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.

Operations Risk Management & Mitigation - from assessment to implementation

27-28 March 2014

Shangri-La Hotel, 176 Cumberland Street, The Rocks, Sydney,

"Operations Risk Management & Mitigation - from assessment to implementation" - This course is approved by NASBA (National Association of State Boards of Accountancy). Seminar attendees are eligible for 16.5 CPE credits upon completion of training.

This course provides a complete structured package for learning in all main aspects of the subject of Operational Risk. It will enable participants to prepare and manage the planning and implementation of operational risk management processes in their bank/ financial institution or firm.

Key objectives and learning outcomes:

The aim of the course is to provide:

• An understanding of Risk in all its facets
• An understanding of Operational Risk Techniques for assessing, managing and mitigating Operational Risk
• A link between Operational Risk management theory & practice
• A clear "road-map" on how to implement an Operational Risk management structures them in practice in a banking organization.

Objective:

The objectives of this training course is to provide all staff, irrespective of whether they work in the front, middle or back-office, with a sound foundation in the theory and practice of Operational Risk Management. This training is provided in a practical "hands-on" manner that allows them to implement what they have learned easily and effectively.

Methodology:

This training course uses a combination of prepared tuition, examples, discussions, exercises and case studies. Most importantly it will offer participants, opportunities to share experiences and plan work within small working groups, providing practice in the application of the techniques and tools generating active participation. Case study materials as well as lecture presentations to set out the key issues in developing good operational risk management in banks.

Agenda:

Day 1:

THE WHY, HOW & WHAT OF OPERATIONAL RISK

• What is risk?
• Risk Types
• Risk & Capital - An Introduction to Basel I, II and III
• Managing Operations Risk
• Operational Risk Practical Examples
• Case Study
• Key Elements in Managing Operational Risk
• Operational Risk Financing
• Methods & Models
• COSO ERM Framework
• The Black Swan
• Case Study
• Operations Risk & Basel (II and III)
• Managing Operations Risk under Basel - A Hands-on approach
• "Sound Practices for the Management and Supervision of Operational Risk"

Day 2:

IMPLEMENTATION

• Developing an appropriate Risk Management Environment
• Defining the Categories of Operational Risks
• Products & Operations Risk
• Case Study
• MANAGING OPERATIONS RISK TOOLS & TECHNIQUES
• Causes & Consequences The Bow Tie
• Methods for Assessing Operational Risks
• Desktop Exercise
• A Risk Assessment Model
• Current Operations Risk Management Themes in Banking
• Closing CASE STUDY

Click here for detailed agenda

Venue:

Shangri-La Hotel,
176 Cumberland Street,
The Rocks, Sydney,
NSW 2000, Australia

Register Now and Save $700 (Offer Extended)
For Registrations till February 20, 2014 - $999
Actual Price - $1,699

Register here

Your registration fee includes the workshop, all course materials and lunch.

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.