Grexit Reality - But maybe we need a reality check ourselves?

Actually Greece isn't out of the EU just yet, but the default is a reality, and unless someone blinks, either as a result of Sunday's referendum, or the reality of the consequences of exiting both the political and currency union, the rest as they say, will be history. The problem is no-one can actually say in advance what that history might look like, apart from the certainty that it is going to get messy.

The fact is that the Greek problems were a classic example of the boiling frog syndrome, in that they developed, or simmered for a long time with nobody prepared to fix the problem until it was too late. The release this week of The Grattan Institute's working paper, entitled "Fiscal challenges for Australia", made us wonder if we aren't heading for our own equivalent of the Greek tragedy, even though to many it might seem we're a long way off at present.

At first glance we're sitting, if not pretty, but at the top of the tree when it comes to net levels of Commonwealth government debt to GDP, which is projected to peak at 18% in 2017. This excludes state government debt, and for good measure treats the value of the Future Fund as an asset. However, the Grattan report notes that when it comes to forecasting, the Federal government's forecasts consistently contains highly optimistic assumptions about revenue growth and spending restraint.

For the last six years budget outcomes have been worse than projections, and both the previous and current Governments have been unwilling to address deep seated issues, instead relying either on the mining boom (gone!) and personal income tax bracket creep to raise additional revenue, while refusing to curb excessive spending. In other words we haven't been the only ones not prepared to accept the austerity measures (increase taxes, reduce spending) needed.

In its place we have increased taxes by stealth, otherwise known as bracket creep. According to a recent article in the Financial Review, the government's reliance on bracket creep will push the average full time worker in Australia on $78,000 a year into the second highest tax bracket this financial year, with any earnings above $80,000 subject to a tax rate of 39% including the Medicare levy. This will earn the government, and cost the average income earner, an additional $1,200 per year over the next decade, and take their average tax rate from 21.7% to 27.4% over the next decade.

The current Federal Government has refused to address major issues such as changes to the taxation of superannuation, changes to the GST (as did the previous Labour government), or curbs on negative gearing, thereby excluding three major reforms which would get them out of the fiscal hole that has been deepening for some time. Relying on personal income tax bracket creep seems to be their only solution, with the creep the equivalent of the above mentioned frog in his slowly warming pot.

As the Grattan Institute correctly points out, hoping for the best is not a budget management strategy: It simply justifies putting off hard decisions, and shifts the costs and risks of budget repair onto future generations, with their research showing that each $40 billion dollar deficit increases the lifetime tax burden for households headed by a person aged 25 to 34 by $10,000.

Your Clippings correspondent can rest easy - it won't be his problem. He's waaay older than that, and will be part of the other side (expenditure) of the problem once he starts to draw a pension!

Specific results received this week include the following PERFORMANCE UPDATES:

The Insync Global Titans Fund increased by 3.0% in May, bringing the Fund's prior 12 month performance to 20.79%.

Totus Alpha Fund was down 1.80% in May, compared to the ASX200 Accumulation Index's 0.40%. However the Fund's annual performance of 23.31% p.a has been strong (Index 14.43% p.a.).

The Signature Quantitative Fund returned -1.20% for May, to bring the annual performance since inception to 11.34%.

Supervised High Yield Fund rose 1.04% during May to bring the Fund's annual return since inception to 10.22%. In the same time frame the RBA Cash Rate returned 3.45%.

FUND REVIEWS released this week:Aurora Fortitude Absolute Return Fund; Pengana Absolute Return Asia Pacific Fund

UPCOMING EVENTS:

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

26 - 28 August 2015 -The15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

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

And now for something completely different. An article in today's Guardian Australia suggesting that in the mid eighties, with the Hong Kong handover looming, and the Troubles in Northern Ireland in full swing, UK officials considered relocating 5.5 million Hong Kong citizens to Ulster, but were concerned about how they'd adapt to the weather. Had it been April 1st you might understand it, but really?

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

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

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

• The Aurora Fortitude Absolute Return Fund  (AFARF) has a 10 year track record investing in ASX listed equities. A Market Neutral overlay is used across a multi strategy approach which allows for flexible asset allocation to maximise returns and minimise risk under a variety of market conditions and cycles.CIO John Corr has over 20 years financial market experience with a strong focus on risk.

