The Australian equity market rally has now seen the ASX200 rise over 8% YTD, and 26% over the past 12 months, driven not only by the rotation out of cash and term deposits which drove the high yielding banks higher, but more recently also into previously unloved discretionary consumer and retail sectors.

As a result some of the concentrated, high conviction funds which had struggled over the previous 3 to 4 years have enjoyed stellar, above market performance. Meanwhile the risk averse long short and market neutral funds which had previously protected investors' capital have struggled to find value at current prices. This has been further exaggerated by some aggressive price moves amongst their short positions where valuations have been stretched even further.

In this environment active and absolute return funds as a whole are likely to underperform, as indicated by the table below based on 53% of funds which have to date reported January results:

These are averages, and there have been some significant outliers. 21% of funds in the AFM index outperformed the ASX200's return of 4.95% in January, and 35% have achieved this over the past 12 months. Conversely, 11% of fund returns for January to date have been negative, while 14% have returned negative performances over the past 12 months.

The improved performance and sentiment is welcome, but following 7 straight positive months, and gains in many stocks of over 100% in 2012, it is worth remembering that risk is always present around the corner, often when it is least expected.

This reiterates the focus on the need for research and investors' understanding. We have just completed collating industry figures covering fund and strategy performances not only for 2012, but also for five and ten years since 2008 and 2003 respectively. What the data clearly shows is that over the longer term the average absolute return fund has performed above (5 years) or in line (10 years) with the ASX200 but at a fraction of the market's volatility.

For a copy of AFM's "Volatility eats Returns" report please email us.

Finally, Now for something completely different this week, the 2 Ronnies Name Dropping; or if you find something a bit more risque amusing, try this one.

Regards,

Chris.