Fed backs off next rate rise

With negative interest rates ruling in many parts of Europe it is probably no surprise to many Fed watchers that the next rise has been kicked further down the track. And as much as the Fed would like the economy to be performing sufficiently well to warrant a further 0.25% rise from historically low levels, the reality is that it is not much more than tepid economic recovery at best. So the "no" decision probably came as no great surprise.

Equity markets liked the news however, but no doubt rallied broadly on a relative yield basis. One has to wonder however, with more debt out in the market than there was pre GFC, what is going to happen come roll-over time if rates ever get back up towards even mid-single digits? No doubt the Fed is hoping there will be sufficient strength in the economy to sustain debt servicing levels, but the way it's looking the world seems well and truly locked in to a low inflation-low growth-low rates scenario for some time to come.

So in spite of the stability of that 3 way "low" scenario, volatility is likely to continue as central banks simply don't have any levers left to pull if they need to.

Meanwhile our attention was drawn to a headline in today's Financial Times titled "Hedge fund closures back to crisis highs" as some of the biggest names in the industry returned funds to their investors after suffering losses. The difference is that this time around the closures are voluntary, not forced on the managers by liquidity mis-matches and (panic) redemptions, and much of the returned capital will be re-allocated into other funds. Certainly some of the largest global funds, with many billions invested (often the manager's own capital) have had disappointing returns, but returning investor's capital because the manager sees that the time is not right for their strategy is a long cry from the chaos of 2008.

Performance updates and reviews received this over the past week included the following PERFORMANCE UPDATES:

Against a backdrop of further volatility in commodities and general de-risking in February the ASX200 Accumulation Index fell 1.76%  to take 12 month performance to -13.73% . The S&P500 fell 0.13% for the month and -6.19% over 12 months. With a sharp "beta" rally towards the end of the month some funds found the going tough. Meanwhile:

Clarity Multi Strategy Fund rose 6.04%, outperforming the AFM Global Equity Index which fell 1.45%, by 7.49%. Over the past 12 months the fund has returned 26.79%.

Bennelong Kardinia Absolute Return Fund fell 1.78% in February taking 12 month performance to 0.59%, outperforming the index by over 14%. Since inception in 2006 the Fund has an annualised return of 11.91% p.a. with Standard Deviation of 7.36% for a Sharpe ratio of 1.02.

Meme Australian Share Fund returned -1.71% for February bringing the Fund's 24-months performance to 36.16%. 

The Pengana Global Small Companies Fund returned -0.33% for the month of February, compared to a -0.44% return for the MSCI AC World SMID Cap Index.

The Paragon Fund returned -5.20% for February, brining the Fund's annual return since inception to 14.73% p.a. and a Sharpe ratio of 1.05

Signature Quantitative Fund fell -2.50% in February to take latest 24-month return to 12.47%.

The APN Asian REIT Fund rose 6.53% for February. Since inception the Fund has an annualised return of 17.42% p.a.

Totus Alpha Fund returned -11.27% for the month of February. The Fund has returned +31.26% over the past 12 months.

FUND REVIEWS released this week: Optimal Australia Absolute Trust; Bennelong Long Short Equity Fund; Morphic Global Opportunities Fund; 

And on that note, have a great week-end.

Regards,

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.

Hedge funds aren't nasty, they're sensible!

Certain sections of the media have been getting excited about the prospect of those 'nasty' hedge funds with short positions losing money thanks to a "short squeeze" rally in the price of the banks and Fortescue Metals Group (FMG). Of course there are some who think (Gerry Harvey for instance, who has always been ready and willing to talk his own book) that all short sellers should "be put up against a wall and shot" (his words, not mine). Others seem to believe that the only reason share prices fall is because of short selling by hedge funds.

Let's put this in perspective: Firstly the banks:

The price of CBA fell from $95 twelve months ago to $72 during September, following which there was a rally back up to $85 by the end of the year. Then a further fall to $72 followed towards the end of February, since which time it rallied back towards $75.

So apart from the fact that most of the downward pressure on CBA has come from "long" investors exiting or reducing their holdings because it was overpriced, any smart hedge fund should have been "short" at prices of over $90, and would have been more than happy to exit  those positions between $70 and $75.