• Significant use of low risk "long" derivatives and option overlays has provided positive returns with low volatility during periods of market dislocation. Risk statistics are impressive and shows the Funds risk philosophy; over 85% of monthly performances have been positive with no losing months in 2008, the Fund's largest drawdown is -2.09% and the Sharpe ratio 1.06.

• ASX listed Aurora Funds Limited was established on the merger of three existing fund management businesses, managing approx. $230m on behalf of more than 2,500 retail and wholesale investors.

ATTACHED FILESAurora Fortitude Absolute Return Fund Review May 2015 (pdf format)

The Game of Greek Chicken Continues

Last week's Clippings noted that Morphic's Jack Lowenstein thought that any Greek solution would (if any) be last minute, but not long lasting. He's certainly right on his first call, although it is too early to tell as yet if there will actually be a solution. We are not sure if they're playing a dangerous game of chicken or not, but it seems that those in the north of the EU are driving a hard bargain, and the Greek PM is between a rock (those in the North) and a hard place, namely the Greek electorate.

The Northerners want hard decisions made both on the revenue and expenditure side. That means increased taxes, and reduced spending. The electorate, who will decide new Greek PM Tsipras' fate at the end of the day, aren't too happy about that. One also has to remember that Tsipras, and his Finance Minister are or were both products of the Greek Communist Party, so fiscal discipline and economic management might not be their natural calling. In any event it seems that the Germans won't budge, and Tsipras has little room to move. For further background read this piece from Arminius Capital's Marcel von Pfyffer.

For what it's worth Marcel's view (he's Swiss Australian, in case you were wondering, not German) is that "Greece will, as sure as the sun sets, default on its debt."

Closer to home the revelations by Fairfax's Adele Ferguson last Saturday (and since) that there was a serious compliance issue at IOOF must have caused shudders in a number of quarters, including ASIC and the board of IOOF itself.

A brief read of IOOF's March 2015 quarterly report would have you beleive that compliance was front and centre in the board's minds. And inded it might have been, but between the board, the stated complaince policy covering 8 full pages, and what is alledged to have occured, there appears to be a significant gap.

This is obviously bad news, not only for IOOF, as it is a further nail in the coffin of much of the financial services sectors' reputation, coming after CBA, Macquarie and others' failings. Strangley in the Senate both sides of politics voted together to knock back a Royal Commission, but Clippings is not sure it would have proven, or changed much. 

As Mike Mangan, quoted (loosely) in the AFR said on Monday there's not going to be a change of behaviour in the industry until some serious sanctions are brought to bear on the wrongdoers. By serious he means jail time, and as he so succinctly put it "the only thing that scares the shit out of white collar workers is jail time."

To be fair a few have gone to jail since 2008, but only a few, including the notable Maddoff in the US, and closer to home Astarra's Shawn Richards. But in the meantime the collective fines and penalties paid by (shareholders of) financial institutions and banks worldwide to cover their corporate and management sins between 2008 and 2014 exceeds $150 billion, enough to go somewhere towards paying off some Greek debt. The "victims" of those misdeeds meanwhile haven't received a cent, penny, centime or drachma! 

Specific results received this week include the following PERFORMANCE UPDATES:

Avenir Value Fund had a strong performance of 4.50% during the month of May, compared to the ASX 200 Accumulation Index's 0.40%.

The Pengana Absolute Return Asia Pacific Fund finished +1% for the month, compared to the HFR Event Driven Index which closed +0.5%.

Since inception in August 2014, QATO Capital Market Neutral Long/Short Fund has returned 37.93%.

Freehold Absolute Return Fund has an annualised return of 17.48% p.a., compared to the ASX200 Accumulation Index's 15.15% p.a.

The Laminar Credit Opportunities Fund returned 0.65% over the month of Month, bringing its annual performance since inception to 18.96%.

FUND REVIEWS released this week: Bennelong Kardinia Absolute Return Fund; Optimal Australia Absolute Trust; Morphic Global Opportunities Fund

UPCOMING EVENTS:

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

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

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

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

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

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