The end of June saw equity markets briefly rally, which gave some hope to the remaining optimists. However standing back and taking a longer term view puts things into perspective. 

Australia's equity market is well and truly stuck between a rock and a hard place, remaining almost 40% below the peak reached in November 2007 in spite of the Treasurer advising all who might listen that the local economy is the envy of the world.

That tells us two things - firstly, he might be talking his own book, and secondly that the rest of the world is in a mess. And of course Australia's economy remains firmly in the grip of those of the US, Europe and particularly China.

Absolute Return and hedge funds have certainly outperformed over the short, medium and long term - and particularly so over the past five years. Meanwhile over the past 12 months any gains have been particularly hard won.

* Based on 31% reported June results.

The above table shows that on a relative basis hedge funds have done well, with 80% outperforming the ASX200 over the past year. However their aim, and in most cases their claim, is to provide investors with an absolute return. On this basis, only 43% succeeded.

No doubt the critics will jump on this fact to claim that hedge funds have failed to deliver, and some have. But the real message is that there are enough funds that do succeed in providing attractive risk adjusted returns to make the reward for finding the exceptional ones well worth the effort.

Regards,
Chris Gosselin

Tomorrow, June 30th sees the end of the financial year in Australia, and while that has little impact on many of our overseas subscribers, for Australian investors in managed funds it marks a yardstick as profits from the last 12 months have to be distributed (even if re-invested) and then accounted for in their personal 2012 tax returns. 

Sydney-based specialist Australian investment manager, Lodestar Capital Partners Pty Limited, (Lodestar) has announced that the company’s founders and principals have made the decision to close the business effective 30 June 2012.

The Lodestar Australian Strategic Shares Fund was established in March 2007 and since that time has returned an annualised -0.32%. The fund had a disappointing 2008/9 when it suffered a drawdown of -27.71% and in spite of returning 28.85% in 2009 as of February 2012 performance remained 11.53% below the high water mark reached in August 2008.

In June 2007, Lodestar announced an alliance with the National Australia Bank Limited for the distribution of Lodestar’s funds, and in September 2009 nabInvest acquired a 33% stake in Lodestar.

BT Investment Management is closing its Total Return Fund after operating for over 10 years.

The Total Return fund was a multi-manager Fund of Fund which invested across a range of strategies including Equity long/short and Market Neutral, and various arbitrage strategies including Convertible Bond, Merger and Fixed Income.

FUM in the fund, which commenced on September 2000, stood at $225 million as at the end of February 2012. The Fund weathered the GFC well with a maximum drawdown of 10% against the ASX which fell over 50% during the same period.

The Fund was a strong and longstanding supporter of local hedge funds. No announcement has been made on the date of closure or future allocations.

Dysfunctional Markets sorting the hedge fund wheat from the chaff.

The dysfunctional markets of 2011 (or should that be four years?) are making it difficult to provide investors with absolute returns. However over 50% of Australian Hedge Funds have provided a positive return over the past 12 months, demonstrating that investors should be increasing their allocation to hedge funds in 2012 - provided they invested in the right 50%. 

Meanwhile only 10% of the 270 funds in AFM's database have under perfomed the fall in the ASX200 of 10.13% over the 12 months to the end of November. Depending on how far down the list they sit, the other 50% of managers might see redemption notices rather than greeting cards in the mail this year.

With the ASX200 racking up its seventh losing month this year, and only one positive month in the last eight, the market's direction has frequently seemed as random as the toss of a coin. It is a true test of investment and risk skills to produce a positive return when the market has fallen over 13% year to date.

On that note we are pleased to see that AFM's Model Portfolio of five Australian equity funds returned +1.90% for November for a 12 month return of 18.47%, certainly vindicating their inclusion in the best of breed category.  Annualised returns from this portfolio over the past five years now stand at 16.84% with a volatility of just 5.76%

However, if there's one thing these markets are doing, it's sorting the wheat from the chaff when it comes to manager selection.  From that perspective we expect that 2011 will be a pivotal year for the industry in Australia and overseas.  Managers who have proven they can provide positive returns - particulary those who have consistently done so - across all market conditions should find themselves in high demand.

Given the typically boutique structure of the industry, and the general reluctance of the larger superannuation funds to allocate to local absolute return managers, it will be the Self Managed (SMSF) sector and Family Offices which are most likely to benefit. 

On a different note it was pleasing to see the announcement by the Australian Government confirming that foreign based funds investing in Australian managers would no longer be subject to tax on profits from capital gains.  This has the potential to significantly lift the interest of offshore investors, and inflows into local managers.

For details on all funds in AFM's database see www.fundmonitors.com.  Meanwhile we wish all our members and subscribers a happy and healthy festive season, and best wishes for a healthy, happy and prosperous New Year.

Regards,

Chris Gosselin