Hedge Clippings believes that while performance is always important, awareness of and avoidance of risk can be essential, particularly if it result in significant or permanent loss of capital. With that in mind, this week we turned our minds to two current risk thematics.

Manager and Market Risk

Obviously 2018 was a difficult year for equity markets, with a positive start before tripping and falling badly in the final quarter. In spite of that, just under 30% of funds who have reported their December results to date returned positive performance for 2018, and just under 50% outperformed the ASX200 Accumulation Index (which fell -2.84%) which www.fundmonitors.com use as a standard comparison.

There has been plenty written in the press about how actively managed funds have disappointed investors in 2018, and in many cases that's true. So how does the average investor make the choice?

As every offer document will be at pains to point out (and as required by ASIC) past performance is no guarantee of future performance. However, the difficulty is that if you can't use past performance as a guide, what do you use? Although we don't recommend the punting analogy, there is a good reason that the form guide to the races is published!

What the form guide will not highlight, and careful analysis of a fund's past performance will, is that risk and downside past performance is just as important as positive returns, if not more so. Certainly, both should be looked at in combination along with each investor's risk tolerance and return objectives.

However, the figures above are a stark reminder that in addition to manager selection based on reliable research, holding a diversified portfolio of funds is an equally important component when investing in actively managed funds. In many ways this is no different to successfully investing in listed equities directly, which requires thorough research and a diversified portfolio. One of the often unrealised benefits of holding a number of managed funds is that they in turn can provide far greater diversification than can comfortably be managed by most individual investors.

As we frequently point out one of the best ways of reducing risk, whether it be when investing directly in individual equities, or managed funds, is to diversify your investments. It is true that in some cases this can dampen your returns, but more importantly, provided funds are carefully selected to have a low correlation to each other, investing in say 5, 10 or more managed funds, and thus potentially between 200 to 1,000 individual companies, will provide a significantly lower volatility and risk of capital loss.

This approach also provides the opportunity for diversification across asset classes such as equities, fixed income or property, in addition to geographic diversification if required. Within equities it also provides the opportunity to choose or avoid market sectors, such as large caps, small caps, or resources.

Selecting a fund manager purely based on their returns without having at least one eye, or possibly both, on their risk profile, and therefore the potential for loss of capital, is risky indeed.

Market & Geo-political Risk

While overall looking at markets there still seems to be significant risk, this is compounded by an ongoing and heightened political risk. The US shutdown continues as Trump plays chicken with the Democrat-controlled lower house. The longer this goes on the more entrenched the opinion of each, along with the reputational loss of not winning the argument, and the loss of voter trust along with it.

Of course, with the shutdown also comes a significant loss of consumer sentiment, and with limited government information being released it is difficult to tell to what extent it is impacting the US economy. Needless to say, it is likely to be significant.

Crossing back to China, an admission (at last) that the "longer for stronger" argument would come to an end sooner or later. Whether that is being caused by Trumps trade policies, concerns over industrial espionage or just the inevitable can be debated. Probably a combination of all three.

Meanwhile in Europe, Brexit is continuing to wreak havoc not only in the UK, but also on the mainland with figures overnight confirming the deteriorating outlook in both Germany and France. As far as Brexit is concerned even the experts have given up making predictions on the outcomes, leaving it to the bookies to figure the odds for each outcome. Most Brits we talk to seems to be reverting to the WW2 slogan of "Keep Calm and Carry On" but that may be wearing a little thin.

In Australia the risk also remains political with an upcoming election where elements of the Liberal party are doing their damnedest to lose.

And on that happy and somewhat uncertain note, we wish all readers a Happy Australia Day tomorrow, whenever you think it should be celebrated, or even if you think it shouldn't!

BENNELONG TWENTY20 AUSTRALIAN EQUITIES FUND

Attached is our most recently updated Fund Review on the Bennelong Twenty20 Australian Equities Fund.

• The Bennelong Twenty20 Australian Equities Fund invests in ASX listed stocks, combining an indexed position in the Top 20 stocks with an actively managed portfolio of stocks outside the Top 20. Construction of the ex-top 20 portfolio is fundamental, bottom-up, core investment style, biased to quality stocks, with a structured risk management approach.

• Mark East, the Fund's Chief Investment Officer, and Keith Kwang, Director of Quantitative Research have over 50 years combined market experience. Bennelong Funds Management (BFM) provides the investment manager, Bennelong Australian Equity Partners (BAEP) with infrastructure, operational, compliance and distribution services.

For further details on the Fund, please do not hesitate to contact us.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - December 2018 (pdf format)

INSYNC GLOBAL CAPITAL AWARE FUND

Attached is our most recently updated Fund Review on the Insync Global Capital Aware Fund.

We would like to highlight the following:

• The Global Capital Aware Fund invests in a concentrated portfolio of 15-30 stocks, targeting exceptional, large cap global companies with a strong focus on dividend growth and downside protection.

• Portfolio selection is driven by a core strategy of investing in companies with sustainable growth in dividends, high returns on capital, positive free cash flows and strong balance sheets.

• Emphasis on limiting downside risk is through extensive company research, the ability to hold cash and long protective index put options.

For further details on the Fund, please do not hesitate to contact us.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - December 2018 (pdf format)