This being the last edition of Hedge Clippings prior to the release of the new Treasurer Joe Hockey's first budget next Tuesday, it stands to reason that we may as well join the throng in both guessing what it might contain, and suggesting what it should, or could.

It goes without saying of course that whatever un-pleasantries the budget does contain will not be the fault of the Treasurer, but that of his predecessor from the opposite side of politics. And being his and this government's first budget it also goes without saying that they'll try to get the worst news out of the way as early as possible.

There seems little doubt that the government is intent on making some significant changes on both the income and expenditure side of the ledger, and the convenient timing of the release of the Commission of Audit Report containing 86 significant and in many cases electorally untenable proposals, will enable them to do so if they wish. However there is also a feeling that much of the measures mooted over the past couple of weeks may well just be a case of softening us up so that the news on the night elicits a collective sigh of relief.

There is also little doubt that both the revenue and expenditure lines, or the concepts and logic behind them, are in serious need of a shakeup. Welfare and government assistance should be aimed at the genuinely needy, not the greedy. Unfortunately over the past 20 to 30 years Australia has developed a welfare habit which it is struggling to break. At the same time demographic changes over the next 20 to 30 years will seriously increase government expenditure, particularly in the health and aged care sectors.

One political sacred cow which may, or possibly should, be considered for the chopping block is negative gearing on residential property, particularly given the housing affordability issues currently facing first-time buyers. The Australian superannuation system would also appear to be in the spotlight. While terrific conceptually, it has evolved over the past 20 years to be unwieldy, overly complicated, and as David Murray indicated yesterday in some preliminary comments on his Financial Services Inquiry, is excessively focused on the 40+ year accumulation phase, and not sufficiently on the subsequent 20 to 30+ year retirement phase.

On the income side the complexity of the taxation system, including superannuation, is extraordinary, and only increasing. One would have thought that increasing the GST would be the logical solution, given that Australia's 10% consumption tax rate is way below, and in some cases less than half the prevailing rate in many other developed economies. For some reason that appears not to be on the agenda.

All this is well and good, and I fear I'm likely to be disappointed on Tuesday. The big risk to the economy is not so much that the budget fails to fix the deficit, but that the increased taxation and expenditure cuts are so severe they damage the consumer confidence which is the lifeblood of any economy.

And the big challenge for the Prime Minister and the government is how to convince the electorate that a great big new levy is not in fact a great big new tax.

Specific PERFORMANCE RESULTS received this week include the following:

The Intelligent Investor Value Fund recorded a strong 24.63% over the previous twelve months as compared to the ASX 200 Accum return of 13.46%. 

KIS Asia Long Short Fund returned 0.70% during March with an annualised volatility of 2.67% (Index 11.03%).

The Laminar Credit Opportunities Fund delivered 0.62% during March and 11.52% for the year, with a low volatility of 2.72%.

Pengana Asia Special Events (Onshore) Fund returned 9.27% for the year with an annualised volatility of 3.22% and Sharpe ratio of 1.98.

The Cor Capital Fund returned -1.34% during March and 2.24% for the prior 12 months.

FUND REVIEWS updated this week included:

Bennelong Kardinia Absolute Return Fund - characterised by steady returns and very low risk. The Fund returned 0.87% during March and 13.57% p.a since inception (May 2006).

The Optimal Australia Absolute Trust - very low risk profile with an annualised standard deviation of 3.53% (Index 14.95%) and a Sharpe Ratio since inception of 1.73.

FUTURE EVENTS

19-20 May in Sydney, IBR Conferences presents the Unit Pricing Forum. This is a 2 days forum exploring Unit Pricing operational challenges for 2014 & beyond. Topics include new APRA reporting requirements & implementation; impacts on unit pricing reporting and more.

Wednesday 21 May in Sydney: The Hedge Fund Association, in conjunction with Pricewaterhouse Coopers, is pleased to present an update on key regulatory matters currently affecting the alternative investment industry. A panel of Pricewaterhouse Coopers senior executives will provide a detailed overview of topics, as well as allowing for questions and commentary from attendees.

28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, a fascinating look at the Honey Badger and the things that this one will do to escape his enclosure. Having watched it, we are wondering why they don't just let him go.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

This weekend one of our staff members is participating in the Sutherland Shire 24 hour Relay for Life and will be walking a marathon to raise money for her team (Nety Girls) and in memory of family members who have died from cancer. Click here to make a donation or watch a short video to see what all the fuss is about.

1 in 2 Australians will be diagnosed with cancer before the age of 85. All money raised through Relay For Life makes a difference in helping fund Cancer Council's critical research, prevention, education and support services. Relay For Life is a fun, outdoor overnight fundraising event that brings communities together to celebrate and remember the lives of those who have battled cancer. Teams take turns to walk or run around a track whilst enjoying entertainment, activities and heartfelt ceremonies.

