That's not a bubble, This is a bubble! Or is it?

Hedge Clippings spent an interesting and informative morning this week at Money Management's Asset Allocation event. Apart from moderating a series of discussions covering retirement income amongst financial and wealth advisors, we were treated to a keynote presentation from Stephen van Eyk.

Stephen opened his address by stating that in preparing his presentation he had determined that he would try to put a positive view on his outlook for our collective financial outlook, but that having sifted through all the data and looked at the evidence, this would unfortunately not be possible. No matter which way one looked at it, Australia's low economic growth wasn't responding to interest rates of 2%, and weren't likely to, providing a headache for both the government and the RBA.

The event was wrapped up with a panel discussion entitled "What is the New Bubble", consisting of five leading fund managers, namely Alva Devoy from Fidelity, Tim Samway from Hyperion, Dr Phil Hofflin from Lazard, Anton Tagliaferro from IML, and Matthew Drennan from IOOF. Some interesting ideas, comments and statistics emerged with the usual varying degrees of optimism and pessimism, some of which I managed to recall after the event. Of course given the RBA's comments earlier in the week regarding Sydney house prices, and some typically insensitive, albeit obvious comments from the Treasurer, the discusion leaned towards a real estate bubble.

Anton noted that he did not expect a crash, as they only occurred when not expected, although he also noted the concentration risk within equity markets, and that in his opinion QE had resulted in one of the greatest examples of wealth transfer (from tax payers to financial markets) in history. His expectation was that low growth is set to continue.

Alva Devoy noted that we should get used to current conditions as the "new normal" and it was likely to be 10 years before interest rates returned to the old normal, and that as a result monetary policy would continue to support stretched equity valuations.

Phil Hofflin wondered if we were heading down the Japanese path of long term low growth in spite of central bank stimulation, and turning to the housing market warned of the 65/65 ratio: 65% of bank assets in Australia are in housing, which in turn is on a PE multiple of 65 times, and that the total value of Australia's housing market, if it does correct, is many times larger that the equity market.

Finally Matthew Drennan cautioned that traditional safe havens may not turn out to be so safe. All in all while some of the panel were more cautious than others, along with Stephen van Eyk, none were overly optimistic either.

Specific results received this week include the following PERFORMANCE UPDATES:

Monash Absolute Investment Fund returned -0.40% in May, taking annualised performance since inception in May 2012 to 15.35%.

The Bennelong Long Short Equity Fund performance in May was down 1.91% taking annualised performance since inception in January 2003 to 17.05%.

Allard Investment Fund  returned 1.0% during May, with annualised performance since July 2003 of 9.99%.

FUND REVIEWS released this week: Insync Global Titans Fund; Monash Absolute Investment Fund

UPCOMING EVENTS:

20 - 21 August 2015 - The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 - The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities.  Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

15 September 2015 - The AIMA Australia Hedge Fund Forum 2015 is the annual non-profit hedge fund conference organised by the industry for the industry. 

And finally best wishes for a happy and healthy week-end ahead,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Volatile global bond markets unsettle markets

While equity markets usually grab the business headlines, it is the global bond market which really carries the punch. The past month has seen some extreme, and worrying moves on bond markets, with German 10 year bonds moving from 0.05% to 0.90% in an unprecendented period of volatility, in part driven by dwindling liquidity.

Other markets have followed suit, with the US 10 year rate moving from 1.80 to 2.30%, and Australia's from 2.30 to 3.05%. 

The background for the situation has been created in part by central bank intervention which has pushed interest rates to unsustainably low levels on the back of QE, and in part by regulators forcing, or at least discouraging, banks from participating as market makers though legislation such as the Volker Rule contained in the Dodd Franks Act.

Expect to hear and feel much more of the outcome of these moves over the weeks to come, with bond markets reportedly 3 times the size of equities. As George Colman from Optimal notes in his monthly note "Beware the bonds: Central banks may just have lost control". Regular readers of Hedge Clippings will note we are prone to quoting George, who has been on the bearish side for some time, but having returned 2% for each of the past two months it is more than possible that his views are worth listening to.  

