21 May 2016 - Hedge Clippings

Low inflation and low returns - Peter Costello weighs in.

For some time Hedge Clippings has been flagging that investors will need to lower their return expectations in the current low interest rate, low inflation environment.

Peter Costello, the architect of Australia's Future Fund, and now its chairman, made much the same call this week, warning that the fund's double digit returns of the past few years were unlikely to be repeated, and that the "inflation +5%" target will be a big ask in the current environment.

Given that Australia's inflation rate is negligible, and looking forward a few years is likely to be no more than 1 to 2 percent, this means investors are unlikely to achieve returns of 5% at best. With government bonds returning little more than 2%, and the local equity market seemingly up against a hard ceiling around the 5500 level, and many key areas of the property market looking soft, (which in turn will impact the banks) achieving the 10 to 15% returns many investors have become used to will not be easy.

To reinforce that unpleasant truth, in the 12 months to the end of April the ASX 200 accumulation index fell 4.93%, compared with an average of the active equity funds in AFM's database which gained 2% and providing an outperformance of 7%. 

73% of funds in AFM's database outperformed the ASX 200, although individual 12 month returns ranged widely from -35% through to +44%. Within those extremes smart and well informed investors still picked up the elusive 10 to 15% per annum return with limited risk by investing in the better managers.

While some may accuse Hedge Clippings of bias, the facts prove that actively managed and absolute return funds provide significant benefits provided investors have the ability to sort the wheat from the chaff.

If Peter Costello's right, and we believe he is, most investors in Australia's $1.8 trillion superannuation sector, plus those relying on the Future Fund's $117 billion, are going to have to tighten their belts over the next 3 to 5 years.

The ASX200 Accumulation Index returned+3.37% in April, with a range of fund returns as follows:

The Paragon Fund returned a +10.80% after fees for the month of April, outperforming the Index by 7.43%.

Alexander Credit Opportunities Fund increased 0.57% to take annualised return since inception to 17.18% p.a.

Cyan C3G Fund rose 7.90% in April 2016, outperforming the ASX 200 Accumulation Index by 4.53%.

Optimal Australia Absolute Trust returned -0.69% to take annualised return since inception to  9.00% p.a.

Bennelong Twenty20 Australian Equities Fund returned 2.31% for the month of April.

Jamieson Coote Bonds Active Fund rose 0.33%, outperforming the Bloomberg Australian Government Bond Index by 0.21%.

Bennelong Kardinia Absolute Return Fund returned 0.52% in April. Since inception, the Fund has an annualised performance of 11.79% p.a.

Totus Alpha Fund returned -1.37% in April to take the latest 12 months return to 20.66%. 

Pengana Absolute Return Asia Pacific Fund rose 1.32% for the month of April, compared to the HFR Event Driven Index, which returned 0.43%. 

NWQ Fiduciary Fund returned 0.27% bringing the net performance for the trailing 12 months to 6.25%.

Pengana Global Small Companies Fund returned 1.01% for the month of April.

Affluence Investment Fund returned 1.92%, to take annualised return since inception to 8.78% p.a.

FUND REVIEWS released this week: Meme Australian Share Fund; Bennelong Long Short Equity Fund; Bennelong Kardinia Absolute Return Fund; Optimal Australia Absolute Trust; Jamieson Coote Bonds Active Fund; 

And on that note, have a great weekend.

Regards,

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.