This week I read an interview with Timothy Spangler, the US author of a book called "One Step Ahead: Private Equity and Hedge Funds After the Global Financial Crisis," in which he provided some interesting insights into the evolution of the managed funds sector, albeit with a very US centric slant and a focus on hedge funds.

To set the record straight I haven't yet read the book, (Amazon aren't that quick) but the interview covered a range of issues including the negative perception of hedge funds in the media, and thus by the general public; the lifting of restrictions in the US on advertising hedge funds to retail investors; and the difference between the asset managers who see their challenge as building assets, and those who see it as the single minded pursuit of performance.

Elsewhere the article covered the perennial debate between Long Only Benchmark Aware Investing vs. Absolute Returns. Of greater interest however was his view that hedge funds act as an effective magnet for talent, and as such their attraction to certain individuals from the long only, asset gathering side of the industry.

Maybe this struck a chord because this week Sean Webster and I had the opportunity to interview Simon Shields and Shane Fitzgerald from Monash Investors, two highly qualified and successful professionals who after 20+ years in the industry, and each at the top of their tree, took the bold step in mid-2012 of launching their own fund.

What intrigued us was why would two highly paid, award-winning, senior fund managers with excellent track records working for major institutions such as UBS, BT and Colonial First State step outside their comfort zone, both emotionally, professionally, and financially, to launch a long short start-up, and try to raise capital without the infrastructure and support provided at the big end of town?

The first response was probably predictable: They wanted to control their own destiny and make their own decisions away from their previous environments. Underlying this presumably was that as they progressed up the corporate ladder their roles became less focused on investment management, and more focused on internal corporate management.

Secondly, and equally importantly, they believed that long only management was no longer at the cutting edge of the industry, and that absolute return strategies provided greater flexibility to adjust investment styles to suit changes in the underlying market. They saw the ability to invest with true conviction, including the ability to short if necessary, and without the limitations of being fully invested in the market at all times, as being a more rewarding approach.

From a performance perspective it is early days yet for their Monash Absolute Investment Fund. After 21 months their annualised return is in excess of 26% with volatility of 7.53% and Sharpe Ratio of 2.76. Until the last three months this has been in a buoyant equity market, so the real test is yet to come. However having returned 8.32% year-to-date compared with the market's 2.09%, early indications are that their absolute return focus is holding its own.

Shields and Fitzgerald are of course not alone, and the absolute return and hedge funds space is typified by individuals leaving the comfort zone of a large corporate investment manager to strike out on their own and make a difference. Some, such as Sir Michael Hintze at CQS, and Kerr Neilson at Platinum, have gone on to not only provide excellent long-term performance, but also build significant businesses and reputations to match. Others have preferred to remain under the radar and focus less on asset gathering (frequently as a result of their specific strategy) and more on performance.

To come back to Spangler's interview, and presumably in his book when I get to read it, is that the absolute return and hedge fund industry acts as a magnet for talent. Markets may change and strategies may evolve, but it is the talent within the industry that will drive its future and success.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Bennelong Kardinia's Absolute Return Fund recorded a reasonable return in a flat market delivering 0.87% with the annual return 9.67%.

The Optimal Australia Absolute Trust returned 0.04% in March with an annual return of 3.30% and standard deviation of 1.89%.

Morphic's Global Opportinuties Fund returned -2.63% for March, slightly above the benchmark ACWI Index (in $A), with annual returns at 27.63%.

The Allard Investment Fund had a sound month returning 0.1% during March (Index -1.9%) and 9.69% for the previous 12 months.

Updated FUND REVIEWS released this week included:

Morphic Global Opportunities Fund, whose philosophy is that only funds with flexible investment and hedging strategies will be able to deliver acceptable, steady, real, absolute returns over the investment cycle.

FUTURE EVENTS

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, just a week out from Easter. We're not quite sure how the Pope will react to this, or if the Church will now allow Priests to marry?

On that note, I hope you have a safe and happy weekend.

Best wishes,

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.  To celebrate the 20th anniversary of their #CBDGolf Escape! charity golf event, Cerebral Palsy Alliance are holding an online raffle. The prize will be a Toyota Yaris YR Hatch 3 Door, plus many amazing prizes inside the car - A total prize value of $22,000...See more

For more information visit www.cpresearch.org.au or contact me by email.

April fools' day came and went this week with little surprise, but luckily for the recently departed Assistant Treasurer, Arthur Sinodinos his appearance at the Independent Commission Against Corruption (ICAC) didn't occur until two days after. The media and others would have had a field day with the headlines covering the story.

For those not familiar with the details, Sinodinos received $200,000 a year to act as chairman of a company seeking a NSW state government contract to deliver water infrastructure to a growing region of Sydney's north west. As such his role took an annual total of 45 hours, or nearly $4,500 on an hourly basis.

Not a bad gig if you can get it, particularly as it only required him to be, in his words "a door opener", but it appears one without a very clear memory based on the number of times he couldn't remember or recall many details to assist the Commission. Adding to his memory lapse was that he forgot to mention to the NSW Premier, presumably one of the doors he opened, that if successful he was personally in line to pick up $20 million for his troubles.

