The government was understandably excited to get their personal income tax legislation through the Senate yesterday, but the fact that it came down to such a knife edge decision is of concern. It remains to be seen whether they will now be able to get the proposed company tax changes through the Senate next week, but with the second highest company tax rate amongst OECD countries, how can Australia compete on the world stage unless they do?

Australia needs to be competitive, and needs a competitive taxation system to be able to do so. Not only is it not competitive, it remains excessively complex, with a GST rate way below most other countries, and only levied on half the economy. It reinforces RBA Governor Phillip Lowe's comments a week ago that the Australian population had no stomach for tax reform.

It was interesting to see the governor of the RBA weigh into the debate, noting that the personal income tax cuts were only the "first step" in the right direction, saying that they were merely incremental, and falling short of "that kind of first-order tax reform that will make a fundamental difference" to productivity growth.

Hedge Clippings believes that the Australian population has, in general, plenty of stomach for tax reform, but the combination of a political process which results in both parties automatically opposing the other's policy, political expediency which encourages negativity (not to mention happily lying in the process), and the inability of either party to successfully prosecute a policy change, leave the Australian population with an overly complex and uncompetitive taxation system.

If the RBA Governor was prepared to speak up, maybe it is time for both the population and the politicians to listen. What is disappointing is that previous governments have had their chance, but didn't have the stomach for tax reform. Ken Henry's 2010 review of the taxation system (excluding the GST which he wasn't allowed to include in the final report) proposed 9 broad themes (still applicable today) covering 138 recommendations, of which the then government implemented only three.

So full marks to the current government for progress to date, but there's an awfully long way to go yet. As the Chinese proverb states, "A journey of a thousand miles begins with a single step."

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 1.02 and 1.69 respectively.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - May 2018 (pdf format)

A short week - and an argument for being short the banks, or avoiding ETF's.

It's been a pretty busy week for one with only four working days - in most of Australia at least. Quite how we have a system where the same event - the Queen's Birthday - is celebrated on three different Mondays in either June, September or October depending on which state you're in, is bizarre.  It's no wonder we have a complex tax system if the same bureaucrats and politicians came up with dates for public holidays…

Firstly Trump, who no one thought would make it to the White House in the first place, achieved what many thought was a diplomatic impossibility by shaking hands with Kim Jong-Un and inking the bones of an agreement that none of his more diplomatic predecessors had even dreamed of.

Then Jerome Powell and the US Fed upped US rates by 25 bps, and the markets … did nothing. The RBA, and then the ECB, kept rates on hold, with the latter announcing the end of QE will take place in December. More of the same…

Fresh from Singapore, Trump is tonight scheduled to announce tariffs on $50 billion of Chinese products, which will inevitably lead to an upping of the trade war with both retaliation and rhetoric from China's President Xi Jinping. Watch that space with care.

Meanwhile at home we gave some focus to the banking sector (again) but this time on the big 4 banks' share price declines over the past 12 months, which caused Hedge Clippings to reflect on one of the great flaws in the passive investing approach of ETF's.

Consider this: Over the past 12 months the share price of each of the big four banks has fallen around 20%, whilst Telstra has fallen almost double that.  These five stocks make up just under 30% of the market cap of the ASX200, which in spite of this Famous Five's 12 month performance, has managed to rise approximately 5%.

Any investor in an ASX200 ETF, or even worse in an ASX Top20 ETF, hase, for better or worse (in fact for worse!) had their returns dramatically curtailed as a result. Simply accepting whatever the market as a whole throws at you and justifying the decision on the basis of low fees makes little sense to us.

While we accept that the opposite can occur as well, boutique or concentrated funds which can avoid - or select - individual stocks, sectors or markets by using their skill and experience on a discretionary basis are worth finding and if appropriate, investing in. Certainly some will perform better than others, and not all of them will perform in unison. Whilst possibly biased, we would argue that a diversified portfolio of well researched boutique managers will provide a better return, with lower volatility and risk than the overall market, and its ETF equivalent.

A short week - and an argument for being short the banks, or avoiding ETF's.

It's been a pretty busy week for one with only four working days - in most of Australia at least. Quite how we have a system where the same event - the Queen's Birthday - is celebrated on three different Mondays in either June, September or October depending on which state you're in, is bizarre.  It's no wonder we have a complex tax system if the same bureaucrats and politicians came up with dates for public holidays…

Apologies - where were we?  The busy week that was… Firstly Trump, who no one thought would make it to the White House in the first place, achieved what many thought was a diplomatic impossibility by shaking hands with Kim Jong-Un and inking the bones of an agreement that none of his more diplomatic predecessors had even dreamed of.

Then Jerome Powell and the US Fed upped US rates by 25 bps, and the markets … did nothing. The RBA, and then the ECB, kept rates on hold, with the latter announcing the end of QE will take place in December. More of the same… nothing.

Fresh from Singapore, Trump is tonight scheduled to announce tariffs on $50 billion of Chinese products, which will inevitably lead to an upping of the trade war with both retaliation and rhetoric from China's President Xi Jinping. Watch that space with care.

Meanwhile at home, we gave some focus to the banking sector (again) but this time on the big 4 banks' share price declines over the past 12 months, which caused Hedge Clippings to reflect on one of the great flaws in the passive investing approach of ETF's.

Consider this: Over the past 12 months the share price of each of the big four banks has fallen around 20%, whilst Telstra has fallen almost double that.  These five stocks make up just under 30% of the market cap of the ASX200, which in spite of this Famous Five's 12 month performance, has managed to rise approximately 5%.

Any investor in an ASX200 ETF, or even worse in an ASX Top20 ETF, has, for better or worse (in fact for worse!) had their returns dramatically curtailed as a result. Simply accepting whatever the market as a whole throws at you and justifying the decision on the basis of low fees makes little sense to us.

While we accept that the opposite can occur as well, boutique or concentrated funds which can avoid - or select - individual stocks, sectors or markets by using their skill and experience on a discretionary basis are worth finding and if appropriate, investing in. Certainly some will perform better than others, and not all of them will perform in unison. Whilst possibly biased, we would argue that a diversified portfolio of well researched boutique managers will provide a better return, with lower volatility and risk, than the overall market and therefore a passive ETF.