This week Hedge Clippings attended the ARRIA Round Table in Sydney. ARRIA, for those not aware of the organisation, stands for the Association of Real Return Investment Advisors and acts as a resource for independent financial advisors looking for ways to improve returns and diversify risk for their clients.
It was the third such ARRIA Round Table event we have attended, and it was pleasing to note the expanding numbers of attendees, and as a result the level and depth of discussion and debate that ensued.
The points we tried to make at the meeting were twofold:
Firstly, what's in a name? It doesn't really matter what they're called - real return, absolute return, alternatives, or hedge funds - the end objective of each is to provide an attractive risk adjusted return, and appropriate diversification to underlying markets or asset classes.
The second point was that there's no silver bullet when choosing the ideal asset class, strategy or product as the universe is infinitely variable, and certainly not homogenous, as are the end investors' needs and objectives. Having said that we do believe that research, research and more research is the key to understanding any investment product's strategy and performance, rather than some simplistic rating or label applied to a product for marketing and distribution purposes.
Inevitably the subject of fees raised its head, as it so often does, with the usual opinions and concerns. Tim Farrelly, probably quite correctly, claimed that over the past half century or so the wealth management industry (and specifically hedge funds) had done more to improve the wealth of those in the industry than the wealth of the investors for whom they were investing.
In our opinion that misses the point about research and manager selection. There are undoubtedly fund managers that don't deliver value, just as there are some who deliver excellent value. Bundling them into one basket and avoiding them all risks reverting to index or ETF type products that provide long term market returns, complete with the market's volatility, albeit at very low fees. The solution comes from doing the research, both quantitatively on performance and risk, and qualitatively on the product, manager, strategy and processes.
Following on from last week's Hedge Clippings, we referred to fund manager Jonathan Rochford's article "The Great Fee Debate - Resetting Manager and Investor Expectations". What did occur to us in this debate is the structure and alignment of interest that fees can create - or for that matter obscure - depending on the strategy, structure and size of the fund involved.
There is a strong argument that funds with assets under management (AUM) well into the multi billions do not require management fees of over 1% in addition to a performance fee of 10% or 20%. Without necessarily singling them out, in Magellan's results announced today, they indicated that the total capacity of their combined funds was potentially $50 billion. Whilst Magellan's average management fee might well be lower than their stated 1.35%, this plays into Tim Farrelly's argument pretty easily.
It is encouraging to note that some smaller managers, such as Monash Investors, are proposing to lower their management fee as AUM increases, and will achieve their alignment of interest with investors through co-investment and performance incentives.
There's a myriad of why's and where fore's in the great fee debate, including the fees on LIC's, structure and others, not forgetting of course that if the manager is performing to expectations, why shouldn't they benefit from the successful business they've built? There are few complaints about the profits made in other industries, with the exception perhaps of banking, but let's not go there.
Specific results received this week include the following PERFORMANCE UPDATES:
Bennelong Kardinia Absolute Return Fund returned 1.07% during July bringing annual performance to 7.02% with a volatility of 4.29%.
Returning a performance result of 12.50% in July (Index 4.40%), the Paragon Fund brings annual returns to 43.65% (Index 16.54%).
The Optimal Australia Absolute Trust returned 1.03% during July and 6.37% for the previous twelve months with a standard deviation of 1.69%.
AFM are now accredited by the Financial Planning Association of Australia to issue CPD points for FUND REVIEWS.
This week's updated reviews include:
Supervised High Yield Fund, Alpha Beta Asian Fund and also Monash Absolute Investment Fund
Read the most recent Fund Review for any of our research clients, and then answer 5 straightforward questions, these are presented in multiple choice format. An 80% or more success score will provide 0.5 CPD points, with a certificate provided as proof of completion. There is no charge for this service.
Wednesday 27 - Friday 29 August Money Management's Platforms and Wraps conference in the beautiful Hunter Valley, NSW. Covers the latest industry trends and innovation, while also exploring technology iniatives, client segmentation, data ownership, analytics, marketing and distribution, regulatory reform and consolidation. Pre-conference golf and wine tour of Hope Estate included. Special rate for fundmonitors.com members.
Tuesday 26 August in Melbourne and also Tuesday 9 September in Brisbane , from 12pm to 4.30pm - ARRIA is hosting a further round table discussion, providing a valuable opportunity to meet with like-minded advisers. Free to Financial Advisors.
If you would like your Event listed in our calendar, please contact us.
This week's Now For Something Completely Different we say a sad farewell to Robin Williams, who made us laugh, he made us cry and bought so much joy to the world. Now go out and make your life spectacular, like he did.
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.