Australia's situation is somewhat different, although no less worrying, in spite of Treasurer Hockey's describing those concerned about the economy as "clowns" for being negative. No sooner had he done so than flat retail sales figures for April were released, possibly indicating who was really wearing the clown's outfit.  

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Supervised High Yield Fund rose 0.52% during April to bring the Fund's annual return since inception to 10.18% aganst the RBA Cash Rate return of 3.47%.

QATO Capital Market Neutral Long/Short Fund  although down -2.96% in April has still returned 16.93% over the last 6 months.

The Insync Global Titans Fund fell -0.40% in April, with 12 month performance 19.27%.

Signature Quantitative Fund returned -2.10% for April, to bring the annual performance since inception to 13.11%.

The Cor Capital Fund was down 0.65% in April to bring annual performance since inception to 5.55% p.a., compared to the RBA cash rate of 2.68% p.a.

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn and Twitter

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Boombustology

The title of today's Hedge Clippings comes from a book of the same name by Vikram Mansharamani. As the name (the book's, not the author's) suggests, it explores the almost inevitable cycle between history's booms and their ensuing busts. 

Last week's Clippings explored two different opinions on the Chinese economy, with the bearish view referring to debt levels identified in an article in the Chinese language version of the People's Bank of China's (PBoC) first-quarter Monetary Policy Report. We also noted the risk created by the levels of margin lending at both street and corporate level.

Thursday's fall of over 6% on Chinese equity markets, reportedly on the back of a tightening of margin lending levels, possibly came a little faster than we had expected, but still reinforced the concept of boom-bust-ology. History has shown that for every irrational boom there is an inevitability that there will be an ensuing bust. It might be too early to call -6% a bust, but the speed and suddenness of the move would have to signify the potential for one.

Closer to home it would be a stretch to describe Australia's economy in the bust phase following the mining boom, but it is certainly struggling with the transition. Hence Philip Lowe, the Deputy Govenor of the Reserve Bank of Australia, in a speech entitled Managing Two Transitions, last week described the difficulty the economy is facing.

The problem is that Australia's manufacturing sector is not taking up the slack from the mining boom. As strong as the housing and property markets are, they are insufficient to prop up non-mining business investment. This is inspite of historically low interest rates, with Lowe making the point that Australian businesses have not reduced the hurdle rate of return required for making new investment decisions in line with lower rates.

Obviously investment decisions are driven by far more factors than interest rates, however when interest rates are high the hurdle does rise. The paradox for the economy is that the same is not true when they fall. As a result capital expenditure is falling, and is likely to continue to do so in spite of the RBA's requests.

To what extent the government (and opposition) are responsible for the lack of business confidence remain to be seen, and difficult to pinpoint, but it has been some years since either side of the political fence in Canberra provided any cause for optimism.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

KIS Asia Long Short Fund rose 4.04% during April, bring the Fund's annual return since inception to 15.48% p.a.

The Laminar Credit Opportunities Fund returned 0.54% over the month of April, bringing its annual performance since inception to 19.13%.

Morphic Global Opportunities Fund rose 0.02% in April as its benchmark (MSCI AC World Total Return in Australian Dollars) fell 0.33%, resulting in outperformance of 0.35%.

The Avenir Value Fund returned -3.57% in the month of April compared to the  ASX 200 Accumulation Index -1.70%.

Aurora Fortitude Absolute Return Fund  rose 0.34% as the market experienced higher volatility over the month of April.

The Paragon Fund returned 1.10% versus the ASX 200 Accumulation's -1.70%, for the month of April 2015. The Fund's annual return since inception has been 21.24% p.a. versus the Index's 10.60% p.a.

Totus Alpha Fund was down 4.5% in April compared to the ASX200 Accumulation Index's -1.70%. However the Fund's annual performance of 24.74% (ASX200 Accumulation Index 14.70% p.a.) has been strong.

