Market volatility - back with a vengeance!

Last week's Hedge Clippings briefly touched on market volatility (interestingly it was 19 October, the anniversary of the 1987 crash) and the risk of averages when grouping funds. Given the continuing volatility this week, and with the expectation of more to come, it's worth focusing on the best way to analyse a fund's downside risk.

There are a number of risk factors apart from volatility or standard deviation which are pretty well understood and known.  Basics such as maximum drawdown, % positive and negative months, worst month etc. are frequently used and quoted.

However a couple we look at that are neither well known, or it seems frequently quoted are Up Capture and Down Capture ratios. Put simply, a fund's up capture ratio over a specific time period (the longer the better) shows how much of the market's positive performance a fund "captures". And importantly given we're talking about volatile markets, the down capture ratio measures how much of the market's negative performance a fund captures.

The key to accurately measuring each is not to simply measure the average positive or negative performance of the fund vs. the market.  Instead, each is calculated by measuring the market's cumulative performance for all its positive or negative months, and then calculating the cumulative performance of the fund over those same months, and expressing that as a percentage, with a result of 100% meaning the fund tracks the index exactly.

For up capture, any number less than 100% means the fund underperforms in positive markets, and if the number is greater than  100%, the fund outperforms when the market is rising.

More importantly in the current environment, for down capture, a result less than 100% means the fund falls less than the market, while a negative number means the fund provides positive returns when the market falls.

Comparing and analysing funds is never easy, but by looking at the down capture ratios of different funds over various time periods will provide a useful guide when putting together a portfolio of funds.

Two important factors to remember of course are that the longer the track record of the fund, the more data points that are available to measure, and thus more instances of rising and falling markets - and secondly, that while a useful tool to understand a fund's performance, it is only past performance being measured.

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 1.66 respectively.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - September 2018 (pdf format)

BENNELONG TWENTY20 AUSTRALIAN EQUITIES FUND

Attached is our most recently updated Fund Review on the Bennelong Twenty20 Australian Equities Fund.

• The Bennelong Twenty20 Australian Equities Fund invests in ASX listed stocks, combining an indexed position in the Top 20 stocks with an actively managed portfolio of stocks outside the Top 20. Construction of the ex-top 20 portfolio is fundamental, bottom-up, core investment style, biased to quality stocks, with a structured risk management approach.

• Mark East, the Fund's Chief Investment Officer, and Keith Kwang, Director of Quantitative Research have over 50 years combined market experience. Bennelong Funds Management (BFM) provides the investment manager, Bennelong Australian Equity Partners (BAEP) with infrastructure, operational, compliance and distribution services.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - September 2018 (pdf format)

For a moment this week it looked as if investors were going to ignore the market volatility of the past week or so, but overnight the US market put paid to that.  However, it is more likely that the conditions underlying the volatility - including rising US 10 year bond rates, falling unemployment levels raising the potential for a breakout in wages fuelled inflation, and the outcome of the US/China trade war - aren't going to change in a hurry.

Overlay these conditions with a market until recently trading at all-time highs, driven by low rates, improving earnings and dominated by tech stocks with stretched valuations, tax cuts flowing through, and an increase in infrastructure spending which is likely to run for the next decade at least, and it becomes less a case of potential for volatility, as a certainty.

Thus with the ASX200's Accumulation Index recording a negative return of -1.26% in September, and in all likelihood worse than that once October is done and dusted, the outlook for the actively managed fund space is going to be varied. Whilst index funds and ETF's will bear the brunt of the negative performance, falling in line with the market, we are already seeing the divergent performance of active funds based on September's results.

The average reported September return of funds in AFM's database is -0.33% almost 1% better than the ASX200, with 70% outperforming the market, and 32% recording positive results. Averages can be misleading, as the range of September's returns to date varies from +9.85% to -12.09%, the latter due to the market's rout in India.

While averages can be misleading, we all use them. After all, the performance of the ASX200 is the weighted average of all 200 stocks. We have recently analysed a range of key performance numbers over a range of time frames, and after wading through all the numbers one of the most telling results was just that: Averages don't tell the full story.

For instance, over the past 10 years, average annualised performance based on a fund's year of inception (with one exception) has been gradually increasing since 2007, while increasing dramatically for funds launched in 2017 to well over 25%.

Allocating each fund into quintiles based on performance shows an even larger discrepancy. Meanwhile breaking down each fund's performance based on their track record - Year 1, Year 2, Year 3 etc, clearly shows funds perform best during their early years - particularly year 1.

This has long been accepted, although not always understood exactly why. It raises the paradox however that although funds perform better in their early years, research houses, consultants, dealer groups and platforms traditionally insist that a fund has at least a 3 year track record - and in some cases 5 - prior to investing in or recommending them.

Whatever conservative or risk-averse logic is involved, the investor misses out on the fund's first three years - and their best period of performance.

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 10.16% p.a. with a volatility of 6.89%, compared to the ASX200 Accumulation's return of 5.93% p.a. with a volatility of 13.29%.

• 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 - September 2018 (pdf format)