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.
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
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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.
