Macro risk and volatility remain front and centre

Macro issues seem to be centred on geopolitical risk, particularly where The Donald is involved. Mind you, his "my button is bigger than yours" policy approach seems to be moving things along on the Korean Peninsula more than those of his predecessor, so while his style may be more "hardball" than "diplomatic", it might just also turn out to be more effective.

Syria, and in particular with Russia and Iran's involvement, may be a harder nut to crack. From a market perspective investors are possibly becoming acclimatised to Trump's Twitter Diplomacy, which in itself may be a risk when, or if, the rhetoric results in an actual physical or military confrontation.  

Meanwhile turning to the markets, in spite of the increased volatility of the past two months, the upcoming US earnings season is likely to see continuing growth in positive numbers. As the US economy picks up, and while wages/inflation remain reasonably benign, interest rates rises will remain firmly on the agenda as the market's number one economic risk. 

What has recently changed in the US is the market's perception and realisation, particularly over the issue of privacy and personal data for tech stocks and the FANGS, which have had such a stellar run for the past few years. Suddenly people are realising that if you're not paying for a service or product, you are the service or product.

Meanwhile taking a look at the local market and funds' performance YTD and over the past 12 months, where apart from January in the US, there is a sea of red:

Hedge and absolute return funds risky? Hardly! Although choppy markets certainly make things more difficult in a general sense, equity based funds' average outperformance of almost 8% over 12 months, with 85% of all funds' returns beating the market, would seem to answer their critics. 

Next week sees a recommencement of the Hayne Royal Commission, with the spotlight turning to the Financial Services sector and wealth advice (or more correctly in some cases, lack of it). Whilst unlikely to be quite as explosive as envelopes stuffed with cash passing across the desks of suburban bank managers' desks, it will still cause plenty of embarrassment to those in the spotlight, and others in the advice industry.

Expect particular attention not only on fees being charged with no advice given, but also over promotion of in house products on dealer groups' approved product lists (APL's), and vertical integration of the industry overall.

ARCO ABSOLUTE TRUST (formerly Optimal Australia Absolute Trust)

AFM have released the most recently updated Fund Review on the ARCO Absolute Trust.

We would like to highlight the following aspects of the Fund;

• ARCO Investment Management is a specialist Australian equity investment manager and the Fund has a long/short equity strategy typically with a low but variable net market exposure comprising 40 to 65 stocks broadly selected from within the ASX200.

• The investment team comprising George Colman, Peter Whiting, and Stephen Nicholls bring 100 years combined experience in equity markets.

• The Fund has an annualised return since inception of +8.43%. The Fund's approach to risk is shown by the Sharpe ratio of 1.41 (Index 0.27), Sortino ratio of 2.95 (Index 0.28), both of which are well above the ASX 200 Accumulation Index and has recorded over 79% positive months.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - March 2018 (pdf format)

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 15-years' track record and an annualised returns of over 16%.

• The consistent returns across the investment history indicate 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 1.00 and 1.64 respectively.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - March 2018 (pdf format)

INSYNC GLOBAL TITANS FUND

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

We would like to highlight the following:

• The Global Titans 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 - February 2018 (pdf format)

Bill Gates reportedly once gave this advice to an audience of school leavers he was asked to address. It might be equally apt for Robert Shand, the CEO of Blue Sky Alternative Investments, under extreme pressure this week from an activist short selling attack by US hedge fund Glaucus, who claim that Blue Sky's share price is (was is probably more correct now) significantly overpriced. Readers would understand that Hedge Clippings has no issue with short selling in itself, but can sympathise with Blue Sky, whom we have always found to be smart and professional, under attack from a concerted campaign online and in the media designed solely to drive the price down for a profit, rather than letting natural market price discovery take its course.

There's no doubt that Glaucus has involved itself in a case of market manipulation, as Shand claimed in his teleconference on Tuesday morning. There's also no doubt that some elements of the Glaucus report were based on assumptions and speculation, which Blue Sky has claimed are not based on fact, but opinion. The issue with activist short selling, and then heavy publication of the logic or otherwise behind it, is that it doesn't have to be based on fact, or accurate. Once the fear factor is in shareholders minds the buying will dry up, even if they don't hit the panic button and sell. That's how the activist model works.

Shand is facing a number of difficulties in responding, and is learning the hard way that running a fast-moving asset management company investing in alternative and unlisted assets as a public company has its own set of issues. Many, or most of the asset they have developed and manage are closed-ended funds investing in unlisted assets, so pricing is always going to be a question. The timing of exiting, or realising the full value of these mainly private equity, private real estate or infrastructure assets is critical. Most importantly the issue of market transparency doesn't necessarily sit comfortably with unlisted assets housed in wholesale funds.

As such Blue Sky are caught between a rock and a hard place, but like it or not Shand and his board have only two options - either open up the books to prove Glaucus is wrong, or secondly, putting their heads down and focus on delivering the performance of the various underlying assets in due course. The second option in itself will not be easy as "in due course" could be a number of years in the case of some of the underlying investments. Meanwhile, market perception will make it difficult to source new deal flow, and the negative publicity will also make it difficult to attract investors to those funds, while at the same time trying to keep the market happy.

Difficult does not mean impossible. Macquarie Bank came under a similar style attack a few years ago when a US based short seller accused it of being a Ponzi scheme. History shows that Macquarie's share price suffered (and no doubt the short seller profited) but over time the performance was such to re-build the bank's reputation - and share price. There have of course been other cases...