endowment fund in the United States.

Guidance from the $140 billion Future Fund is that for the 12 months to the end of March 2018 their return was 8.6%, which is in line with its yearly average for the past decade.

The Harvard fund (AUD 50 billion) returned 8.1% on investment in the year ended June 2017 - a year they lamented as sub-par, as the fund has generated an average of better than 10.0% per year for the past two decades.

Noting that "the successful investments of the last five decade won't necessarily be the successful investments of the next five decades," Raphael Arndt, the Future Fund's Chief Investment Officer, is focused on the role the "new generation of hedge funds (will) play in delivering uncorrelated returns and reducing risk."

The Harvard Management Company, which operates the university's endowment, is, like Dr Arndt, also wary of the past ... and is currently reconstructing its investment foundations from traditional "asset allocation" towards a "risk allocation strategy." The objective is better management of risk across the fund, rather than individual asset classes.

Harvard allocates around 15% of its funds to Absolute Return, which is the same amount the Future Fund allocates to Alternative Assets - but in handing over his money Dr Arndt measures performance against the objectives of diversification, downside protection and alpha generation.

He's hit the nail right on the head. But what sort of diversification optimises alpha generation and downside protection? To my mind, diversification these days requires a lot more than a spread of asset classes and geography.

True diversification is often difficult to achieve in high volatility markets, as traditionally uncorrelated assets become highly correlated - failing the investor when most needed. Arndt says "the inclusion of uncorrelated sources of return in our portfolio allows us to invest into risk assets elsewhere in the fund."

Which brings me to the nub of my argument: the two true diversifiers in approach to investment that Australian investors need to fully embrace are equity market neutral and managed futures. Integrated into a portfolio, they enhance the high probability of returns at a targeted rate year after year and have a "smoothing" effect.  This is the peace of mind all investors desire.

At NWQ we have been researching uncorrelated returns for several years, piloting a global markets fund as a next-step to our highly successful equity market neutral fund.

It is incontrovertible: managed futures work. Ineichen, a leading asset allocation researcher, concluded a well managed portfolio of managed funds "delivered a positive return in 18 out of 20 systemic events in the equity market from 1980 to 2012." Ineichen added that "in the field of investment management, there is simply nothing that comes anywhere close to this."

But, in the times which have proved that even Nobel Prize winner Harry Markowitz's Modern Portfolio Theory wasn't quite there (as we found out, all asset classes are affected by systemic shock such as the GFC), my conclusion is that to optimise managed futures it is necessary to have the right, diverse mix of largely uncorrelated global managers on your platform.

And that's the key to my hypothesis of an expanded definition of diversification.

ATTACHED FILESRe-casting Diversification - the True Diversifiers (pdf format)

Hayne Royal Commission - the ongoing revelations are taking their toll on so many reputations:

ANZ, NAB, IOOF, and Ric Allert from AMP Trustees were enlightening this week at the HRC, but for all the wrong reasons.

AMP Trustees simply haven't been doing what they should have - namely looking after other peoples' money. Rather it seems they're simply looking after themselves and AMP.

Meanwhile, IOOF's board notes are akin to a second former's (not sure if in junior or senior school).

NAB played with ASIC, and indulged in some cute information timing.

ANZ played with the rules, and played with …. Other peoples' money!

It seems not to matter if it occurs at "Industry" or "For Profit" funds. Of course Hostplus need to spend hundreds of thousands of dollars taking prospective clients to the Australian Open tennis. Oops, 'so I had to take the wife and kids as well to fill a few spare seats'. What, no fund members could be found at short notice and invited along?

And it's a great use of members' funds to sponsor the footy - but I wonder which team the Hostplus CEO barracks for? Oh! Surprise, Surprise, the Richmond Tigers. And who sponsors the Tigers (and admittedly some other clubs)? Hostplus! I'm sure there are always a few seats in the sponsor's box at the MCG reserved for Hostplus' super members.

And a staff lunch? Forget the local restaurant across the road from the Hostplus offices in Melbourne's William Street. We'll just pop up the road to the Flower Drum at the Paris end of town.

