13 Feb 2015 - Hedge Clippings

Difference of opinion is what makes a market.

AFM's "Looking Forward Looking Back" seminar, held yesterday in conjunction with Deloitte provided attendees with a reasonably universal view of the economic world and the challenges facing it, but some significantly different opinions on the level of risk faced, and the eventual outcomes.

The introductory presentation addressed, and we hope answered, the question of whether hedge funds are risky or risk averse? The facts plainly speak for themselves, with the sector providing 1 to 2% higher returns than the ASX 200 accumulation index over each of one, five and 10 years, but on average with half the market's volatility.

Following this Michael Thomas from Deloitte Access Economics provided a presentation on the Australian economic outlook, following which he joined a panel of fund managers including Simon Shields from Monash Investors, John Corr from Aurora Funds Management, Monic Kotecha from InSync Funds Management, and finally George Colman from Optimal Australia.

As indicated above there was generally a standard view of where the world stands, and the challenges (particularly low growth, low to negative interest rates, high levels of central bank intervention, and the potential for deflation) which it faces. That's about where the consensus ended, with significantly different views on what might happen when, or if the music ever stops.

The most bearish of the participants was George Colman from Optimal Australia, who interestingly noted that they launched their fund in 2008 on the same day that Lehman Bros filed for bankruptcy. In spite of that the fund has managed to return an annualised 9.23% over the following 6 1/2 years, during which time their largest drawdown has been just 2.75% (against the market's largest drawdown of 33%) George was of the opinion that 2014 was one of the most difficult years he had experienced in his 25 years in the financial markets.

George was unequivocally of the view that the distortion to financial markets caused by the unprecedented levels of central bank intervention, and the stretched valuations that have occurred as a result, could only end in tears once interest rates started to rise.

Sharing George's negative view was John Corr from Aurora Funds Ltd, who also added his concern regarding the ongoing political instability in Australia. While political instability in Australia takes a different form to that experienced in many other parts of the world, his concern was the level of influence exerted by minor parties, which along with a fickle electorate was preventing electing governments from making the hard decisions necessary to resolve structural problems within the economy.

John also felt the market was expensive, and although he did not feel that a large pullback was imminent he did note concern around the stretched pricing of the financial sector. For the record Aurora's Fortitude Absolute Return Fund has returned 7.38% over 10 years, all of which have provided positive returns with a largest drawdown of 2.09% and volatility of just 2.71% against the market's volatility of 13.88%.

Monik Kotecha from InSync's Global Titans Fund (annualised returns of 11.22% over five years with the largest drawdown of just 4.39%) had a somewhat different view of the outcome, possibly as a result of his investment universe being global mega stocks. His feedback was that company management continues to report business conditions as being very difficult, particularly in Europe where sales growth is flat, although the weaker Euro is expected to improve export opportunities.

Of interest was the fact that InSync normally runs put protection at about 25% of the portfolio, whilst at the current time it is around 80% even though much of this is largely due to the fact that put protection is currently very cheap - at odds with the general concerns about risk.

Finally the most positive of the four was Simon Shields from Monash Investors, whose Absolute Investment Fund has returned 16.6% per annum (over a shorter time frame than the other panellists albeit with a slightly higher volatility). Whilst noting that the market overall is quite expensive Simon still felt it offered opportunities, feeling that any pullback was not imminent, and in any event was unlikely to be as severe as predicted by his more bearish panel members.

One reason provided by Simon for his view was the rise of the global middle-class as a major economic factor, and his feeling that this demographic change had some time to run, whilst he was also bullish on technology and its impacts on the economy.

Whether one's prediction of the outcome sits at the bearish end as outlined by George Colman and John Corr, or the more opportunistic approach from Simon and Monik will depend on one's view of the world, but what did not seem to be in question was that we are living in in unprecedented economic times - with risks that are high, and the outcome uncertain.

Specific results received this week include the following PERFORMANCE UPDATES:

Morphic Global Opportunities Fund rose 4.42% in January 2015 (Global Equity Index 3.27%) with a volatility of 8.68%.

Chris
CEO, AUSTRALIAN FUND MONITORS

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