Only about  3% of the total big four banks' stock is "borrowed", which includes borrowing by traders who need to cover their option positions. While the banking sector may be large, that's not enough to have enabled short sellers to have cut the price by 20%. The reality was that at $95 the CBA was overpriced and conditions for banks were, as George Colman from Optimal Australia said at the time, "as good as they get", and the downside was inevitable.

Let's take a look at Fortescue:

In June 2008 FMG was trading at close to $11, riding high on the back of iron ore prices of around $140 a tonne. By January 2009 the price at fallen to $1.94 before rallying over two years to $6.65 in January 2011, before falling to $1.60 in January 2016.

FMG's share price might well have bounced $1.00 from that low, but that completely ignores the fact that they had fallen from $11 to $1.60 during their volatile journey.

It's not only short sellers that push the price of stocks down. It is the outlook for the company's earnings and profitability. Long only investors reduce their holdings, and just as importantly buyers pull bids back because there is limited value, or the stock is overvalued.

Message: Don't blame short sellers for the company's prospects and share price. Having said that manipulation of news and research (whether positive or negative) should not be allowed to benefit the peddlers of such information.

Performance updates and reviews received this over the past week included the following PERFORMANCE UPDATES:

Against a backdrop of further volatility in commodities and general de-risking in February the ASX200 Accumulation Index fell 1.76%. The S&P500 fell and the Asia Pacific ex Japan Index fell 0.63%. Meanwhile:

The Optimal Australia Absolute Trust recorded a positive 0.80% return, in another tough month to outperform by 2.56%.

The Bennelong Long Short Equity Fund rose 2.37%, to outperform by 4.13%.

KIS Asia Long Short Fund returned a positive 0.67% for the month, to give an out-performance of 1.30% against the Asia Pacific ex Japan index.

The Alexander Credit Opportunities Fund returned +0.55% for the month of February.

Morphic Global Opportunities Fund fell 2.24% in February, underperforming its benchmark (MSCI AC World Total Return in Australian Dollars), which fell 1.65%, by 0.59%.

The Newgate Real Estate and Infrastructure Fund returned -0.24% for the month of January.

FUND REVIEWS released this week: Insync Global Titans Fund  

And on that note, have a great week-end.

Regards,

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.

We're searching for a confident economist, but can't find one!

This week Hedge Clippings seemed to be in the company of economists and other experts more than normal. It's not that we have a habit of avoiding them, even if we wanted to, it was just the way the week unfolded. And having paid attention to what they were variously either saying and putting up on the screen, you'd have to say it was a pretty sobering experience, particularly in a week when the once big Australian, BHP, cut their dividend by 75%.

Now trying to distil close to four hours of economic opinion and expertise into a few paragraphs is not the easiest thing to do - so much so that I'm just going to jot a few dot points down and hope they're the right ones. Here goes, and no doubt I will be reminded either that I got it wrong, or missed other more pertinent points:

• Demographics across the globe are changing, and causing some major issues. More people are earning, but not much, and therefore not spending or paying much tax, and more people are getting older and relying on welfare of one sort or another.
• China is in serious transition from their infrastructure boom of the past decade or so, to a consumer and consumption and service based economy. Transitional economies (Australia's included) are always difficult.
• Interest rates are at all time lows, and either negligible or negative. This leaves central banks with no room to move, and no levers left to pull.
• Over supply and inflation. As one who grew up, or at least experienced the '70's, '80's and '90's, it is almost unthinkable that rates would be close to zero, and deflation is the problem, rather than inflation.
• Profit share has overcome labour - and there's signs of political pushback as evidenced by Donald Trump's appeal in the US.

Amongst all this returns of double digits from traditional portfolios are going to be hard to find. Mid-single figures possibly, but that's not attractive if it comes with anything like equity volatility. Choosing the correct, and diversification of, asset class is going to be vital.

And in case you think we're not grateful for their views, we were, and are. Thanks to Charlie Jamieson of JCB Bonds, Saul Eslake, Mark Burgess (ex Future Fund), Daniel Blake of Morgan Stanley, Ben Silluzio of QATO Capital, and Deloitte for their hospitality.

