NEWS

16 Apr 2021 - Fund Review: Bennelong Long Short Equity Fund March 2021
BENNELONG LONG SHORT EQUITY FUND
Attached is our most recently updated Fund Review on the Bennelong Long Short Equity Fund.
- The Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large-caps from the ASX/S&P100 Index, with over 19-years' track record and an annualised returns of 14.10%.
- The consistent returns across the investment history highlight the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market. The Fund's Sharpe Ratio and Sortino Ratio are 0.83 and 1.31 respectively.
For further details on the Fund, please do not hesitate to contact us.


15 Apr 2021 - Performance Report: Bennelong Long Short Equity Fund
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Fund Overview | In a typical environment the Fund will hold around 70 stocks comprising 35 pairs. Each pair contains one long and one short position each of which will have been thoroughly researched and are selected from the same market sector. Whilst in an ideal environment each stock's position will make a positive return, it is the relative performance of the pair that is important. As a result the Fund can make positive returns when each stock moves in the same direction provided the long position outperforms the short one in relative terms. However, if neither side of the trade is profitable, strict controls are required to ensure losses are limited. The Fund uses no derivatives and has no currency exposure. The Fund has no hard stop loss limits, instead relying on the small average position size per stock (1.5%) and per pair (3%) to limit exposure. Where practical pairs are always held within the same sector to limit cross sector risk, and positions can be held for months or years. The Bennelong Market Neutral Fund, with same strategy and liquidity is available for retail investors as a Listed Investment Company (LIC) on the ASX. |
Manager Comments | The Fund's Sharpe and Sortino ratios (since inception) of 0.83 and 1.31 respectively, by contrast with the Index's Sharpe of 0.39 and Sortino of 0.43, highlight its capacity to achieve superior risk-adjusted returns while avoiding the market's downside volatility. The Fund's significant outperformance in falling markets is demonstrated by the following statistics (since inception): worst month of -10.11% vs the Index's -20.65%, maximum drawdown of -23.77% vs the Index's -47.19%, and down-capture ratio of -162%. The Fund's down-capture ratio indicates that, on average, it has risen during the market's negative months. Bennelong noted the rotation into leveraged cyclicals which hit the Fund in February continued into the first half of March. The portfolio stabilised in the second half of March, ending the month down -5.95%. Contribution was spread across half a dozen sectors with none standing out. Contribution from the top and bottom pairs was similar in magnitude. |
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15 Apr 2021 - One Year On - What Did We Learn?
One Year On - What Did We Learn? Marcus Padley, MarcusToday 29th March 2021 It is a year since the bottom of the market on March 23, 2020. Since then, the ASX 200 is up 54.44% if you bought at the absolute low and sold today. What a year of opportunity. The 54% is a fantasy of course - no-one bought at the bottom, or could be expected to have bought at the bottom and amazingly, if you bought just a week after the bottom, the market is up 26.7%, less than half the 54% - what a difference a week makes in volatile times. Here are some of the best and worst performers over the last year. Lets see if we can learn something from a year of pandemic hindsight. All these tables have been derived from our Marcus Today All Ordinaries spreadsheet. I have included the one-year performance column and a few other columns as you can see, in particular the PE, Yield and Revenue Growth. The reason for including those is to highlight how you simply would not have picked these stocks on basic fundamentals - the best performers are not necessarily profitable or cheap, and most of them offer no yield at all. TOP 100 - Top 20 performers in the biggest 100 stocks: TOP 100 - Worst 20 performers in the biggest 100 stocks: NEXT 100 - Top 20 performers in the next biggest 100 stocks: NEXT 100 - Worst 20 performers in the next biggest 100 stocks: ALL ORDINARIES - Best 20 performers in the All Ordinaries Index: ALL ORDINARIES - Worst 20 performers in the All Ordinaries 15 GOLDEN RULES FROM THE PANDEMIC - Here are some of the lessons from these lists. Observations about sharp market corrections and the recovery.