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn and Twitter

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Two different views of China

There appear to be two different views when it comes to the outlook on China: In Thursday's Australia Financial Review Louis-Vincent Gave of Hong Kong's GaveKal Dragonomics outlined why he describes himself as a "massive China bull". The article went on to explain that Gave believes the global investment community is underexposed to Chinese stocks and bonds, and as a result will be compelled to increase its exposure over the coming 3 years as Chinese financial assets begin to be included more fully in the global benchmarks that passive, and many active institutional investors track.

That certainly could occur, and one should never ignore markets which rise on the back of the pure weight of money which either has to invest, or can find little reason not to. For an example of the latter, just consider the recent bull run in Australian bank and high yielding shares. However it doesn't necessarily mean that the fundamentals of the underlying Chinese economy, or the companies operating there are investment grade or secure.

Taking the other view is this article entitled China is Choking on its Own Debt which drew attention to the release earlier this month of the People's Bank of China's (PBoC) first quarter Monetary Policy Report. The report somewhat alarming given the authoritative source, in that it points out that:

1. China has too much debt
2. The government has relied too heavily on investment for growth
3. Credit expansion is no longer possible
4. The economy is inevitably decelerating as a result

If all of that is alarming in itself, so is the reason that the report received so little media exposure: Given that the conclusions are not new for most avid watchers of China the fact that it has yet to be published in an English language version perhaps suggests why didn't hit the headlines, most probably because the Chinese government didn't want it to.

As the article points out the PBoC website has somewhat of a history of being less than transparent when it comes to posting English language versions of articles, citing April as an example when 32 stories were posted in Chinese while only 12 made it to the English version. There are many conspiracy theorists who believe that the level of influence exerted by the Chinese government on economic statistics are, not to put it too mildly, relatively well controlled.

Which of the two opinions play out in the future remained to be seen, and to be fair the Chinese authorities' manipulative attitudehas been known to work in the long run. However a combination of the above, and anecdotal evidence of massive margin lending at street level as well as corporate, will keep the risk factor high.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Bennelong Long Short Equity Fund performance in April was flat (0.03%), however long term performance remains sound with since inception (Jan 2003) returns of 17.33% pa (Index 8.56%) and a volatility of 11.79% (Index 12.86%).

The Pengana Absolute Return Asia Fund had a strong performance of 3.87% for the month of April, bringing the annualised return since inception to 11.43%.

Allard Investment Fund increased 1.50% during the month of April, to bring the Fund's last twelve month performance to 27.08%.

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn and Twitter

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. For more information visit www.cpresearch.org.au or contact me by email.

Hedge Funds show their mettle

Every cloud has a silver lining, or so they say, so the volatility in Australia's equity market in the last couple of weeks, and which saw the ASX 200 drop 1.7% in April following a negative (albeit small) fall of 0.06% in March has probably played into the hands of hedge fund managers. Local equity-based hedge funds have gained around 1.2% over the past two months, and have now outperformed the index by 2.5% percent over a rolling 12 month period.

Globally it is no different. Industry newsletter Hedgeweek reported this week that hedge fund managers may be showing their mettle as global financial and geopolitical volatility continues, with the hedge fund industry beginning to beat popular indexes, according to eVestment's just-released April 2015 Hedge Fund Performance Report.

There has been a very long and very active debate over the value of hedge funds, but the popular opinion of hedge funds as being highly risky is simply not borne out by the facts. In a strongly rising market the protection taken by hedge fund managers on the short side frequently sees them underperforming, but when volatility increases and markets fall, their short positions come into their own.

This is not always the case, and there are someexceptions to the rule with a handful of fund managers behaving or performing according to the myth. Thankfully there are others, and many more of them, who outperformed the market in both positive and negative markets. By definition this is difficult to do as they have to actively short stocks or the market to drive performance, rather than just to reduce risk. Part of the skill when selecting the best manager to suit the end investor's objective therefore is to analyse both their up and down capture ratios.