Performance updates and reviews received this over the past couple of weeks included the following PERFORMANCE UPDATES:

For January, the Alexander Credit Opportunities Fund rose 0.43%, to bring 12 month performance to +7.08%.

The QATO Capital Market Neutral Long/Short Fund returned a solid +4.90% versus the S&P/ASX-100's fall of -5.48%; an outperformance of +10.38%.

Pengana Absolute Return Asia Pacific Fund finished -2.0% for the month, compared to the HFR Event Driven Index which closed -3.8%. Asia Pacific markets sold off sharply -8.0%, with volatility measured by VIX hitting a high of 30.

Totus Alpha Fund rose 0.67% for the month of January, compared to the ASX 200 Accumulation Index that fell 5.48%, an outperformance of 6.15%.

The NWQ Fiduciary Fund returned -1.62% for the month of January and has returned +14.06% over the last 12 months.

Signature Quantitative Fund returned -0.6% for the month of January, compared to the S&P/ASX 200 Accumulation Index's return of -5.5%, an outperformance of 6.08%.

APN AREIT Fund rose 0.55% for the month of January to bring annualised return since inception to 17.60% p.a.

Supervised High Yield Fund decreased by 0.51% for the month of January, to bring annualised performance since inception to 9.47% p.a.

FUND REVIEWS released this week: Meme Australian Share Fund; APN Asian REIT Fund; Morphic Global Opportunities Fund; Bennelong Kardinia Absolute Return Fund; Optimal Australia Absolute Trust; QATO Capital Market Neutral Long/Short Fund; Pengana Absolute Return Asia Pacific Fund; Totus Alpha Fund 

And on that sobering note, have a great week-end.

Regards,

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.

In the race of life, always back self-interest... at least you know it's trying

Paul Keating once used this quote, and reviewing the resistance from a range of self interested parties, (including a bunch of government back benchers) to an increase in the GST having any part in the GBT (Great Tax Debate), it seems self-interest, rather than the longer term interest of Australia's budgetary and fiscal future, is alive and well. At least we now know three things:

1. Trying to sell a tax increase - sorry package, whether necessary, logical, sensible or otherwise, shortly before an election is not possible, and,
2. If nothing else, Wee Willie Shorten can run a great scare campaign, even if he has to deal leniently with the truth to do so, and;
3. The Prime minister has shown himself to be ultra-pragmatic in understanding that there's no point in flogging a dead horse in the face of said scare campaign if it's going to lead to defeat in the media, or worse still, at the polls.

In amongst all the rhetoric and rubbish spoken was someone on the ABC claiming, and being allowed to get away with it, that a pensioner spending his or her $30,000 a year will pay as much extra GST on that as Jamie Packer will on his $30,000 spend. Quietly ignoring of course that young Jamie will go through his $30,000 somewhat more quickly or more often than once a year.

Next was the cash economy, be it from the local cafe, tradesman, cleaner or whatever. While cash payments avoid income tax, it is presumed they are spent in the real economy and at least taxed. We could go on, but what's the point, the subject is dead and buried. Well done self-interest!

Now to performance and the markets which are being subject to increasing volatility, making it difficult for the average investor to do anything other than hang on, or stay on the sidelines. Even the experts are finding the going tough, although based on the selection of results below they're still proving more than capable of protecting their investors' capital to a large degree. We have about 50% of January results in to date, with the average of all funds -1.85% against the ASX200's -5.48%. Over the 12 months to 31 January the outperformance is +12%.

As with all bear markets and negative volatility the selling pressure tends to accelerate as support levels and confidence crumbles, and the weight of money that has flowed into index and mutual funds, (here and overseas over the past 3 years) and is now flowing out equally quickly is not helping the market.

On the subject of the economy AFM is pleased to be offer subscribers and readers of Hedge Clippings an opportunity to join Jamieson Coote Bonds' Charlie Jamieson, in conjunction with Deloitte to hear the combined thoughts of noted economist Saul Eslake, and the ex-head of the Future Fund, Mark Burgess, at a breakfast presentation in Sydney on 25th February. Seats are strictly limited, so please respond directly to this link. 