At the end of the day the pandemic year has been great for us as investors. It has been a year of fabulous opportunities. Hopefully you played the game. Look forward to the next great correction. Hopefully we`ll all have the vigilance, experience and courage to exploit it, not run from it. Funds operated by this manager: |

14 Apr 2021 - Performance Report: Cyan C3G Fund
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Fund Overview | Cyan C3G Fund is based on the investment philosophy which can be defined as a comprehensive, clear and considered process focused on delivering growth. These are identified through stringent filter criteria and a rigorous research process. The Manager uses a proprietary stock filter in order to eliminate a large proportion of investments due to both internal characteristics (such as gearing levels or cash flow) and external characteristics (such as exposure to commodity prices or customer concentration). Typically, the Fund looks for businesses that are one or more of: a) under researched, b) fundamentally undervalued, c) have a catalyst for re-rating. The Manager seeks to achieve this investment outcome by actively managing a portfolio of Australian listed securities. When the opportunity to invest in suitable securities cannot be found, the manager may reduce the level of equities exposure and accumulate a defensive cash position. Whilst it is the company's intention, there is no guarantee that any distributions or returns will be declared, or that if declared, the amount of any returns will remain constant or increase over time. The Fund does not invest in derivatives and does not use debt to leverage the Fund's performance. However, companies in which the Fund invests may be leveraged. |
Manager Comments | After a run of positive months, the Fund returned -3.1% in March. Two strong performers during the month included Alcidion and Universal Biosensors, while some of the Fund's longer-term holdings including Swift Media, Readcloud, Mighty Craft and Quickstep retraced more than 10%, and a handful including Raiz, Vita Group and Kip McGrath experienced smaller declines. Cyan noted the majority of these stocks had posted significant gains in recent months, so last month's declines weren't unexpected. Cyan remains positive on the long-term positioning of these companies and stay committed to their investments unless there are significant negative fundamental changes. In the coming months Cyan expect some good news from their already-committed pipeline of IPO and pre-IPO positions in companies such as the Afterpay-backed venture capital company AP Ventures and influencer marketing platform Tribe. The Fund has enjoyed a strong start to April and Cyan are excited about a number of company specific opportunities that should play out in the coming months. |
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14 Apr 2021 - Are rates barking or biting?
Are rates barking or biting? John Abernethy, Clime Asset Management 11th March 2021 In calendar year 2020, the US Treasury issued US$4.4 trillion of new debt to undertake and fund its "rescue and recovery" plan for the US economy. Of the bonds that were issued, only 5.2% (US $200 billion) were bought by traditional non-US (foreign) buyers. Meanwhile, the US Federal Reserve (the Fed) bought US$2.4 trillion (54%) or an average of US$197 billion per month as it reignited a new and sustained QE program. For calendar 2021, the Fed has now indicated its intention to buy bonds at a rate of US$80 billion per month. However, pundits and market players are concerned because this rate of buying seems too low. This is particularly so given the anticipated passing through the US Congress/Senate of the US$1.9 trillion Biden "rescue" program and perhaps up to another US$3 trillion of "recovery" fiscal stimulation ("build back better" infrastructure investment) that is being proposed for later in the year. The above may amount to the world's largest sustained fiscal stimulus of all time. Consequently it will also require the support of the largest QE of all time and this is what is weighing on the long dated US bond markets. Should the Fed not introduce a program of higher and more sustained QE along the yield curve (even past 10 year duration), then long bond yields will probably rise further. Whilst inflation is flagged as a risk for bond yields, it is not that big an issue at present with an excess supply of both labour and energy dampening inflation. Rather, it is primarily the excessive supply of bonds to fund extraordinary fiscal expenditure that is driving long dated yields higher. However, the massive fiscal plan has led to upgrades in the outlook for US growth in 2021. Recently some major US economists have forecast that gross (or pre-inflation) GDP growth will be 7% in the US. This forecast begs the question: How significant will inflation be in this gross GDP outcome? Our view is: not much - maybe 1.5% - but we also doubt that 7% growth can be achieved. The complete COVID vaccine rollout will take at least 4-6 months to occur and the infrastructure investment is really a 2022 story and beyond. The US will recover but not as quick as many suggest. The rolling US fiscal program seems based on Modern Monetary Theory (MMT). As discussed previously in these pages, MMT argues that governments create new money by using fiscal policy, and that the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector. If unemployment is too high, then this is a signal that the Treasury or the Fed is overly restricting the supply of financial assets needed to pay taxes and satisfy the desire for savings. It would appear that the Biden Administration firmly believes that with unemployment still very high, there are few bounds to fiscal stimulation and that the Fed will maintain QE at a sustained rate. This point is totally lost in the political debate across the world. Indeed, if for a moment we think about the current monetary and fiscal policy settings in Australia, we see a disconnection