Full marks to Hostplus for being a top performing fund. But that should be enough to get employers and others to park their retirement savings with them. Not for taking family to the tennis, CEO's of employers to the footy, or staff to the "Drum" for a not inexpensive Chinese meal (trust me, I've had a few there in days gone by) .

Remember, it's other peoples' money. That's taking the old adage of "looking after it as if it is your own" just a tad too far!

BENNELONG KARDINIA ABSOLUTE RETURN FUND

Attached is our most recently updated Fund Review. You are also able to view the Fund's Profile.

• The Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with over ten-year track record. 

• The Fund has significantly outperformed the ASX200 Accumulation Index since its inception in May 2006 and also has significantly lower risk KPIs. The Fund has an annualised return of 10.38% p.a. with a volatility of 6.90%, compared to the ASX200 Accumulation's return of 6.00% p.a. with a volatility of 13.37%.

• The Fund also has a strong focus on capital protection in negative markets. Portfolio Managers Mark Burgess and Kristiaan Rehder have significant market experience, while Bennelong Funds Management provide infrastructure, operational, compliance and distribution capabilities.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - July 2018 (pdf format)

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 - June 2018 (pdf format)

BENNELONG LONG SHORT EQUITY FUND

Attached is our most recently updated Fund Review on the Bennelong Long Short Equity Fund.

• The Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large-caps from the ASX/S&P100 Index, with over 15-years' track record and an annualised returns of over 16%.

• The consistent returns across the investment history indicate the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market. The Fund's Sharpe Ratio and Sortino Ratio are 0.99 and 1.63 respectively.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - July 2018 (pdf format)

Are we becoming immune to poor corporate governance?

It would be unfair to call it boring, but the Hayne Royal Commission (HRC) is becoming so repetitive it's almost predictable, so much so that it's losing its shock factor.

Misdeeds at the big end of the financial system? So what? We all either knew that, or suspected it, and by now we have heard it all (or much the same) before.  No wonder the banks fought so hard against the RC being established in the first place.

In any other area, the charging of fees for no service would be called for what it is - a SCAM.  If perpetrated by an individual advisor they'd be struck off in quick time. But at executive and board level different rules obviously apply. The key point going forward is not how much financial pain is inflicted on executives via lost or reduced bonuses, or penalties on the banks themselves (which of course flow on to shareholders), but the potential for criminal charges to be laid.

That, to excuse the pun, might help to arrest the problem.

Whilst this might seem extreme, the reality is that theft has occurred, deliberately, knowingly, and frequently - and worse still more often than not at the expense of those most vulnerable, both as a result of their lack of financial interest or knowledge, or those least likely to be able to afford it in terms of their financial security in the future.

What is astounding is that, like at AMP, the senior ranks of the banks such as CBA and NAB knew of the theft, and did nothing to fix it - even worse, NAB did whatever they could to obfuscate to protect their position, including asking Mr Hayne to keep it confidential.

Nothing will focus their minds more than the prospect of some quiet, reflective time in a green uniform, with set meal times, and limited visiting hours.

CEO's and chairmen (and women, although there's been little apology we can recall from AMP's previous Chair) may apologise' but saying sorry is one thing. Changing the systemic cultural and operational problems are another.

By contrast, Australian Super's Mr Silk gave a "smooth as" performance, partly as a result of what seemed to be a less severe interrogation, itself quite possibly because there have been fewer misdemeanours uncovered on his watch.  We'd still like to see the HRC delve into where the fees behind industry super flow - over and above purchasing shares in the New Daily. That problem's unlikely to resolved while the boards and trustees of industry funds are not required to have independent members.

Unfortunately the superannuation pie is so large, so opaque, and in many respects so distant from the majority of contributors and beneficiaries that it is going to take some serious government intervention to change the current malpractices. And while talking of change, with an election looming in less than a year from now, it's likely the "for profit" sector is likely to be firmly in Canberra's sights, while the "industry" sector will remain as opaque as ever.

Pity the poor punter!