Performance updates and reviews received this over the past couple of weeks included the following PERFORMANCE UPDATES:

For January, the Bennelong Long Short Equity Fund returned -0.29% compared to the ASX 200 Total Return Index which fell -5.5%.

The Jamieson Coote Bonds Active Fund rose 1.39% for the month of January 2016.

Meme Australian Share Fund returned -4.89% for the month of January, outperforming by +0.59% the ASX200 Accumulation Index's return of -5.48%.

The Paragon Fund returned -0.5% for the month of January, outperforming the ASX 200 Total Return Index which returned -5.48%, by 5.98%.

Morphic Global Opportunities Fund fell 1.98% in January, outperforming its benchmark (MSCI AC World Total Return in Australian Dollars), which fell 3.35%, by 1.36%.

The APN Asian REIT Fund rose 1.95% for January. Since inception, the Fund has an annualised return of 16.15% p.a.

Bennelong Kardinia Absolute Return Fund Fund fell 3.42% in January. Since inception, the Fund has an annualised return of 12.22% p.a.

Optimal Australia Absolute Trust recorded a flat return in January, against a 5.48% fall in the ASX 200 Total Return Index.

FUND REVIEWS released this week: Jamieson Coote Bonds Active Fund; Bennelong Long Short Equity Fund; 

And on that note we trust you have a happy and safe week-end - and be good to each other this Sunday on Valentine's Day!

Regards,

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.

Welcome back - but not to a great start to the New Year!

Not a great start to the New Year is probably an understatement in anyone's language. Whether it is equity prices across the globe, commodity prices, a refugee crisis in Europe threatening widespread economic, security and social problems, or the Chinese authorities hamfisted approach to stablising markets, the news has been dismal to say the least - unless you're a motorist filling the car at a nearby petrol station, or taking advantage of lower airline prices.

At the current time the ASX200 is down around 5.5% since the start of the year, for a fall of around 12.5% over the past 12 months, having at one stage during the month looked even worse. Ugly to say the least, and while not wishing to forcast more gloom and doom, it does seem that volatility will remain entrenched across the globe for some time to come. To what extent the US rate rise late last year has had anything to do with equity market weakness in difficult to fathom given it has been clouded, or at least overshadowed by the exteme volatility and weakness in Chinese markets.

So if we can't (or don't want to) forcast the future beyond the obvious, let's look back at the previous year, as we usually do at this time: Over the 12 months to December 2015 the ASX200 absolute return struggled to gain 2.56%, while excluding dividends  the ASX200 recorded a loss of -2.13%. Probably the only reason it performed as well as it did was the unquenchable thirst for yield that those two statistics indicate.

Over the other side of the Pacific the S&P500 fell -1.58% or on an accumulation basis it rose a paltry 1.38%.

Not unsurpisingly the Equity based hedge and absolute return fund sector out-performed underlying markets significantly - with the average performance of all funds in AFM's database (unweighted for size) up 12.49%. Non equity funds, including credit, fixed income, commodites and FX for example, fared less well, but still managed a return of just over 4% for the year. Almost 80% of all funds - equity and non equity - outperformed the ASX200, and only 12% finished the year in negative territory. 

As usual the spread of performances was dramatic, and after stripping out the top and bottom 1% of funds, ranged from -10% to +55%. From a strategy perspective equity based funds such as Market Neutral (+14.82%), Active Long Only (+14.2%), Long/Short (+13.22%), and 130/30 (+10.34%) all performed well, while at the other end of the scale, only two strategies, Commodities/CTA and Managed Futures, averaged negative returns.

Some highlights are shown below, or for full details follow the link to www.fundmonitors.com 

Performance updates and reviews received this over the past couple of weeks included the following PERFORMANCE UPDATES:

Bennelong Long Short Equity Fund rose 6.22% in December, to bring latest 12-month return to 37.14%.

For the month of December, the Meme Australian Share Fund gained 4.40% compared to the ASX200 Accumulation Index's return of 2.73%, an outperformance of 1.67%.

Optimal Australia Absolute Trust recorded net return of -0.1% to bring the year 2015's return to +8.05%.

The Paragon Fund returned 0.3% for the month of December, to take latest 12 month return to 16.44%.

Bennelong Kardinia Absolute Return Fund rose 1.74% in December, to bring annualised performance since inception 12.74% p.a.