Regular readers of "Hedge Clippings" might wonder if this is relevant to our weekly update on managed funds, but given that as Assistant Treasurer Sinodinos was until very recently the champion of changing the FoFA regulations, we think it is. What is relevant that he was trying to soften the FoFA legislation around conflicted remuneration (otherwise known as commissions) not strengthen them. If anyone was better placed, or more personally involved, to understand conflicts of interest I'd like to know who.

Having said there was a significant amount of misinformation and fear mongering in the campaign against the FoFA changes, but that in itself was caused by the lack of clarity and transparency on what the REAL effects would be.  And as the previously mentioned Sinodinos would now realise, transparency is essential if one is to avoid confusion, or misinterpretation. Unless of course clarity and transparency are not in your best interests.

This week's "and now for something completely different" is probably topical.

And now to matters financial. Equity markets both here and in the US saw very narrow trading ranges in March, with the S&P500 trading in a 49.3 point range even as it topped new highs. By comparison January and February ranges were 111.18 and 130 respectively. Meanwhile the ASX200 equivalent was 173 points in March, compared with 224 points in January, and 409 points in February. Volatility has collapsed accordingly, and given the concerns over the credit situation in China, military activity in Eastern Europe, and the growing realisation that interest rates can only rise, albeit possibly not for another 12 months.

Against this backdrop the ASX200 Accumulation index rose 0.29% in March to take the YTD return to just 2.08%. Early indication of March fund returns are significantly positive with the Monash Investment Fund the standout to date with an estimated +4.6%. 

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

The Pengana Australian Equities Fund recorded a 1.44% return during February 2014 and 7.30% for the preceding 12 months with a volatility of 6.41%.

The Monash Absolute Investment Fund returned a solid 4.6% during March (Index 0.20%) and 27.72% (Index 12.0%) over the last 12 months.

Updated FUND REVIEWS released this week included:

AFM's updated Fund Review for the Optimal Australia Absolute Trust  has been released. The fund is characterised by very low risk with an annualised standard deviation 3.55% (Index 15.07%) and a Sharpe Ratio since inception of 1.76.

Insync's Global Titans Fund Review shows the Fund delivering an annualised return of 11.33% and annualised standard deviation of 7.59% (since inception in October 2009) with sound risk-reward statistics.

Aurora Fortitude Absolute Return Fund - The Fund is characterised by steady returns and very low risk. Since inception (March 2005) the Fund has returned 8.12% pa.

FUTURE EVENTS

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, although this clip is about a golf situation it presents a real-life dilemma regarding ethics. The real question is: What would the aforementioned Sinodinos do in this situation?

On that note, I hope you have a safe and happy weekend.

Best wishes,

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.  To celebrate the 20th anniversary of their #CBDGolf Escape! charity golf event, Cerebral Palsy Alliance are holding an online raffle. The prize will be a Toyota Yaris YR Hatch 3 Door, plus many amazing prizes inside the car - A total prize value of $22,000...See more

For more information visit www.cpresearch.org.au or contact me by email.

Who's buying the Aussie $??

There are a few people scratching their heads this week, wondering what's pushing the A$ towards US$0.93 when most of them are of the view that it's heading towards $0.83. Of course it may well be a temporary correction having fallen over 15%, or it might be a reflection that the market feels that the next move from the RBA will be up, even if not in the short term. Alternatively there's the view that there might be stimulus package in the offing in China in an attempt to head off a slowdown in the event of a credit crunch.

Whatever the reason, and whoever is buying, it is probably frustrating Australia's export efforts, as well as some local fund managers investing in global equities, as the rise in the A$ has been widespread. Many of those same managers have had the benefit of a falling currency adding to the returns from buoyant US equity markets, so March results from that sector will be of interest, especially given the inflows to some of the larger managers such as Magellan and Platinum over the past 12 to 24 months.

Meanwhile, this week Deloitte Access Economics released a report which focussed on the five industry sectors which they expect to drive the growth of the Australian economy over the next 20 years. Needless to say the financial services sector was one of them, along with gas, agribusiness, international education and tourism,  with a number of demographic and other factors behind the prediction. 

"With the combination of the world getting older and wealth in our region continuing to grow - wealth management services will continue to be in high demand," Deloitte wealth management leader Neil Brown said. "This offers the Australian industry the perfect opportunity to trade on its expertise and the probity of its wealth management sector."

By 2030, three billion people in Asia will join the middle class and by 2050 the region will account for more than half the world's financial assets. Brown said this combination, together with Australia's domestic success in building the fourth largest superannuation asset pool in the world, is an attractive proposition to both the domestic and the growing Asian middle classes.

We certainly concur regarding the opportunity for the financial services industry, with technology and communications reducing Australia's previous limitations of distance. However potential is one thing, achieving it is another. If Australia is to succeed in the financial services sector on a global rather than merely a local stage, the structural and regulatory environment has to be in place, including a level taxation playing field for offshore investors.

