Skating on thin ice:

My old friend Patto was the master of market sayings which became known to those who followed him as "Pattoisms". One of his favourites was "when skating on thin ice, the speed at which one has to skate is directly proportional to the thickness of the ice."

Markets have seemed a bit like that this week. In the US the ice appears to be very thin every time Ben Bernanke goes off cue and suggests that QE might end at some stage. The ice in China appears thin whenever the numbers indicate growth might slow below 7%. And in Australia it seems that without the mining and resources sector, we are skating on thin ice as significant parts of the rest of the economy (manufacturing, retail) are struggling.

Over the past couple of weeks the ice actually cracked under those companies whose earnings are reliant on the mining sector.  In the last couple of days it seems that even the yield driven rotation into the banks might also be on thin ice.

April Fund Performance:

Close to 90% of single funds have now reported April results as follows:

From a Strategy perspective the best performances are:

Performance and News Updates on www.fundmonitors.com this week:

The BlackRock Australian Equity Market Neutral Fund had a sound April returning 2.18%, bringing its 12 month return to 8.71%. The portfolio benefitted from the resource under performance due to a tilt toward producers versus explorers, with significant contribution coming from short positions in Kingsgate Consolidated, Newcrest Mining and Oz Minerals, amongst others. The yield theme also proved profitable via our exposure to property trusts and telecoms.  

Pengana Australian Equities Market Neutral Fund delivered -0.9% for April and has an annualised return of 8.82% since inception in September 2008. Two of the largest long positions in April were BC Iron and Skilled Group, while two of the largest short positions were Macquarie Atlas Roads Group and AWE.

The 8IP Asia Pacific Partners Fund delivered -1.17% during April bringing its six month performance to 21.57%.  After five months of strong gains, a number of stocks in the Fund ran into profit taking. Largest sector exposures were financials, real estate and consumer discretionary.

Allard Investment Fund recorded 0.80% over April with it's since inception (July 2003) performance at 8.49% pa. At end-April the asset breakdown was 68.6% equities and 31.4% cash and fixed income. The geographic breakdown was HK/China 32.1%, Sing 12.4% and Korea 9.3% with other countries at lower percentages.

The Pengana Asia Special Events (Onshore) Fund returned 1.31% during April and had a twelve month return of 8.23%. The Fund maintained an average net and gross exposure of 16% and 164% respectively. Largest month end net exposures were China, Japan and Indonesia and biggest gross exposure by strategy was Merger and Acquisitions. April was very eventful led by a significant pick up in M&A activity and the earnings seasons in some markets. Japan was the most active M&A market in Asia, accounting for 6 of the 14 new deals during the month.

And finally, for something completely different, the latest Evian commerical, also featured on Alan Kohler's Eureka report (if you are not a subscriber, I recommend it) last week.

On that note, I hope you have a happy and healthy weekend!

Budget week finally confirmed what most already knew: Australia was not going to be in, or return to, surplus any time soon, irrespective of any change in government in September. Treasury's earlier revenue estimates were far too optimistic, and some (in particular from the mining and carbon tax) have simply not materialised as anticipated by the government.

Coincidentally or not with the confirmation of the federal deficit, the A$ came under pressure as the combined effects of lower rates (down 25 bps to 2.75%), a reduced outlook for resources, and the reality of a mid to long term budget deficit added to the effects of a strengthening US currency.

The current government delivered a strategic budget which promised large social programs such as the disability pension scheme and education reform, cleverly boxing in the opposition and making it difficult for them to abandon them if, or when they assume power.

As previously telegraphed the budget included the gradual increase of the superannuation guarantee levy from the current 9 to 12%, which the opposition promptly announced would be delayed or deferred on their watch. One interesting twist in the ongoing progress or otherwise of reform of the superannuation system was the opposition's successful amendment this week requiring at least one third of industry superannuation fund trustees to be independent.

The current equal representation model requires industry super funds to appoint half their trustees from union representatives and the other half from employer representatives.  Although the Cooper Review recommended that a lack of independent trustees was no longer appropriate, the government chose not to include the changes in the legislation.

The twist came not so much that the amendment was proposed, and passed 72 to 68, but in the fact that the independent MP's voted against a proposal favoring independence, and that it appears four government MP's, including two ministers and a government whip, either abstained, or were absent.