Talking of risk, it seems that twenty years after bringing down major British bank Barings (which listed amongst its historical credits funding the Napoleonic wars), the SMH reports that rogue trader Nick Leeson is sounding alarm bells about China. Unless the country reforms its stock markets, he warns, it's only a matter of time until his earlier disaster repeats itself on a larger scale. So it  is not only rogue traders that create risk, but underlying government controls or lack thereof. The level of speculative trading in China driven by retail investors (or should that be punters?) funded by margin trading is, unless they are very, very careful, going to lead to inevitable volatility, and a repeat of the damage witnessed in 2008.

Finally Hedge Clippings can't resist mentioning something about this week's budget. It was certainly better than last year's, but we can't help feeling that it's really all about job protection - those of Treasurer Joe Hockey, and the Prime Minister, Tony Abbott. The real issue we see with the budget, was its lack of commitment to tackle major issues for the future. For example, consider the estimate that in 10 year's time the tax concessions on superannuation will cost the nation double that of the age pension - which the superannuation system was orginally designed to reduce.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Optimal Australia Absolute Trust Fund reported a net positive return in April of 1.96%, compared to the ASX200 Accumulation Index of -1.70%

The Bennelong Kardinia Absolute Return Fund fell 0.59% in April to bring the Fund's annual performance since inception to 13.08% compared to the ASX200 Accumulation benchmark's 5.61%.

Monash Absolute Investment Fund had a flat April (0.0%), while the Australian equity market had its second consecutive negative month (-1.70%).

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

We might apologize for being boring, but the budget shouldn't be!

Each Friday the Hedge Clippings team cast their collective minds over the economic activity of the previous seven days, taking note when we can of happenings relevant to the absolute return and hedge fund sector. Uppermost in our thinking is trying to remain relevant and informative while trying not to bore the socks off our readers, not to mention ourselves, at the same time.

You might think we shouldn't be so indulgent as to worry about whether we're the ones bored or not, but it does concern us. Given that there's been an unrelenting theme of QE, central bank intervention, and low and falling interest rates across financial markets for so long now, it's been difficult to avoid being boring, as we're sure you might have noticed.

The net result of the these conditions has been, as we've mentioned before, the rise of the TINA, or There Is No Alternative, investment strategy that has seen equity market valuations pushed and stretched to dangerous levels as noted this week by no less than US Fed head honcho, Janet Yellen.

It is ironic therefore that at a time when the RBA reduced rates by a further 25 bps to an unheralded 2%, 10 year bond yields both in Australia and overseas start to rise, and rise quite sharply, with the result that equity markets, and particularly the high yielding banks, retreated sharply.

For the record the ASX 200 Accumulation Index fell 1.7% in April (compared with early indications of equity-based hedge funds rising 0.52%) and has fallen a further 2.5% since, including the largest one-day fall for a couple of years.

Whether this was the start of a much anticipated pullback, or just a pause remains to be seen, but it was certainly an indication of what could, or should happen in response to rising bond yields.

And while on the subject of boring, PM Tony Abbott has promised Australia a boring budget next week. For his part it might be wishful thinking, hoping perhaps that the electoral response to Joe Hockey's second budget will be boring, unlike last year's. Unfortunately a boring budget is not what is required, and it is gratifying to see that there is an increasingly widespread opinion that long-term vision and strong management, rather than pandering to interest groups and personal political survival, are what's required.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Alpha Beta Asian Fund generated a return of -1.16% during March, to bring the Fund's annual return since inception to 6.77% p.a.

Signature Quantitative Fund 2.80% for March, to bring the annual performance since inception to 15.99%.

The KIS Asia Long Short Fund returned of2.59% during March, bringing the Fund's annual return since inception to 14.91% p.a

Supervised High Yield Fund rose 0.45% during March to bring the Fund's annual return since inception to 10.23%. In the same time frame the RBA Cash Rate returned 3.49%.