Totus Alpha Fund rose 4.5% net of fees in December taking the latest 12 month return to 53.40%.

NWQ Fiduciary Fund returned +2.22% for the month of December, to bring latest 12 month return to 17.18%.

Pengana Absolute Return Asia Pacific Fund rose 0.72% for the month, outperforming the HFR Event Driven Index which closed down -0.9%, by 1.62%.

Signature Quantitative Fund rose 2.50% for the month of December, to bring annualised performance since inception to 10.40% p.a.

Morphic Global Opportunities Fund returned -2.48% in December to bring latest 12 month return to 9.08%.

APN Asian REIT Fund returned -0.48% in December. Since inception, the Fund has an annualised return of 15.97% p.a.

Freehold Absolute Return Fund  delivered a positive 1.95% for the month of December.

Jamieson Coote Bonds Active Fund rose 0.25% in December.

APN AREIT Fund  rose 4.67% in December to bring annualised return since inception to 17.73% p.a.

Laminar Credit Opportunities Fund returned +0.66% for the month of December.

Qato Capital Market Neutral Long/Short Fund rose 2.70%, compared to the S&P/ASX 100 Price Index, which returned 2.40%.

Supervised High Yield Fund produced a return of +0.37% for the month of December, to bring annualised performance since inception to 9.68% p.a.

Insync Global Titans Fund returned -1.90% for the month of December, to take the latest 24 months to 18.72%.

KIS Asia Long Short Fund rose 2.90% for December, outperforming the AFM Asia Pacific ex-Japan Index by 4.32%

FUND REVIEWS released this week: Meme Australian Share Fund; Bennelong Long Short Equity Fund; Optimal Australia Absolute Trust; Bennelong Kardinia Absolute Return Fund; Totus Alpha Fund;  Morphic Global Opportunities Fund; Pengana Absolute Return Asia Pacific Fund; APN Asian REIT Fund

And on that happy note it's good to be back, and as always I trust you have a safe and enjoyable week-end.

Regards,

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.

Are we turning Japanese?

The experts are telling us that we are facing the first US rate rise in nearly seven years. However it is worth remembering we've been here before, with expectations for a Fed tightening having been on the cards for at least the past 18 months. Each time they've pulled back from the brink, either because the market reaction was so savage, or a more recent statistic or world event cut them off at the pass.

So we would have to ask the question, will it be any different this time around? And if it is, what's in store beyond the first upward move, considering that interest rate movements rarely, if ever, occur in isolation?

The reality is that the world's economy is in a very different place, and what might have occurred in the past is not occurring now. Maybe we're fixated by the recent past, rather than the distant, or the reality of the present, but the feeling is that as and when US rates do start to climb, they will struggle to get far beyond 1% in the foreseeable future.

Now one percent might not seem much, but given there's been so much debate and consternation about the first 0.25% (or maybe it will only be 0.125%) rise, one percent represents at least four rate rises. Could it be that the Japanese experience of the past 20 years is going to be reflected across the Pacific? 

Japan has effectively had a debt overhang, having never cleared their debts of the '80's. Allied with a demographic problem, Japan has struggled to record any meaningful growth since the early 1990's. The US may be different, but is the world's economy facing the same future as Japan, and are we all turning Japanese as a result.

Performance updates and reviews received this week included the following PERFORMANCE UPDATES:

APN AREIT Fund rose 4.43% in October to bring annualised return since inception to 17.90% p.a.

Insync Global Titans Fund rose 3.5% in October, to take their 12 month return to 22.02%

In October, KIS Asia Long Short Fund rose 2.50%, to bring the Fund's annualised return since inception 15.16%.

Freehold Absolute Return Fund delivered a positive 1.29% for the month of October, to take their 24 month return to 26.97%.

The Supervised High Yield Fund produced a return of +0.54% for the month of October, to bring annualised performance since inception to 9.87% p.a.

FUND REVIEWS released this week:Pengana Absolute Return Asia Pacific Fund; Totus Alpha Fund; APN Asian REIT Fund;

And on that note, I trust you have a safe and enjoyable week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Is the Hedge Fund Fee Frenzy a Furphy?