In that regard the Financial System Inquiry headed up by the former head of CBA David Murray is perfectly timed to make appropriate recommendations when it reports to the Treasurer in November of this year.  This week the government announced the addition of four overseas members of the inquiry, including Sir Michael Hintze, one of Australia's most successful hedge fund managers whose $13 billion CQS Global Multi Strategy Asset Management business is based in London.

While confident that David Murray and his panel will come up with the solutions, the challenge will be to see if the current Government implement their findings. Sadly their predecessor's failed to make the most of the opportunities provided by the the Henry Tax Review, and Mark Johnson's "Australia as a Financial Centre" report before it.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Auscap's Long Short Australian Equities Fund had strong performance during February to return 5.32% (ASX 200 Acc 4.97%) bringing annual returns to an impressive 58.90% (Index 10.56%).

The KIS Asia Long Short Fund returned 1.76% during February and 15.99% (10.56% Index) for the previous twelve months with a volatility of 2.71% as compared to 11.49% for the ASX 200 Acc Index.

Pengana Asia Special Events (Onshore) Fund recorded 0.48% during February and 11.76% for the preceding twelve months with a very low standard deviation of 2.39%.

The Cor Capital Fund benefited from buoyant asset markets to return 2.34% during February with positive performances from all the underlying assets. .

Laminar's Credit Opportunities Fund returned 0.57% during February and a creditable 11.93% for the prior 12 months with a volatility of 2.71%.

Updated FUND REVIEWS released this week included:

Bennelong Kardinia Absolute Return Fund. The Fund is characterised by steady returns and very low risk. The Fund returned 2.69% during February and since inception (May 2006) the Fund has returned 13.85%

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

Tuesday 1 April 2014: The Future of Financial Services Regulation breakfast seminar at Cockle Bay, Sydney. At this upcoming Leaders Series breakfast, Money Management and Super Review will bring together key players involved in this inquiry, including the deputy chairman of ASIC, Peter Kell, and one of the politicians at the centre of the Parliamentary Inquiry into ASIC, Senator David Bushby. They will provide unique insights into what the future of the financial services regulator will look like and the implications which may flow from the Financial Systems Review.

Tuesday 1 April 2014: AdventConnect 2014, Sydney. Stay up to date on industry trends with fresh insights from industry thought leaders, fund managers, and the executive management team at Advent Technology. Also in Melbourne on Thursday 3 April.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, perhaps you use some medication? Have a laugh at Mr Bean.

On that note, I hope you have a safe and happy weekend.

Best wishes,

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.  To celebrate the 20th anniversary of their #CBDGolf Escape! charity golf event, Cerebral Palsy Alliance are holding an online raffle. The prize will be a Toyota Yaris YR Hatch 3 Door, plus many amazing prizes inside the car - A total prize value of $22,000...See more

For more information visit www.cpresearch.org.au or contact me by email.

FoFA stalls, QE falls, Taper and the new era of the dot plot.

In the first Hedge Clippings of 2014, way back in mid-January, we wrote that we had polled a number of fund managers on their views of the market's direction for 2014. The general consensus was for a more subdued return than in 2013 but with higher volatility, and in that regard they were spot on. Year to date the ASX200 has gone nowhere, although it has hardly flat lined, after falling over 3% in January, rising almost 5% in February, and falling a further 1.6% so far in March.

For the record, in 2013 the 12 month rolling return of the ASX 200 Accumulation Index only fell below 20% for one month (in March, and even then it was 19.98%) while in May it reached an impressive 26.5%. By comparison in the first two months of 2014 the rolling 12 month performance in January was 11% and 10.6% in February. Month to date in March the twelve-month return is 11.31%.

It would seem that the fund managers we spoke to in January got it right, at least so far. However it does mean that if the market is to repeat the 20% returns enjoyed in each of the last two years it will need to get a move on, with almost one quarter of the year already history.

Changing tack, in more ways than one, the proposed changes to FoFA would appear to have stalled as the Bill amending the legislation has been referred to a Senate Economics Committee enquiry which is not expected to complete its task until mid-June. Coupled with the upcoming Murray enquiry into the financial system, due to release it's interim report mid-year, with the final report expected to be delivered in November, the potential for a changing landscape is considerable - or should that be inevitable?

And on the subject of changing landscapes, overnight the new chair of the US Federal Reserve, Janet Yellen, confirmed the continuing unwinding of the great ongoing experiment known as Quantitative Easing, with the third consecutive monthly reduction, or Taper as it has become known. Expectations are now that QE will be a thing of the past by October or November this year, while expectations for a tightening of interest rates in the US have increased, albeit only marginally, by the end of 2014, but with a more significant shift in expectations for both 2015 and 2016.

