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.

BENNELONG LONG SHORT EQUITY FUND

Attached is our most recently updated Fund Review on the Bennelong Long Short Equity Fund.  

• The Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large cap stocks from the ASX/S&P100 Index, with a ten year track record and annualised net returns of over 20% pa.
• Fund performance was disappointing in January with exposures in the Consumer Discretionary (long) and Materials (short) sectors being the main culprits. 
• Since inception in January 2003 the Fund has had positive annual returns each year, including an 11.95% return in 2008 and 20.6% in 2011, both of which were negative years for the ASX200.
•  The Fund's risk statistics are also sound with maximum drawdown of 12.22% and 70% positive months. Both the Sharpe Ratio at 1.23 and the Sortino ratio at 2.15, indicate a high reward-to-risk ratio.
• The consistent returns across the investment history indicates the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market.

Sean Webster

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESAFM Fund Review: Bennelong Long Short Fund (pdf format)

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.