A cursory glance at the Index table on www.fundmonitors.com gives a stark reminder that while the fees charged by hedge and absolute return funds might be high compared with their "long only" counterparts, and higher again still than the increasingly popular ETF sector, you only get what you pay for.

YTD to the end of October equity based funds in AFM's database have returned 10.66% after all fees, against the ASX200 Accumulation Index (AI) which has returned a meagre 0.53%, and 12.39% over 12 months against a fall of 0.74% for the ASX200 (AI). So while it is easy for the detractors of hedge funds due to their higher fees, and performance fees in particular, when calculating the total cost of those fees to the end investor, the choice would seem pretty simple: Either pay for performance, or pay the price.

Certainly the performance of different funds varies, which is where research, and the ability of the underlying manager comes into play, but 80% of funds have outperformed the ASX200 YTD, and over 12 months that climbs to 83%. It would seem on the surface that the worse the market does, the better hedge funds do by comparison.

Putting aside individual skill for a moment (which we generally do not advise) the reasons behind the out-performance seems pretty obvious. The ability of a fund with a flexible investment mandate, including the ability to short sell, move to cash, or protect investors' capital using risk averse option strategies, provide a clear advantage over those funds which are forced to remain in the market come what may (ETF's), or have limited flexibility in overall stock, sector or asset allocation (long only, index aware).

Figures in today's AFR showed the rise of allocations to ETF's in particular, but why an investor, or their advisor would choose to do so escapes me. Sure the fees are minimal, and certainly they get market performance, but that's not much benefit when the market is going nowhere - or worse.

Price isn't everything: Quality and performance is, otherwise we'd all be eating hamburgers and pizza, and drinking vino collapso out of a cardboard box. So before making a decision based on the cost of an investment product, consider the value of the investment, risk of capital loss, and performance in both positive and negative markets.

FUND REVIEWS released this week: Morphic Global Opportunities Fund; Bennelong Kardinia Absolute Return Fund; Jamieson Coote Bonds Active Fund;  Meme Australian Share Fund; Bennelong Long Short Equity Fund

And on that note, I trust you have a safe and enjoyable week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Title: GST reform firmly and (finally) on the agenda. What's next?

This week it seems the GST hit the press (and hopefully not the fan) in no uncertain terms. Regular readers of "Hedge Clippings" might recall that an increase (and broadening) of the GST has been one of our hobby horses since before Joe Hockey's first budget, so we'd like to think someone has at last been listening, but we might be deluding ourselves on that count. In any event now it is on the front pages it is probably time for us to move on, and leave it to Malcolm Turnbull and Scott Morrison to battle it out with Bill Shorten. As unfair a match as that might be, we will all be heartily sick of the argument by the time of the next election.

So while reform of taxation is on the table, and reform of superannuation concessions a part of that, it is worth re-visiting the argument for tying Australia's super retirement pool to the need for increased spending on infrastructure. Taking some basic figures, the total value of Superannuation assets as at the end of June was just over $2 trillion. Research from Deloitte estimates that this will reach $7.6 trillion by 2033.

The taxation of treatment of superannuation has always been generous, partly as an incentive to encourage its initial adoption, and partly as a gift from John Howard and Peter Costello to reward the faithful along the way. There's little doubt this generosity will come under pressure in any taxation review, but the government could introduce a part carrot/part stick approach to encourage/enforce a slice of all superannuation accounts to invest in the currently underfunded infrastructure sector.

By setting a minimum percentage of all super balances (say 10%) to be invested in infrastructure bonds, with a low but steady return (say CPI plus 3-5%), with an appropriate taxation incentive for doing so, two objectives might be achieved at once. At 10% of all balances it would provide $200 billion at current levels, increasing to $760 billion by 2033. In reality at those levels there would be a shortage of projects by that time, but there could be worse problems to have.

Airports, roads, rail, water and power projects all come to mind. All it takes will be some vision, then political commitment, and finally electoral acceptance. Hopefully we now have the prospect of enough of all three to generate the debate. 

FUND REVIEWS released this week: Insync Global Titans Fund; Supervised High Yield Fund

Finally we hope you enjoyed this week's Melbourne Cup, and congratulations to the first winning female jockey in the Cup's history. Now for something completely different, this news item regarding the obedient, but not too quick on his feet, bank robber in the USA.