Given the importance and value of the superannuation system it seems incongruous that industry super funds are not subject to the same or similar governance and transparency regime as corporate Australia.

The Bloomberg saga:

While on the subject of governance and transparency, Bloomberg the global leader in financial information with over 300,000 terminals installed, was (or should be) severely embarrassed.  It was revealed this week that Bloomberg has been engaging in a case of "big brother" by enabling their journalists to be able to track who, what and where the terminals were being used, and what was being viewed.

While we haven't yet read of actual cases where the information gleaned has been misused, the potential for misuse (given that each terminal is usually registered to an individual user) is massive, and Bloomberg will no doubt be scrambling to protect their reputation in dealing rooms around the globe, just as users will be demanding changes to the terms of their agreements.  

Performance and News Updates on www.fundmonitors.com this week:

The Monash Absolute Investment Fund returned 1.13% during April, a month of extreme moves on the ASX with Small Cap Resources falling 19% and the top industrials rising 4.7%. At month-end Fund net exposure was 67%.  

Insync Global Titans Fund returned 1.63% for April with the biggest positive contributors coming from a range of stocks including Sanofi, Coach, Roche and Walt Disney.  Average mkt cap of stocks in the portfolio is $A 99.1bn with a weighted average forecast dividend yield of 2.90%. The fund is currently un-hedged. We also released the latest Fund Insync Review for April 2013, which you may read here.

The Pengana Australian Equities Fund had a strong April returning 3.51% bringing its 12 month return to 25.91%. Cash exposure at end April was 29%.

Morphic Global Opportunities Fund had a sound April returning 2.80% with top stock contributors coming mostly from Japan. Performance since inception in August 2012 is now 20.53%. The Fund is fully un-hedged, you can read the most recent Morphic Fund Review here.

The Auscap Long Short Australian Equities Fund had a very strong month, recording 9.83% during April. A major contributor to performance was shorting gold stocks which provided the Fund with a 2.8% return.

And finally, for something completely different, a funny clip on how frustrating it could be to teach a child how to tell the time, almost as frustrating as teaching my wife how to fix her computer.

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

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Based on 31% of single funds' results reported to date, AFM's index of absolute return and hedge funds returned 2.19% in April, to take year to date performance to +6.15%, and 12 month performance to 9.89%. Equity based funds have outperformed the broader average, up 2.27% in April, 7.41% YTD, and 12.22% over the past 12 months. 

By comparison, the ASX200 accumulation index rose 4.54% in April, 12.99% YTD and 23.58% over 12 months. 

As far as spread, or range of returns is concerned, the sector returns of the ASX provided some clue as to fund returns, particularly those focusing on the resources, and more specifically the small resources sector. The ASX Smallcap Resources Accumulation Index fell for the seventh consecutive month, with a fall of 20% in April alone, its third largest fall since inception in 1995 with gold stocks particularly affected.

As a result, the spread of fund returns for the month was wider than usual, ranging from -22% through to +22%, although 90% of results to date have been positive. The performance spread over the past year also ranges widely, from -57% through to +58%, again reinforcing the importance of strategy and fund selection. Full details are available on our index pages.

Next Tuesday sees the handing down of the federal budget, the last in the term of this parliament, and the last prior to the election in September. The Prime Minister and Treasurer have both been at pains to prepare everyone for bad news and a significant deficit, having been equally strident until comparatively recently that everything in the garden was rosy.  With apologies to Abraham Lincoln, "you can fool all of the people some of the time, some of the people all of the time, but you can't fool yourself forever".

So while the pain has been flagged, the medicine has yet to be prescribed. What is interesting is that short of a miracle, neither the PM or Treasurer will be around to administer the dosage.

Meanwhile yesterday the (current) Minister for Superannuation, Bill Shorten announced his plan to establish a Council of Superannuation Custodians with the intention it would oversee a "Charter of Superannuation Adequacy and Sustainability". That all sounds well and good, but where was the Council over the past 5 years as the rules affecting Super have been chopped and changed with monotonous regularity?