between the policy makers (Treasury and the RBA) and the politicians. For example, in the last week we have had a Royal Commission declare that Australia's aged care system is broken. The response from the Government is that we must increase expenditure in this area and that it may be best to fund it with an income tax surcharge. That begs the obvious but uncomfortable question - Why not just increase Commonwealth borrowings and fund Aged Care investment inside the QE policy? At some point, the politicians need to focus on this issue. Also the bureaucrats need to share their analyses of the logic and sustainability of QE or MMT. The average Australian may soon question why QE that funds "JobSeeker" or "JobKeeper" is fine, but a substantial investment in aged care, healthcare and general public infrastructure is not? Moving back to the US, we see the surge in expenditure in the Biden program below as the new Administration revisits and resets the programs that were originally set in March 2020 as COVID commenced. The explosion of the Fed balance sheet is shown below as it lifted from about US$3.5 trillion in assets to over US$7.5 trillion last week. Based on the projections above, it may well reach US $10 trillion by year's end (or about 40% of US GDP). At that point, the Fed would own about 35% of all US bonds on issue. The effect of sustained QE is well observed. Bond yields are held down and the rates that would exist in a "free market" - where Central Bank interference does not occur - are absent. A free market would see bond yields affected or influenced by economic activity, inflation expectations and the credit quality of the issuing government as measured by its fiscal responsibility. The graph below compares global manufacturing activity (Purchasing Managers Index or PMI) to US bonds, and shows that bond yields are particularly low on this measure. Since the GFC it has been a fairly good tracker, but during COVID the relationship has broken down with the massive US QE program artificially suppressing yields. That is not to deny that bond yields have risen lately. However, across the world yields are rising back to where they were prior to the COVID crisis - and that is to be expected. It is not alarming; rather, it is logical. The above chart shows that Australian 10 year bonds have moved above their pre-COVID levels despite the RBA introducing QE. The reason for this is because the RBA program is very focused on the short end. It originally (in March 2020) targeted 3 year bonds at 0.25%, until November 2020 when it reduced the target for 3 year bonds to the same as the official cash rate, namely 0.10%. It is likely that the RBA will expand its QE program and move into the 10 year bond market at some point. It is truly perverse that Australian 10 year bonds yield 2% higher than German bonds - which are still trading with a negative yield! The next chart takes a slightly longer look at Australian bond yields. In early 2018, three year bond yields were over 2% and therefore substantially higher than today's ten year bond yield. The compression of three year bond yields to slightly above the 0.1% target by the RBA is a major reason why investible cash will continue to flow towards the Australian listed yield market. The next chart shows that US ten year bond yields have now moved above the S&P 500 dividend yield. So is this a problem for markets? Our view is "No" because the dividends that will flow from the US economic (and world) recovery will grow, and will be far superior to the static and controlled yields of the bond market. We regard the chart as interesting but not persuasive. The sustained decline in bond yields driven by QE programs had an outsized effect on returns generated by all bond indices. The return for Australian asset classes is shown below and it is observable that Australian bonds delivered an extraordinary return compared to Australian shares. The return on so-called low risk assets (bonds) should not be the same as the return on risk assets (equities). Based on historical data the chart above, in our view, suggests a relatively strong outlook for Australian equities compared to both Australian bonds and international equities. Excess performance over a short term (say 3 years) is often reversed over a longer period. Markets typically "overshoot"; more so when the relative out-performance is generated by the use of QE in offshore economies. Thus, as Australia has now joined the crowd and also embarked on QE, our view is that our market will benefit from this policy -- just as international markets have. However, a sobering observation (our final one in this edition) is the forward looking benefit of having a balanced portfolio that has an allocation to bonds.The following chart shows the "defensive" benefit of bonds as a risk and return offset to the volatility in equities has and is declining. The lift in long term bond yields is predictable. A consequence is that while the outlook for equities is positive, the ability to manage portfolio volatility has become harder. For self-directed pension funds, this suggests that an increased allocation to direct property, credit and yield assets should be sought as the usefulness and return on bonds declines. Funds operated by this manager: Clime Australian Value Fund - Retail, Clime Internation Fund - Wholesale |

13 Apr 2021 - Performance Report: DS Capital Growth Fund
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Fund Overview | The investment team looks for industrial businesses that are simple to understand; they generally avoid large caps, pure mining, biotech and start-ups. They also look for: - Access to management; - Businesses with a competitive edge; - Profitable companies with good margins, organic growth prospects, strong market position and a track record of healthy dividend growth; - Sectors with structural advantage and barriers to entry; - 15% p.a. pre-tax compound return on each holding; and - A history of stable and predictable cash flows that DS Capital can understand and value. |