In doing so Yellen has introduced into every day financial speak the concept of the dot plot as a way to graphically illustrate the expectations of the individual FOMC participants for the timing and extent of the inevitable start of rate hikes. As someone who much prefers to look at a picture that paints a thousand words than having to read and then hopefully understand them, I'm rather taken by the dot plot and its graphical simplicity, even if Yellen suggested that we should not pay it too much attention.

The bottom line was that there has been a shift - marginal but quite pronounced - in FOMC expectations for a tightening. Even so, more than half the FOMC participants expect the Fed funds rate to still be 1% or less by the end of 2015. The problem is that with everyone hanging on every word Yellen utters it is inevitable that her suggestion not to follow the "dot plot" too closely is likely to be ignored, and I would be very surprised if we don't hear a great deal more of the term going forward.

While on the subject of looking forward, keep an eye out for natural gas prices in the US which have jumped sharply on the back of President Putin and his slightly clumsy attempt at democracy for the Crimea; a sharp rise wheat prices, and even more alarming, the price of coffee on the back of the drought in Brazil forcing up the price of my multiple daily doses of caffeine. 

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Totus' Alpha Fund has taken full advantage of the buoyant equity markets over the last twelve months to return 51.45% over that time. The fund returned 1.44% during February.

The Pengana Australian Equities Market Neutral Fund returned 2.90% during February with a net market exposure of 2.7%.

Insync's Global Titans Fund benefited from stronger equity markets during February returning 2.39% and 24.17% over the year with a notable down capture ratio of -0.84.

The Paragon Fund returned 3.80% for February, with a net exposure of 73.6%, and 21.72% (10.56% ASX 200 Acc Index) for the previous twelve months. Over this time average cash holdings were 35% contributing to the lower volatility number of 7.56% as compared to the Index 11.49%.

Intelligent Investor's Value Fund returned 0.48% in February and a very sound 31.94% for the year to end-February (ASX 200 Acc Index 10.56%).

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

Also in Sydney on 27-28 March 2014: Operations Risk Management and Mitigation seminar enables participants to prepare and manage the planning and implementation of operational risk management processes.

Tuesday 1 April 2014: The Future of Financial Services Regulation breakfast seminar at Cockle Bay, Sydney. At this upcoming Leaders Series breakfast, Money Management and Super Review will bring together key players involved in this inquiry, including the deputy chairman of ASIC, Peter Kell, and one of the politicians at the centre of the Parliamentary Inquiry into ASIC, Senator David Bushby. They will provide unique insights into what the future of the financial services regulator will look like and the implications which may flow from the Financial Systems Review.

Tuesday 1 April 2014: AdventConnect 2014, Sydney. Stay up to date on industry trends with fresh insights from industry thought leaders, fund managers, and the executive management team at Advent Technology.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, it has been a long time since I have had any interaction with a bouncer, and when I did I'm sure I was blameless (?) so "giving bouncers a taste of their own medicine" struck a chord!

On that note, I hope you have a happy, safe and bouncer free weekend.

Best wishes,

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.  To celebrate the 20th anniversary of their #CBDGolf Escape! charity golf event, Cerebral Palsy Alliance are holding an online raffle. The prize will be a Toyota Yaris YR Hatch 3 Door, plus many amazing prizes inside the car - A total prize value of $22,000...See more

For more information visit www.cpresearch.org.au or contact me by email.

Last week's Hedge Clippings focussed on the Australian market's exposure, and Australian investors' love affair with the big four banks, or at least their dividend yields. In particular we noted the difficulty that value-based managers were having finding quality companies (which the banks undoubtedly are) that have the potential to continue to provide dividend growth, while still trading below their intrinsic value.

One theme that came out of this was the falling levels of market exposure that many absolute return managers currently have to domestic equities. Of course this is both a problem, and an opportunity, that long only index tracking fund managers don't have as their mandates require them to be fully invested irrespective of the market's direction.

Generally the managers that AFM monitors raise or lower their market exposure depending on their outlook for the market. Some may increase exposure through increased leverage (although this is a relative rarity compared with pre-GFC levels) or by reducing short exposure. At other times when the risk outlook appears excessively high, or when they see the opportunity, reducing exposure to the market might be achieved by increasing short positions.

However consistent with the theme that while not excessively overpriced the market is not exactly cheap, is the current trend for a number of managers to hold higher levels of cash, with some current examples approaching and possibly exceeding 30% of NAV. For value based managers who consistently refuse to overpay for an asset simply because everyone else is doing so, this tactic is simple risk avoidance.

If one assumed that this is particularly prevalent amongst large cap and high yield strategies, think again. There are a number of small to mid-cap specialists who are finding opportunities for value investing outside the ASX100 or 200 increasingly difficult following some recent stellar share price gains. Against this there are more companies to choose from, although the undervalued gems are difficult to find.

Irrespective of market sector, what we are seeing and hearing is that many managers are experiencing a decreased opportunity set following two or three years of strong gains. While some investors may question paying management fees of 1 or possibly 2% of NAV when 30% of the fund's assets are held in cash, this would seem preferable to being 100% invested in fully, or overpriced stocks when the unexpected occurs.