Performance and News Updates on www.fundmonitors.com this week:

The Bennelong Kardinia Absolute Return Fund recorded 1.34% for April 2013 bringing since inception (May 2006) performance to 14.47% pa.  We also released the latest Fund Review for April 2013, which you may read here.

Platinum Japan Fund had an exceptional April 2013 with a performance of 13.75%, well ahead of its benchmark and bringing the six month return to 45.83%.

The Bennelong Long Short Equity Fund had a flat month in April 2013 recording a return of 0.01% bringing their since inception return (January 2003) to 20.16%.  Their most recent Fund Review for April 2013, is here.

Aurora Fortitude Absolute Return Fund had a sound April 2013 with a return of 1.68% bringing the twelve month return to 5.24%. The Fund's volatility is notable at 2.84% annualised since inception.

The CSAG Long Only Program delivered -0.16% for the month and -4.39% for the year to end March 2013.

Continuing our successful Meet the Manager presentation series, on Thursday 16 May, AFM is holding a city lunch time briefing featuring Jack Lowenstein from Morphic Asset Management. The Morphic Global Opportunities Fund is a global equity long/short manager with a macro-economic overlay. The Fund's portfolio construction has a long bias and favours value based and momentum strategies, with a strong emphasis on risk management. If you would like to join us for the presentation, please reply to this email.

And finally, for something completely different, short and sweet this week.

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

BENNELONG KARDINIA ABSOLUTE RETURN FUND

Attached is our most recently updated Fund Review on the Bennelong Kardinia Absolute Return Fund.  

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

• Kardinia is a boutique Australian based Fund Manager established in August 2011 in conjunction with the Bennelong Group to continue the management of the Herschel Absolute Return Fund.
• Long biased, research driven, active equity long/short strategy investing in listed ASX companies with a six year track record and an annualised return of 14% net of fees.
• Portfolio Managers Mark Burgess and Kristiaan Rehder have significant market experience, while the Bennelong Group provide infrastructure, operational, compliance and distribution capabilities.
• Consistent top decile long short equity sector performance. Key Performance and Risk Statistics indicate an attractive risk/reward profile, and a strong focus on capital protection in negative markets.

Sean Webster

Research and Database Manager
Australian Fund Monitors

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

News article from Investor Daily today is a worthwhile read.

The implication of this is potentially significant for Australia's absolute return and hedge funds sector - assuming they qualify under the SIV rules, and assuming they are sufficiently well organised to market to the UHNW Chinese market.

There still appears to be some question marks around the use of derivatives which might make qualifying difficult for many hedge funds, and the sector has never had the benefit of an industry wide marketing or communications plan which it needs.

Read the entire article here.

Further details of the new MySuper rules emerged this week, even if drowned out somewhat by other announcements from Canberra. However in principal the thrust of MySuper is admirable, if the stated objectives are achieved:

• creation of a simple, low cost default superannuation product
• cheaper and easier processing of transactions, and
• strengthen the governance, integrity and regulatory settings of the superannuation system, including SMSF's.

Anything that simplifies Super, or creates a lower cost structure, particularly for super accounts with lower balances, is to be applauded. In this regard, the push for more transparency can only assist. However the risk is that the focus falls more on the fee structure than the actual risk adjusted returns after fees.

While it is easy to point to high fees as a destroyer of an investment's value, performance has a far greater effect, particularly in negative markets. Hopefully the new MySuper transparency and reporting regime will recognise this.

Elsewhere, we noticed a good article in InvestorDaily quoting Pengana's CEO Russel Pillemer, who (correctly in our view) points to the flawed logic of placing many hedge and absolute return funds into the "alternatives" bucket. All too often anything that can't be categorised easily ends up as an alternative, with no real analysis of its return profile or correlation to other asset classes.

Russel's suggestion is to allocate to a category called "uncorrelated", as that is what most investors are seeking from a true alternative investment. In our opinion, the majority of equity long/short strategies might then more correctly fit in the equities bucket, or at least active equities.

At the end of the day simply having a low correlation to equities doesn't really work 100% of the time. What investors want, or need, is an asymmetric return profile where the fund captures the market's upside (a high up capture ratio) and avoids the downside (a low downside capture ratio).

Easier said than done in a single fund, and not always easy when constructing a portfolio, but worth the effort. 