Chris
CEO,AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

23 out of 27 Economists can't be wrong - could they?

The Aussie dollar's brief resurgence above 80 US cents this week would not have pleased the RBA governor Glenn Stevens. Or maybe it would have pleased him, given that he will have one more justification to cut rates at the bank's next board meeting.

He is not alone in thinking that the A$ is too high, and it seems that 23 out of 27 economists surveyed by Bloomberg this week (that's an increase of one since the previous survey) are of the view that a 25 bps cut to just 2% is in store at 2:30 on Tuesday. The consensus is that the only thing preventing the rate cut is the red-hot property market, particularly in Sydney, where the median house price is now over $900,000.

That is over 12 times the annual average full time wage of $74,724 so no wonder there is concern over housing affordability. Granted there are regional differences both in property prices and wages, but housing prices in Sydney have risen 16% over the past 12 months to the point where just over 35% of a Sydneysider's income is spent on mortgage repayments.

Other statistics this week indicated that a significant proportion of the housing push, particularly in Sydney, is coming from overseas buyers, particularly from Asia. The reality of course is that overseas buyers have been pushing the price of real estate up in Australia, since the First Fleet landed in 1788 with only the occasional pause for a recession, and there hasn't been one of those for close to 20 years.

However it does mean that for a significant portion of the population the great Aussie dream of a house on a quarter acre block will remain just that - a dream.

While most of the focus on the effect of a rate cut next week will be on housing affordability and mortgage rates, spare a thought for the number of people dependent on term deposits for their income. As Philip Carden from the Supervised High Yield Fund pointed out this week, the current one-year bank term deposit is 2.65%, and one can safely assume that that will fall below 2.5% if or when the RBA moves. Meanwhile ten-year Australian Treasury Bonds are already yielding less than this at 2.25%.

With the current debate over superannuation and concerns about "wealthy" retirees with million-dollar lump-sum payouts, consider that the income on $1 million in the bank doesn't provide income equivalent to the aged pension.

Therein lies part of the Treasurer's challenge when he hands down his second budget in a couple of week's time. Joe Hockey and the government are between a rock and a hard place, albeit much of their own making given they failed to grasp the nettle this time last year.

Specific results received this week include the following MARCH PERFORMANCE UPDATES:

Allard Investment Fund increased 0.90% during March, to bring the Fund's last twelve month performance to 25.22%.

Over the quarter to the end of March, Cor Capital Fund returned 4.20%, bringing the Fund's 12-month return to 7.70%.

The Insync Global Titans Fund decreased 0.50% in March bringing the Fund's prior 12 month performance to 18.55%.

The Paragon Fund  returned 2.10% (ASX 200 Accum -0.09%). The Fund's annual return since inception has been 21.54% p.a. versus the Index's 11.95% p.a. 

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

Superannuation: Time to go back to basics?

It is a sad reality that from a great concept, Australia's superannuation system, much admired by many governments around the world, has become a dog's breakfast - complicated, messy and not really recognisable from its origins. And without going into graphic details of what happens to a dog's breakfast when it is repeatedly consumed, and then regurgitated - well, I think you understand the picture.

Our understanding of the original concept of superannuation was that the government of the day recognised that looking into the future, funding the ageing population was going to impose significant budgetary issues.

By forcing either employees or their employers to pay a proportion of all wages into a compulsory retirement scheme the intention was that, coupled with the magic of compounding returns, after 40 years a large proportion of the population would be self-sufficient in their retirement, thereby reducing the drain on the public purse.

Understanding that there are two sure ways to try to alter behaviour - generally known as the carrot or the stick approach - Keating's concept was quite simple: Legislate to enforce a basic level of compulsory contribution (the stick) and then provide attractive taxation benefits (the carrot) to encourage those able to do so to make additional contributions.

To gain acceptance, and to ensure both individuals and their employers could get used to the process, the Superannuation Guarantee Levy or SGL commenced at 3%, and has steadily risen since to 9.5%. Most economists understand that to be really effective the SGL should be 15%, but at least at 9.5% it is getting there.