Or as Benjamin Disraeli pointed out "what we anticipate seldom occurs, what we least expect generally happens."

Think Crimea. Or a slower than expected economy in China.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Bennelong's Long Short Equity Fund returned 2.50% in February and 20.61% since inception in January 2003 with below Index volatility.

The Bennelong Kardinia Absolute Return Fund had a strong February (2.69%) making the most of the buoyant equity markets.

Morphic's Global Opportunities Fund returned -0.71% during February with a net exposure of 101% and gross exposure of 157%.

The Optimal Australia Absolute Trust returned 1.06% during February with a net exposure of 3.1%, a 12 month return of 3.20% and volatility of 1.90% (11.49% Index).

Allard's Investment Fund increased 0.2% during  February 2014. The 2.0% appreciation of the Australian dollar, detracted from the Fund's performance.

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

Also in Sydney on 27-28 March 2014: Operations Risk Management and Mitigation seminar enables participants to prepare and manage the planning and implementation of operational risk management processes.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, it's Billy Crystal's birthday today, so to celebrate here's a clip from one of his early stand up routines.

On that note, I hope you have a happy and safe weekend.

Best wishes,

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.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

For more information visit www.cpresearch.org.au or contact me by email.

I had the pleasure this week of listening to George Colman of Optimal Australia Funds Management present both his view of the markets, and the thoughts behind his fund's investment strategy. For those not aware of George or Optimal, he launched the fund on the same day that Lehman's failed in 2008, and is one of only a handful of managers that have provided their investors with positive returns every year since.

As such it is fair to say that financially George is what one might describe as a "safe pair of hands". However, in spite of not losing money, and since inception having annualised returns of 10.38%, with volatility of just 3.55%, he was less than enthusiastic about his 2013 returns when the fund significantly underperformed the strongly rising market.

Optimal's long/short investment strategy relies on what George describes as deep value investing. Between them, George and his colleague Peter "Fish" Whiting have almost 60 years' experience in the market, and their major concern in 2013 was the excessive valuations put on Australia's banks as bond yields collapsed and they became the most expensive in the world.

Firstly we make the point that we are not suggesting an imminent collapse in bank share prices, nor are we qualified to do so. The point is that at both an individual household, and the overall market level, Australia is heavily exposed to interest rates and the yield play of the banks. However there are some worrying statistics and signs on the horizon.

One came from a recent report from another local fund manager, Paul Moore of PM Capital which included a chart of the percentage of household share portfolios in banks, which having fallen to a recent low of around 30% in 2000 (think tech wreck) has risen to exceed previous highs to be nudging 60%.  One can safely assume this is the retail investor chasing a dividend yield, further bolstered by the effect of franking credits.

That's fine in a low interest rate environment, but as George pointed out, Australia's 10 year  bond rate has risen to 4.10%, becoming one of the highest in the world, well above Mexico (3.76%), Spain (3.4%) and not far off Brazil (4.75%) and Portugal (4.66%). In addition, RBA governor Glenn Stevens warned this week of the risks of further rises to rates, and the dangers that poses to the property market. This is relevant considering although the cost of servicing household debt has decreased as rates have fallen, the overall level of that debt has remained static - and high - at around 150% of household disposable income.

At the risk of embarrassing him, back to George. His current view (or at least one of them) is that while prices rose over the past two years somewhat irrationally from a value perspective, he refrained from joining the crowded trade, but feels value will become front and centre once again as rates rise.

He also was able to explain to me the real meaning of the term a Gordian knot and his feeling that the US QE program and current tapering exercise was a prime example of one. Altogether an illuminating and informative discussion.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Cor Capital Fund returned 0.92% and 4.87% (annualised) since inception in August 2012.

The Pengana Asia Special Events (Onshore) Fund 2.00% for January, a very difficult month for Asian equity and 11.76% for the 12 months to end-January.

Intelligent Investor Value Fund managed the poor equity market of January with a good return of 1.05%. For the year the Fund recorded  a very strong 37.69% (Index 10.98%).

The Monash Absolute Investment Fund has a sound February returning 2.60% with the twelve month return 24.51% (ASX 200 Acc 10.56%).

FUND REVIEWS RELEASED THIS WEEK:

Aurora Fortitude Absolute Return Fund is characterised by steady returns and very low risk. Since inception (March 2005) the Fund has returned 8.12% pa.

AFM's updated Fund Review for Insync Global Titans Fund for January 2014 shows the Fund delivering  an annualised return of 10.96% and annualised standard deviation of 8.46% (since inception in October 2009) with sound risk-reward statistics.

Morphic Global Opportunities Fund has returned 34.52% for the previous twelve months with a volatility of 10.04% p.a.

AFM's updated Fund Review for Optimal Australia Absolute Trust has been released. The fund is characterised by very low risk with an annualised standard deviation 3.57% (Index 15.06%)and a Sharpe Ratio since inception of 1.73.