Performance and News Updates on www.fundmonitors.com this week:

The Pengana Australian Equities Market Neutral Fund had a good March 2013 returning 3.2% bringing it's since inception (September 2008) return to 9.21% pa with a zero correlation to the market of -0.02.

BlackRock Multi Opportunity Fund had a sound March 2013 with a return of 1.09% and a twelve month return of 9.70% with positive returns in each of the 3 months of the quarter.

The Pengana Asia Special Events (Onshore) Fund returned 0.83% for March 2013 and 3.28% for the quarter to end-March.  Notably the Fund has a volatility of 6.7% as compared to its benchmark volatility of 17.8% (since inception).

Pengana Australian Equities Fund had a flat March with a return of 0.0% but strong 12 and 24 month returns, delivering 22.5% and 33.06% respectively to the end of March 2013. At month-end cash (including notes and preference shares) represented 32% of the Fund.

The K2 Australian Absolute Return Fund had a strong April 2013 delivering 4.54% with its annual return to the end of April, 23.99%.

Continuing our successful Meet the Manager presentation series, on Thursday 16 May, AFM is holding a city lunch time briefing featuring Jack Lowenstein from Morphic Asset Management. The Morphic Global Opportunities Fund is a global equity long/short manager with a macro-economic overlay. The Fund's portfolio construction has a long bias and favours value based and momentum strategies, with a strong emphasis on risk management. If you would like to join us for the presentation, please reply to this email.

And finally, for something completely different, we bring you a short clip from Cancer Council NSW on Relay for Life.  This weekend our Administration Manager Alexis will be camping out and walking for 24 hours out at the Sutherland Shire Relay and we support her in this worthy cause.  

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris Gosselin
CEO, AUSTRALIAN FUND MONITORS

"MySuper product providers will be required to disclose investment risk, the dollar value of fees and their investment performance in an easy to read way, the Minister for Financial Services and Superannuation, Bill Shorten revealed today.

The Government has issued draft regulations that represent the final stage of the Government?s MySuper reforms and are aimed at helping Australians better understand how their fund is performing".

You can read Mr Shorten's comments here.  And the draft Regulation is published on the Treasury site.

We recently reviewed an article in The Economist which provided an excellent summary of the challenges of establishing a hedge fund in the current environment, even if the article's title, "Launch Bad" left a little to desired, assuming it wasn't a simple typo. Actually the first sentence was somewhat off the mark also, claiming that when starting a hedge fund "bar inheritance or winning the lottery, there are few swifter paths to immense riches".

However, back to the excellent article which (excluding the title and the first sentence) does paint an accurate picture of the challenges facing not only any aspiring fund manager, but the vast majority of the existing funds as well.

Although the Economist's focus was naturally on the challenges in the US and Europe there are many parallels in Australia for aspiring managers, with increased due diligence, a focus on fees, and regulations all featuring to a greater or lesser degree.  What is interesting to us is that there have been a number of start up funds in the past 12-18 months, with the trend being towards better levels of strategic thought, business process, and risk management than in the past.

As a result the investors who back early stage managers continue to do so partly because research shows that while not without some risks, early stage, smaller or boutique fund managers provide significantly better returns, better transparency and more personal investor relations. Read the balance of our review here.

Performance and News Updates on www.fundmonitors.com this week:

Magellan Global Fund was up 1.92% in March 2013 taking its 12 month performance to 19.78% as compared to an index (MSCI World Net) return of 11.1%. All stocks in the portfolio produced positive local currency returns and the portfolio was fully invested.

Auscap Long Short Australian Equities Fund had a strong return of 1.46% over March with an average next exposure of 116.5%. Performance benefited from exposure to property trusts, healthcare and materials sectors and avoiding the mining sector

Allard Investment Fund fell 2.1% over March impacted by the $A and generally weaker Asian markets. Twelve month performance was 6.72% and since inception performance 8.47% net compound annual return. Notable is the Funds low volatility at around two-thirds of the MSCI Asia Pacific ex Japan Index.

Monash Absolute Investment Fund returned a solid 2% over March bringing its six month return to 17.17%, achieved with an average net exposure of 62%. The portfolio avoided defensives, Telstra, consumer staples and utilities.

