5 Sep 2015 - Hedge Clippings

Don't say we didn't warn you!

Every now and again - and frequently more often if the truth be known - we choose, or are forced to look back at what we've said or written previously. Occasionally  - and more often than we'd care to admit - we have to revise our thinking, but hopefully not too often.

One has to remain open to the possibility that we might have been wrong. However as Sir Winston Churchill once famously said, quoting economist John Maynard Keynes, "when the facts change I change my mind. What do you do Sir"?

So having said that I'm now going to say we were right, and in our opinion the facts haven't changed. Back on 11th July in Hedge Clippings we said "if anyone can pull off what the Chinese authorities are trying to do, they can, but we doubt they'll succeed".  At the time we were referring to their ability to control or ban investors putting in sell orders, but it matters not. The Chinese are now realising that as great as their economic growth miracle has been, once it becomes a market economy, the market takes over.

The trouble is that it is not just the Chinese economy that's at stake. So much has the global economy been tied to the Chinese miracle, that now the real slowdown has become apparent, the reverberations have set in.

Australia, having missed the post GFC global slowdown thanks to Chinese demand for our resources, failed to make the most of it, and failed to adjust the rest of the economy whilst it could. Now we're suffering as a result, added to which the liquidity of both the market and the currency makes us easy prey to global capital flows.

Thanks in part to an overheated market (and possibly the irrational valuations of Aussie bank shares on the back of the yield trade) the ASX200 has just suffered its worst monthly return since the height of the GFC in 2008. As we have indicated in previous Clippings, this will sort the fund manager men from the boys (sorry, a little sexist) and the wheat from the chaff. Numbers are scarce to date, but a good example is George Colman's Optimal Australia Trust. Having struggled for the past year in the irrationally exuberant markets which ignored the fundamentals of what was going on, they returned a positive (repeat, positive) return of 1.5% in August, an outperformance of just over 10% for the month.

Two predictions from here: One, that interest rates will now stay lower for longer, both here and in the USA as the authorities have limited room or levers left to pull. Two, that the current volatility will remain as global investment banks, plus the combined effects of ETF's, move markets.

And one more: Volatility, while it may settle down from these levels, is never far away, particularly when you least expect it. High returns may be appealing, but not nearly as comforting as capital preservation.

Specific results received this week include the following PERFORMANCE UPDATES:

FUND REVIEWS released this week: Pengana Absolute Return Asia Pacific Fund; Supervised High Yield Fund;

UPCOMING EVENTS:

17 September 2015 - The 14th Annual Hedge Fund Rock and Australian Hedge Fund Awards 2015 as the industry lets its hair down with some drinks, music and great videos. All proceeds go to Redkite helping childern with cancer and their families.

Now for Something Completely Different is taking a rest this week, but try to have a good week-end anyway.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

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