So far so good.

Unfortunately for whatever reason successive governments have comprehensively tinkered around the edges, making the taxation rules, processes and conditions associated with superannuation unbelievably complicated. At the same time they have created an uneven playing field, making superannuation significantly more attractive for some in the community than others.

This is probably par for the course for all governments and bureaucrats, and it may well be far-fetched to think that this or any other government will return to the basic concepts while making superannuation simpler fairer and as a result more economical for both retirees and the country as a whole.

By all means provide the carrot of a concessional tax rate for super contributions, and to encourage people to make additional contributions, but either at the time of making a contribution or when eventually in retirement. However having a concessional tax rate when making the contribution and a zero tax rate in retirement seems unnecessarily generous.

Equally allowing retirees to take 100% of their superannuation as a lump sum on retirement, rather than as an annuity to replace or supplement the aged pension defies logic.

While Australia has a poor record when it comes to the complexity of its taxation system, it is disappointing that when introducing something as well-meaning and logical as self-funded retirement they didn't take the opportunity of making it both effective and simple. Added to the problem of complexity (as noted above)is the constant change introduced by successive governments, each in turn further complicating the system.

And in case you think this is just Hedge Clippings having a typical Friday afternoon whinge, here's a link to the Charter of Superannuation Adequacy and Sustainability and Counsellors Superannuation Custodians (itself a monumental mouthful) report to the government in 2013, Chapter 3, entitled Constant Change.

Specific results received this week include the following MARCH PERFORMANCE UPDATES:

The Aurora Fortitude Absolute Return Fund returned 0.55% to bring its annual performance since inception to 7.32%.

Avenir Value Fund rose 0.78% in a down equities market (-0.09%).

The Bennelong Kardinia Absolute Return Fund returned 1.24% bringing the Fund's annual performance since inception to 13.29% compared to the ASX200 Accumulation benchmark's 5.87%.

Morphic Global Opportunities Fund rose 1.61% in March as its benchmark (MSCI AC World Total Return in AUD) rose 0.87%, resulting in out-performance of 0.74%.

Totus Alpha Fund had a strong performance in March of 5.50%, compared to the ASX200 Accumulation Index of -0.09%.

Chris
CEO, AUSTRALIAN FUND MONITORS

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*estimated

Bond yields fall to all time lows - or less - on inflation expectations

This week saw the first instance of a negative interest rate bond issue by the Australian government. Now while the bond market in Australia is not as well understood or as large as it is overseas, and as such it didn't make the front pages of even the financial press, the event is pretty significant.

For the record the actual negative interest rate was -0.07%, so in actual terms it's pretty marginal, as was the size at $200m of the actual issuance. Equally the 10 year bond yield traded at an all time low yesterday of 2.27% per annum yesterday. However the reality is that some investors have bought Australian government bonds on which they will effectively PAY the government 0.07% per annum for the privilege. As the good doctor would once have said: "why is it so"?

Our understanding is threefold: firstly various investors and institutions in Australia are required to hold a portion of their assets in government bonds. In that event they have no choice, although they do have a choice of which issue to invest in.

Secondly, overseas investors believing that their currency (such as the Yen) might actually fall vs the A$ will be playing the currency trade.

Finally the fact that this issue attracts a negative interest rate is an indication that inflation, (currently 1.7% pa) going forward is expected to fall further, and remain below the RBA's official cash rate. This historically low inflation rate is a real concern for the government and the economy, even though it may be welcomed by sections of the community, simply because it indicates limited, or potentially zero (or worse) economic growth.

Which leads us to the government's more immediate issue, namely the forthcoming budget.

One somewhat tricky point for the government while trying to manage the economy is that they comprehensively fluffed last year's budget to the extent that various measures have yet to pass the Senate. So lopsided, and in our humble opinion, poorly devised and subsequently communicated was last year's budget that many of its key features have had to be abandoned, and in doing so any element of political capital the government might have had has now evaporated.