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

Also in Sydney on 27-28 March 2014: Operations Risk Management and Mitigation seminar enables participants to prepare and manage the planning and implementation of operational risk management processes.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, and in particular for Dylan fans (yes RVC, that includes you) here's a clip, that while not very Australian we couldn't help but enjoy.

On that note, I hope you have a happy and safe weekend.

Best wishes,

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.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

For more information visit www.cpresearch.org.au or contact me by email.

Size matters, sometimes?

A recent (January 2014) research paper published by The University of Chicago entitled "Scale and Skill in Active Management" analysed the nature of returns vs scale in active mutual fund managers. Whilst the study focused on US mutual funds the findings were seemingly both worrying and logical, particularly from an investor's point of view.

The study found strong evidence of decreasing returns at the industry level - in other words as the size of the mutual fund industry increases, a fund's ability to outperform a passive benchmark declines. At the same time the skill (and we would assume advances in technology) levels have improved, but this has coincided with the industry growth, thereby cancelling out the benefits of the improved skills from boosting fund performance. The study also found that performance deteriorates over a fund's lifetime, which could also be explained by the decreased ability to outperform by the industry as a whole.

The full report, which covers 51 pages, can be found here, focusses on the mutual fund industry - in other words long only funds trying to achieve relative outperformance of the underlying benchmark, rather than an absolute return. In essence it seems to be saying that as the industry gets so large, and information, technology and skill become so readily available, the opportunity to outperform diminishes. In simpler terms the whole market is in danger of becoming a huge "crowded" trade.

In the absolute return space there have been a variety of studies over the years that indicate early stage managers outperform, as do those with limited funds under management. However in an Australian context this has not always been the case, partly because there aren't many Australian funds which are genuinely large by global standards. In addition the Australian absolute return sector is not homogenous, as shown by the wide ranging returns from both early stage and developed managers, small and large and across and within strategies.

There's no doubt that being in the correct asset class, or having the right strategy to suit the prevailing market significantly affects performance, but the one factor which dominates performance over time is skill. In absolute return investing skill can be found in managers with both and small large FUM, even if the opportunity set decreases as FUM increases.

Over the last 12 months 90% of Australian funds provided positive returns, with an average return of 12.19%, outperforming the ASX200 at 10.98%. But those averages mean little when the range of individual fund performances are considered - the best returning 73%, and the worst -54%. Even those statistics mean little given the volatility of some fund's returns, with less than 20 with at least a six year track record providing positive returns every year.

Size doesn't matter. Skill does

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Pengana Australian Equities Fund recorded -2.00% during January but still a positive 10.45% for the previous 12 month period.

The Auscap Long Short Australian Equities Fund recorded 1.32% during January, a weak month for domestic equity (-3.03% ASX 200 Acc) and 52.73% during the previous twelve months.

Totus Alpha Fund returned -0.59% during January, and 57.2% for the previous twelve months with a volatility of 16.9% and Sharpe ratio of 2.65.

The Allard Investment Fund returned -1.1% during January, a good outcome in difficult Asian markets which fell 3.3% (MSCI Pacific ex Japan A$).

FUND REVIEWS RELEASED THIS WEEK:

Optimal Australia Absolute Trust The Fund has a track record of just over 5 years which incorporating the market conditions that have been both varied and challenging. To date the Fund has significantly outperformed the underlying market since inception, particularly given the high market volatility in 2008 & 2011.

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, an irreverent look at Quantitative Easing.

On that note, I hope you have a happy and safe weekend.

Best wishes,

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.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

For more information visit www.cpresearch.org.au or contact me by email.

There's been widespread comment in both the mainstream and industry media over the past couple of weeks about the proposed changes to FoFA, particularly relating to conflicted remuneration (a.k.a. commissions) and financial advisers' fiduciary obligations (a.k.a. acting in the client's best interests).  Without wishing to enter into the debate in too much detail we would have thought both were only aimed at a small minority of financial advisors, with the vast majority complying irrespective of any legal obligations.

As with many such things it is always the actions of the minority that lead to the creation of laws, rules and regulations, as generally common sense and sound ethics prevail. In the case of financial services when a product issuer has to offer significant incentives, such as a commission of over 5% to an advisor, to gain support for their product it is pretty safe to assume there's a catch, and its the investor who's caught. Think Trio's Astarra for example.

As a result the whole industry ends up with a significant ongoing regulatory burden, and as at present, more change and potential uncertainty. To be fair the government's stated objectives of the current changes to FoFA are to reduce compliance and the regulatory overhead, but one aspect which does help the consumer is simple and clear transparency. Generally speaking disclosure over fees and costs is now transparent, even if not always easy to fully understand. Similar disclosure over an advisor's potential conflicts, commissions and parent ownership would not go astray.