Manager Comments | The March quarter featured the February reporting season with most of DS Capital's businesses reporting results in line with their expectations. They noted that the underlying operations of almost all their businesses continued to perform well in an unusual environment. Top contributors included Resimac, Dusk and Kogan. DS Capital's view is that short to medium term economic conditions will largely remain dependent on the continuing impact of Covid-19. They also noted that their investment process has long been focused on identifying businesses offering earnings growth in a variety of environments over the long term. Should the expectation of rates rising sooner than previously expected materialise, then DS Capital believe it is likely that economic conditions are also improving and will be accompanied by stronger earnings growth. In this event, they expect that stronger earnings should provide some insulation against any impact that higher interest rates may have on derating earnings multiples. They continue to monitor inflation and interest rates for evidence of a more significant change. |
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12 Apr 2021 - Performance Report: AIM Global High Conviction Fund
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Fund Overview | AIM look for the following characteristics in the businesses they want to own: - Strong competitive advantages that enable consistently high returns on capital throughout an economic cycle, combined with the ability to reinvest surplus capital at high marginal returns. - A proven ability to generate and grow cash flows, rather than accounting based earnings. - A strong balance sheet and sensible capital structure to reduce the risk of failure when the economic cycle ends or an unexpected crisis occurs. - Honest and shareholder-aligned management teams that understand the principles behind value creation and have a proven track record of capital allocation. They look to buy businesses that meet these criteria at attractive valuations, and then intend to hold them for long periods of time. AIM intend to own between 15 and 25 businesses at any given point. They do not seek to generate returns by constantly having to trade in and out of businesses. Instead, they believe the Fund's long-term return will approximate the underlying economics of the businesses they own. They are bottom-up, fundamental investors. They are cognizant of macro-economic conditions and geo-political risks, however, they do not construct the Fund to take advantage of such events. AIM intend for the portfolio to be between 90% and 100% invested in equities. AIM do not engage in shorting, nor do they use leverage to enhance returns. The Fund's investable universe is global, and AIM look for businesses that have a market capitalisation of at least $7.5bn to guarantee sufficient liquidity to investors. |
Manager Comments | Over the past quarter, the Fund rose +2.82%. Top 5 quarterly contributors included Alphabet, Berkshire Hathaway, Estee Lauder, UnitedHealth and Microsoft. The top 5 detractors were Keyence, Nike, Heineken, and Amazon.com. Over the past month, the Fund sold out of two businesses in full (Salesforce and Novo Nordisk), while also introducing two new businesses (Ninendo and Croda International). AIM noted that, while allowing for the likelihood of unexpected setbacks over the short-term, they believe that the combined fiscal, monetary, and public health policies in place are revealing the path towards a more 'open' and normalised economy in the second half of 2021 and beyond. |
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12 Apr 2021 - How Hybrids fit into 2021 Income Portfolios
How Hybrids fit into 2021 Income Portfolios Campbell Dawson, Director, Elstree Investment Management 24 March 2021
"We have seen better days" (Shakespeare) Australian income investors lives have changed, maybe permanently. Between 1990 and 2015, Australia was the lucky country. High interest rates meant that it was relatively easy to create income portfolios with good returns and low(ish) volatility. After adjusting for inflation, Australian cash and bonds produced the highest 'real' returns in the world for most of the period since 1990. After 2015, cash and bond rates started to fall, and income portfolios became a lot harder. In the chart below we've shown the income yield and rolling 12 month return of a typical capital stable/safe income portfolio (50% cash/TD, 30% equities, 20% property).
How good is Australia? The past 15 years have been great; average income levels were 4%, the annual total return (income plus capital) of the 50%/30%/20% portfolio was around 5.25% p.a. including two pretty severe stress events (GFC and Covid-19). Ex Covid, the portfolio volatility was 5% p.a. which meant that capital changes were within the range of +/- 5% for 2 out of 3 years. Of course, some years were more volatile than that. The portfolio got towelled during the GFC, but if you went to sleep often enough in the years after that, you probably didn't see the portfolio generate a negative return on a rolling 12-month basis until Covid-19, and even after that it's now back to a flat return for the year. But the income has halved ... and investors can't cut their spending by 50% The income yield on the previously impeccable income portfolio is now less than 2%, down from the previous decade of average of over 4%. The obvious dilemma is that investors can't cut their spending by 50%, so they either need to start eating into capital, or take more risk on in an attempt to generate previous income levels. We've highlighted the dilemma by showing what happens to the previously effective TD/Equity/Property portfolio when you increase the equity component to generate higher income. To get to a 3% income return, you need to increase risk materially. It's a big jump for most investors to almost double their risk tolerance, so there has to be a better solution.