Continuing our successful Meet the Manager presentation series on Thursday 16 May, AFM is holding a city lunch time briefing featuring Jack Lowenstein from Morphic Asset Management. Contact us to reserve your seat.

As a tribute to yesterdays ANZAC Day, we would like to show this short clip of The Last Post from the Sydney Symphony.

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

A recent article in The Economist provided an excellent overview of the challenges of establishing a hedge fund in the current environment, even if the article's title, "Launch Bad" left a little to desired, assuming it wasn't a simple typo. Actually the first sentence was somewhat off the mark also, claiming that "bar inheritance or winning the lottery, there are few swifter paths to immense riches".

It is estimated that there are over 20,000 absolute such funds globally, variously described as absolute return, alternative or hedge funds. There are no doubt some which have made their founders immensely wealthy, but in spite of their profile they are a significant minority, and almost none have done it swiftly. The Economist should know better.

However, back to the excellent article (excluding the title and the first sentence) which does paint an accurate picture of the challenges facing not only any aspiring fund manager, but the vast majority of the existing funds as well.

The article focuses on the increased level of due diligence and compliance which institutional investors in particular focus on, an area that is frequently difficult for new and emerging managers to tick the appropriate boxes. Bernie Madoff of course made things more difficult in this regard, but with the increased institutional investment, plus the risk averse post GFC world,  this was always going to be the trend.

Along with due diligence from prospective investors the current crop of new managers also face increasing regulatory hurdles, particularly in the USA and UK/Europe. Australia's regulations have remained reasonably constant and consistent, (short selling bans aside) but that may be because they were better to start with.

Fees remain under pressure, but that is probably consistent with margins in most other industries, and particularly in financial services. In addition, any industry that emerges into the mainstream is always going to face competitive pricing pressure.

The initial capital raising process is certainly more difficult than it was seven or eight years ago. Back then the big investment banks would toss anywhere from $50 to $500 million to a star trading team wanting to leave the desk and set up on their own, just to ensure they could feed on the fees from prime brokerage operations including leverage, brokerage and stock lending.

Now many start ups have little other than choice of the three F's (friends, family and fools) or a couple of seed investors with which to build the three year track record that most institutions, asset allocators and research houses demand. Umbrella groups or incubators in Australia such as Bennelong, Ascalon and Pengana generally prefer a decent track record prior to risking their capital and reputation by investing in an early stage or start up manager.

There are exceptions, mainly those former star portfolio manager with a prior high profile who gain the backing of an institution or distribution house, but they are certainly in the minority.  All this leads to the question, why bother?

For some it's the opportunity, some a necessity as the big banks close their proprietary trading desks as a result of the Volker Rule in the US. For others, the challenge, or wish to prove their own worth after ten or twenty years under the perceived security of a broad corporate roof.

But what of the investors who back them and take the risk of allocating to early stage manager? Reduced fees certainly don't make the difference, but all the research shows that early stage, smaller or boutique fund managers provide significantly better returns, better transparency and more personal investor relations.

It is open to debate if this improved performance is due to the alignment of interests, managing smaller pools of capital, or lower levels of bureaucracy, but it hasn't changed much over the past decade.   

So much so that the big end of town is trending back to funding start ups, but with the added incentive of sharing the revenue when they're successful.  As in the past however, and in spite of the impression given by The Economist, only a handful make it to the front pages, and almost all will take a decade at least to confirm their position. 

Hardly swift or overnight success, and only if they provide their investors their promised, or hoped for, returns.

Chris Gosselin
CEO, Australian Fund Monitors

Alternatives category 'meaningless'

By Katarina Taurian, Investor Daily

Mon 22 Apr 2013

Pengana recommends 'uncorrelated' category

Placing investments into an alternatives category because they vary from standard categories is a "flawed logic", according to Pengana Capital. 

Some portfolio constructors have created an alternatives category to hold investments that differ from standard categories, resulting in that category becoming "meaningless", according to Russel Pillemer, chief executive officer at Pengana Capital.

"If you're using it as a category to throw in all orphan investment opportunities - everything that doesn't fit anywhere else - then you just end up with a collection of strategies where there's no logic for them to be together," Mr Pillemer told InvestorDaily.

ATTACHED FILESAlternatives category "meaningless" (pdf format)