Two different views of China

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

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

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

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

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

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

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

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

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

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

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

Chris

CEO

AUSTRALIAN FUND MONITORS

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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 Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with an nine year track record. 

• The Fund has significantly outperformed the ASX200 Accumulation Index since its inception in April 2006 and also has significantly lower risk KPI's. The Bennelong Kardinia Absolute Return Fund fell 0.59% in April and has volatility of 7.33% pa, compared to the ASX200 Accumulation's 14.19%.

• 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 the Bennelong Group provide infrastructure, operational, compliance and distribution capabilities.

ATTACHED FILESFund Review: Bennelong Kardinia Absolute Return Fund April 2015 (pdf format)

OPTIMAL AUSTRALIA ABSOLUTE TRUST

AFM have released the most recently updated Fund Review on the Optimal Australia Absolute Trust.

We would like to highlight the following aspects of the Fund;

• Optimal Australia is a specialist Australian equity investment manager and the Fund has a long/short equity strategy typically with a low but variable net market exposure comprising 40 to 65 stocks broadly selected from within the ASX200. 

• The investment team comprising George Colman, Peter Whiting supported by Stephen Nicholls and Justin Hay have over 100 years combined experience in equity markets.

• The Fund's approach to risk is shown by the Sharpe ratio of 1.41, Sortino ratio of 3.17, both of which are well above the ASX 200 Accumulation Index and has recorded 80% positive months.

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

Sean Webster
Research and Database Manager
Australian Fund Monitors

ATTACHED FILESFund Review: Optimal Australia Absolute Trust April 2015 (pdf format)

MONASH ABSOLUTE INVESTMENT FUND

ATTACHED FILESMonash Absolute Investment Fund Review April 2015 (pdf format)

Hedge Funds show their mettle

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

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

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

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

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

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

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

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

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

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

Chris

CEO

AUSTRALIAN FUND MONITORS

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