Meanwhile regulatory changes around licencing and custody of assets are also in the wind, both of which will increase compliance costs for fund managers, and hopefully towards the end of 2014 we will see the outcome of the David Murray chaired inquiry into financial services, which is almost guaranteed to change the regulatory landscape further.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Monash Absolute Investment Fund returned 0.80% for January, a strong performance against the Index (-3.03%) and 26.7% for the latest 12 months.

The Pengana Australian Equities Market Neutral Fund returned -2.5% during January, a weak month for local equities which fell -3.03%, and 12.52% for the previous 12 months.

The Paragon Fund focusses on core competencies in the resource and industrial sectors. The Fund deploys a high conviction, long bias strategy, focusing on proprietary, fact based research. The fund returned -1.1% for January and 14.10% over the previous six months. It has recorded a Sharpe ratio of 2.00 since inception and strong up and down capture ratios of 0.70 and -0.18 respectively

FUND REVIEWS RELEASED THIS WEEK:

Bennelong Kardinia's Absolute Return Fund returned -2.12% in January 2014, taking returns for the year to 9.91%, with annualised returns since inception of 13.62%.

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

On that note, I hope you have a happy and safe weekend.

Best wishes,

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.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

If you believe, like us, that something must be done about this, please sign the pledge and share with your friends today. Your name will help us raise awareness for more CP research funding. Thank you! For more information visit www.cpresearch.org.au or contact me by email.

What a difference a year makes! If you're getting older (like me) another year under the belt - sometimes literally - doesn't change much except to add a fraction more experience, a couple of kilo's move downwards from the chest, while on the negative side one subtracts a few grey cells.

If you're at the other end of the scale, and just arrived into the world like young Molly, the latest addition to the extended Gosselin "Brady bunch", then a year makes a massive difference, as she grows, and goes, from crawling to walking. OK, so she might not be reading this, but I'm sure you get the picture.

To most investors however an extra year falls between the two, depending on what year it is, or was, and where on the timeline of life one sits.

I was reminded of this during the week by Sean Webster, AFM's Head of Research, who had put together some tables and charts of one, five and ten year returns for a range of absolute return and hedge fund strategies, comparing them against the ASX200. In addition to the wide diversity of returns of each strategy from year to year, the headline statistics looked pretty impressive, and from the perspective of the annualised returns of the funds and the ASX, reasonably consistent.

For the record to December 2013 the annualised returns of each were as follows:

Over ten years the ASX200 Accumulation index returned 9.63%, while hedge funds returned 10.95%.

Over five years the ASX200 returned 12.45%, while hedge funds returned 12.57%.

Not bad, and pretty consistent as mentioned earlier, except for the range of returns by individual sector or strategy which varied dramatically.

Add in one year though to take in 2008, and what a difference a year makes:

Over six years the ASX200 returned 1.72% per annum, while hedge funds returned 5.91%

If there was one consistent statistic over all three time frames it was their respective levels of risk, with hedge funds running at half the volatility of the underlying market which ranged from 13.21% (five years), 13.53% (over ten years), to 15.79% (over six years), compared with 6.90%, 7.80% and 8.75% from hedge funds.

Whichever the time frame, the ASX200's volatility was invariably higher than its return.

And on that sobering note..

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

Morphic's Global Opportunities Fund primarily consists of Global listed shares, and will generally have at least 50% of its net assets invested in same. The fund returned 34.52% for the previous twelve months.

The Optimal Australia Absolute Trust returned 0.57% during January, a weak month for domestic equities, and 1.60% for the last twelve months with a volatility of 1.83%. Since inception in September 2008 the annualised return is 10.34%.

Bennelong Kardinia's Absolute Return Fund is an Australian domiciled equity long/short fund investing in ASX listed securities. The fund has returned 9.91% over the previous twelve months.

The Aurora Fortitude Absolute Return Fund returned 0.32% during January and 8.12% for the previous 12 months with a very low volatility of 1.39% (S&P ASX 200 Accum 11.54%).

Insync's Global Titans Fund investment strategy is driven by fundamentals combined with active risk management. The fund returned 23.33% over the last year with a Sharpe ratio of 2.47.

FUND REVIEWS RELEASED THIS WEEK:

BlackRock's Multi Opportunity Fund current strategy has returned 8.85% pa since inception (July 2004), annualised volatility of 4.14% and 13.88% and only three negative months since May 2010.

FUTURE EVENTS

21 February 2014 in Sydney: AIMA's Hedge Fund Regulatory Update provides an update on Hedge Fund regulations including the Investment Manager Regime; ASIC Regulatory Guides 166 and 133 plus more. No charge to attendees.

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, I would simply like to wish my beautiful wife a Happy Valentines Day. As they say, "happy wife, happy life".

On that note, I hope you have a happy and safe weekend.

Best wishes,

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.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

If you believe, like us, that something must be done about this, please sign the pledge and share with your friends today. Your name will help us raise awareness for more CP research funding. Thank you! For more information visit www.cpresearch.org.au or contact me by email.