So just when the country is in desperate need of long-term thinking and budgetary reform, it is unlikely we are going to get it. Having just announced a tax White Paper the Prime Minister has already ruled out various options (including the abolition or scaling back of negative gearing) that might have been recommended simply because they would be politically unacceptable to the government's support base.

Equally it would appear that any change to the GST, whether by increasing the current rate from 10 to 15%, to bring it more in line with most other developed countries, or by broadening it to include the other half of the economy which is currently GST free, would seem to be a bridge too far for the government's current standing in the opinion polls. Hence the only real GST debate we are currently seeing is the squabbling between State premiers, which make them look much like siblings or cousins at the reading of great aunt Thelma's will.

As a result it looks like this year's budget will include the usual tinkering around the edges, some of which will be unpopular and some popular, but all with an eye on how many votes might be won or lost as a result. Sadly what we need is a strong and reforming government which can make the hard but necessary decisions to overcome the current budget woes and set the country on the course of a sustainable economic footing.

Specific results received this week include the following MARCH PERFORMANCE UPDATES:

The Bennelong Long Short Equity Fund returned 3.59%, to being the performance over the latest 3 months to 6.40%.

Laminar Credit Fund rose 0.54%, to bring the Fund's annual performance since inception to 19.33% pa.

The Monash Absolute Investment Fund returned 1.1% in March, when the Australian Equity Market fell slightly -0.09%.

QATO Capital Market Neutral Long/Short Fund rose 3.12%, bringing the Fund's performance for the last 6 months to 25.16%.

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

Absolute Return: Chasing Yield - high risk, but is there no alternative?

A recently published report from S&P Dow Jones comparing Index versus Active Funds gained (not surprisingly) some coverage this week, primarily as it showed that in the six months to December 2015 Active funds had underperformed Index funds (and therefore presumably the index itself). The S&P scorecard showed that 8 out of 10 Australian active funds had underperformed their benchmark in all the major sectors barring domestic small caps.

However Active funds come in all shapes and sizes, and AFM's figures for equity based Absolute Return funds for the 12 months to December 2014 show that 60% outperformed the ASX200 accumulation index. To be fair that percentage has dropped somewhat for the 12 months to March 2015, thanks largely to the market's return of almost 7% in February, taking the YTD return to 10.29%.

A swift response from Epoch Investment Partners ensued pointing out the distorting effect of QE which was creating a false investment environment, and that talented active "stock-picking" managers would prove their value again once QE had passed. Actually, QE has already finished in the US, although the effects are lasting longer than imagined, while in other parts of the world it is ongoing.

In Australia QE was avoided, probably in part thanks to the mining boom which most will have noticed is long gone, and now in bust mode, relatively speaking. However interest rates remain in a downward trajectory, with the economy appearing close to stagnation, with Sydney's property boom probably the only thing preventing the RBA from cutting rates a further 25 bps earlier this week.

However, investor's obsession with the yield play, described by Optimal Australia's George Colman in their most recent performance report as TINA, or "There Is No Alternative" is indicative of the distorting effect of the current interest rate environment, which is making it difficult, or at least expensive for long/short managers to either short poor stocks which are benefitting from the rising tide, or be comfortable holding good stocks at seemingly unattractive prices.

As many managers, including Optimal, are pointing out, this must all end in tears eventually, and even though portfolio insurance is a difficult and costly exercise, this is certainly no time to drop it. As an example, even though only 28% of results are to hand for March, equity based hedge funds returned 1.39% for the month, against the market's flat (-0.09%) return.

Specific results received this week include the following RECENT PERFORMANCE UPDATES:

Alpha Beta Asian Fund rose 0.45% to bring the Fund's return since inception to 21.40%.

The KIS Asia Long Short Fund was flat (0.09%) in February. Since inception the Fund's annual return was 14.61% p.a.

Chris
CEO, AUSTRALIAN FUND MONITORS

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