Uncomplicated portfolios don't work anymore We don't think there are any magic solutions. Investors need to take on more risk, but they need to do it more sensibly than just buying more equities, because even 'defensive equities' lost 35% in the Covid-19 downturn. The solution is more difficult because investors need to buy more stuff. It's not going to be as familiar as the old portfolio and has different risks to watch out for. Diversify and get the free lunch It is one of the wonders of investment science that you can mix a bunch of higher return but risky assets but if they are not exactly correlated, you end up with a portfolio that's not as risky as you might think. For example, combining non-AUD equities with AUD equities produces a portfolio with around 30% less volatility than each individual asset class. Diversification is the biggest free lunch an investor will ever get. We think investors should use this free lunch concept to combine a range of income type investments with a range of return and risk profiles and let the correlations work for you. The table below shows a range of asset types with their return and expected volatility. What should be immediately apparent is that there are a range of assets that sit in the mid points between Term Deposits (which are risk free) and Equities (which are definitely not risk free). A combination of these asset classes increases the return above a Term Deposit exposed portfolio, but the risk and the correlation benefits result in a less risky portfolio than jumping to a higher equity position.
So, how does it look in practice? We created a portfolio with 10% cash holdings 20% Hybrids and the balance evenly split between the other 8 asset classes mentioned above. Only 35% was allocated to equity and property. We've detailed the return and volatility of the portfolio on the table below and compared them to the "capital stable" of last decade.
It's interesting to note (with the caveat that we have made assumptions about volatility and correlations) that if you diversify your income sources, you can create a c4% income portfolio while still having an acceptable amount of volatility. The previous optimal portfolios either produce less income with the same risk, or the same income with more risk. Neither are particularly palatable outcomes. The one trade-off is liquidity. Most previous income portfolios were very liquid with up to 90% invested in cash and term deposits and with lots of that in TDs which are able to liquified at face value. The more diversified portfolio has a greater proportion of assets in classes that are either less liquid or more volatile, so selling in crisis results in a discount. The liquid, non-volatile component is around 30% of the portfolio (cash and hybrids) with a further 25% in listed equities and listed property, which are liquid but maybe not at close to face value. Why are Hybrids so important? Hybrids are really important in new age income portfolios for two main reasons:
The liquidity benefit is particularly important in a portfolio which is trading off liquidity for return. More about Elstree: Elstree Investment Management Limited was formed in 2002 and is exclusively and equally owned by the three executives associated with the company. Since 2003 it has managed ASX listed hybrid portfolios and at the same time developed the Elstree Hybrid Index, which is the only index of post-1999 hybrid prices and returns. The data from the Elstree Hybrid Index extensively for security selection, risk management and benchmarking. Currently the firm manages approximately $150 million across a wholesale unlisted fund (Elstree Enhanced Income Fund, minimum investment $500,000) and a number of individually managed accounts. The Elstree Enhance d Income Fund returned 8.8% (excl franking) for the 12 months to end- February 2021. Elstree has recently launched the Elstree Hybrid Fund (EHF1), an Exchange Traded Product (ETP) version of the successful unlisted Elstree Enhanced Income Fund for retail investors. EHF1 will shortly commence trading on Chi-X (Chi-X: EHF1). For more information visit www.elstreehybridfund.com.au. Funds operated by this manager: Elstree Australian Enhanced Income Fund, Elstree Enhanced Income Fund |

9 Apr 2021 - Hedge Clippings | 09 April 2021
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9 Apr 2021 - Managers Insights | Equitable Investors Dragonfly Fund
Chris Gosselin, CEO of Australian Fund Monitors, speaks with Martin Pretty, Director at Equitable Investors. The Equitable Investors Dragonfly Fund was started in September 2017 and has returned +3.06% p.a. since inception. Over the 12 months to February 2021, the Fund rose +59.82% against the ASX200 Accumulation Index's +6.48%.
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