10 Apr 2015 - Hedge Clippings

Absolute Return: Chasing Yield - high risk, but is there no alternative?

A recently published report from S&P Dow Jones comparing Index versus Active Funds gained (not surprisingly) some coverage this week, primarily as it showed that in the six months to December 2015 Active funds had underperformed Index funds (and therefore presumably the index itself). The S&P scorecard showed that 8 out of 10 Australian active funds had underperformed their benchmark in all the major sectors barring domestic small caps.

However Active funds come in all shapes and sizes, and AFM's figures for equity based Absolute Return funds for the 12 months to December 2014 show that 60% outperformed the ASX200 accumulation index. To be fair that percentage has dropped somewhat for the 12 months to March 2015, thanks largely to the market's return of almost 7% in February, taking the YTD return to 10.29%.

A swift response from Epoch Investment Partners ensued pointing out the distorting effect of QE which was creating a false investment environment, and that talented active "stock-picking" managers would prove their value again once QE had passed. Actually, QE has already finished in the US, although the effects are lasting longer than imagined, while in other parts of the world it is ongoing.

In Australia QE was avoided, probably in part thanks to the mining boom which most will have noticed is long gone, and now in bust mode, relatively speaking. However interest rates remain in a downward trajectory, with the economy appearing close to stagnation, with Sydney's property boom probably the only thing preventing the RBA from cutting rates a further 25 bps earlier this week.

However, investor's obsession with the yield play, described by Optimal Australia's George Colman in their most recent performance report as TINA, or "There Is No Alternative" is indicative of the distorting effect of the current interest rate environment, which is making it difficult, or at least expensive for long/short managers to either short poor stocks which are benefitting from the rising tide, or be comfortable holding good stocks at seemingly unattractive prices.

As many managers, including Optimal, are pointing out, this must all end in tears eventually, and even though portfolio insurance is a difficult and costly exercise, this is certainly no time to drop it. As an example, even though only 28% of results are to hand for March, equity based hedge funds returned 1.39% for the month, against the market's flat (-0.09%) return.

Specific results received this week include the following RECENT PERFORMANCE UPDATES:

Alpha Beta Asian Fund rose 0.45% to bring the Fund's return since inception to 21.40%.

The KIS Asia Long Short Fund was flat (0.09%) in February. Since inception the Fund's annual return was 14.61% p.a.

Chris
CEO, AUSTRALIAN FUND MONITORS

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