4 Jul 2014 - Hedge Clippings

THE RETURN OF THE BOILING FROG

This week saw the much discussed changes to FoFA become reality, at the same time as the Senate released its report on poor management controls in the financial planning arm of the Commonwealth Bank. There's been plenty of rhetoric, along no doubt with some behind-the-scenes lobbying, regarding the changes to FoFA, and it is fair to suggest that much of the scaremongering has been just that.

From what we've seen of the new legislation (which is a fair amount having trawled through it along with the relevant sections of the Corporations Act) there would appear to be appropriate safeguards and controls in place to protect retail investors from inappropriate actions by financial advisers. Time will tell of course, but the reality is that no legislation will deter those intent on breaking the law, and as has been seen with the Commonwealth Bank, the risks are not so much with the law, but a lack of effective compliance controls at management level.

So back to markets and risk. This week we read an excellent piece of research by Simon Doyle, Head of Fixed Income and Multi Asset at Schroder Investment Management, entitled 2014: The year of the "Boiling Frog" in which he continued with the theme of heightened risk at the same time as excessive complacency that we highlighted a few weeks ago in George Colman's Optimal Australia performance report.

It is difficult to boil down (excuse the boiling pun) the contents of Schroder's five-page article to a couple of paragraphs, but the essence would seem to be that as valuations rise, so the risk of loss increases, while at the same time volatility, (which implies relaxed and comfortable investors) as measured by the VIX is trading at historic lows.

Doyle's alternative interpretation is that "extra easy monetary policy and reassuring words from central bankers is lulling investors into a false sense of security" and that parallels with the proverbial boiling frog come to mind. As such the temperature may be rising, and the risk to investors more significant than they currently perceive. According to his research and return forecasting framework, Doyle concludes that "valuations in key markets are stretched, future returns are diminishing and the risk of loss is high (and uncomfortably so)".

A link to the full article is included here. Doyle puts the responsibility of the current situation firmly at the feet of central banks and exceptionally easy monetary policy, but at the end of the day it is likely to be investors who are hurt.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

In the first negative month of the ASX since January the Microequities Deep Value Microcap Fund returned 1.39% and 31.53% for the year.

Fund Reviews released this week included:

Optimal Australia Absolute Trust; Insync Global Titans Fund; Supervised High Yield Fund.

FUTURE EVENTS:

14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different, more details on the boiling frog analagy can be found here.  Please note, no frogs were harmed in the filming of this clip.  Unlike this second clip, but at least they were dead first.

On that note, I hope you have a safe and happy 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.  For more information visit www.cpresearch.org.au or contact me by email.