And on that note, I trust you have a safe and enjoyable week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Two sides of the confidence coin

There's little doubt that business conditions are not getting any easier based on a number of results and guidances released this week. The share price of electronics retailer Dick Smith has been savaged following an earnings downgrade; Woolworths continues to struggle to return to the glory days of their dominance over Coles, as well as having to contend with the rise of Aldi; and National Australia Bank's margins in the business loan division appear to be declining sharply.

In spite of this business confidence, based on the NAB's monthly survey of around 350 small, medium and large Australian companies, increased to 5 in September from a score of 1 in August, not-withstanding it remains a long way south of the all-time high of 21 in May 2002, but also well north of the all-time low of -31 in January 2009 during the hiatus of the GFC.

To what extent the rise in business confidence is a result of the change in Prime Minister will no doubt depend on one's own political view, but anecdotal evidence would suggest that the two are strongly correlated. In discussions over the past couple of weeks with a variety of fund managers amongst others, the majority of whom one would safely assume to be variously to the right of centre, the mood appears to be universally positive.

To what extent one person can change the Country's outlook, and even more importantly, to what extent that change will affect the eventual outcome, we will have to wait and see. The pertinent point is that even rusted on Liberal voters were deeply concerned with the direction (or should that just be the diction) of the previous leadership, and it now appears that clear confidence in leadership, and clear direction, might be able to overcome difficult economic conditions.

Given that this week-end we will see the Wallabies in the final of the RWC, when just over 12 months ago they were a leaderless, or badly led rabble, and more generally tagged as the "Woefull Wallabies" there's a great message here. Michael Cheika has shown that properly motivated, the same players playing up at the back of the bus can respond to difficult times, and through hard work and plenty of grunt, turn a potential disaster into the possibility of taking the prize.

Irrespective of the outcome of this week-end's final, pride will have been restored both on and off the paddock, win, lose, or heaven help us, draw.

FUND REVIEWS released this week: Morphic Global Opportunities Fund; Pengana Absolute Return Asia Pacific Fund; APN Asian REIT Fund

And on that note, Go! Wallabies, Go! so that at least on this side of the Tasman we can enjoy the week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

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FSI endorsed, Mortgage rates rise, and the GFC rolls on... and on.

Although it can't be pinned onto the new government, the fact that nearly all the recommendations of David Murray's Financial System Inquiry were endorsed this week makes a welcome change from the treatment previous administrations gave to similar inquiries. Take for instance the Henry Tax Review which amazingly excluded the GST in the terms of reference in the first place (Rudd), and then cherry picked those they wanted, or the 2009 Johnston enquiry which, where accepted, took six years to implement.

What is encouraging is that although it will be some time for all the FSI's outcomes to come to pass beforebeing fully implemented, some decisions, such as the increase in bank capital, have flowed through already. Banks had been raising additional capital in anticipation (including as a result of the Basle lll requirements out of Europe) and may need to raise more again in the future, but the immediate effect was an increase in mortgage rates.

It could be argued that having been protected at no cost to themselves during the GFC by the government, the banks should be wearing the costs of increased capital themselves. Be that as it may, it is indicative that the after-shocks, or effects of the GFC continue, as shown by the increase in mortgage rates this week independently of the RBA, which in turn is now being tipped to lower official rates to compensate.

We are not suggesting for one moment that the requirement for the banks to hold more capital is a bad thing as it adds stability to the system in the event of future issues, including a potential down-turn in the property market which already seems to be rearing its head. On that note one of Murray's few recommendations not to be approved was a ban on borrowing by SMSF's for property, and one has to wonder why this is so.

So now we look forward to the outcome from the current thoughts on tax reviews which Malcolm Turnbull has sent back to the bureaucrats for a re-work. While it may take a while, one has to believe that there's a greater conviction for change from this PM and his ministers than we have seen for some considerable time.

And about time too!

FUND REVIEWS released this week:Aurora Foritude Absolute Return Fund; Totus Alpha Fund;Bennelong Long Short Equity Fund; QATO Capital Market Neutral Long/Short Fund

And on that note, enjoy the week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook