Expect the unexpected!

A few years ago there was a rush of newspeak around the known knowns, and known unknowns, and unknown unknowns. It was all a little confusing (especially when written like that) and mainly emanated out of US military and political circles, particularly Donald Rumsfield. Thankfully, here at least, the fad passed. But it did make us think about the unexpected, and the old market adage to expect the unexpected.

To be fair the market has seen a fair number of expectations come to pass over the past 12 months, including the well telegraphed end of QE in the US, the inevitability of the ECB's own stimulus program, and although not universally expected, a slowdown in the growth of China's economy.

However there have also been some unexpected and significant market moves over the past six months: Few, if any expected the Swiss to remove the cap on their currency which resulted in the Swiss Franc jumping 15% overnight. Few expected the price of oil to halve. Equally three months ago few would have expected a rally in the Australian equity market of 10% in just eleven days this early in the new year.

But then few were expecting a rate cut of 0.25% in February either, whilst now the expectation is for a cut of a further 0.25% in the next few months. To put the market's rise of 10% in context, the ASX200 (excluding dividends) only rose 1.4% in the whole of 2014, so there'll finally be some happy investors around, particularly those focusing on stocks within the yield theme such as Telstra and the banks.

The question for local investors is whether this can continue, or is this as good as it gets? A further rate cut, and a weaker A$ will no doubt fuel the rally further, but one wonders how long OPEC will continue to pump oil at these levels, and therefore subsidise the price of petrol. However, the opposite side of the cause of the rate cut is falling consumer and business confidence, neither of which will have been improved by the current state of play within the government in Canberra.

We have repeatedly warned that sooner or later interest rates WILL increase, certainly from their near zero or negative levels overseas, whereupon there's likely to be outflows from equity markets. When, or by how much is not known, but when it does occur we suspect it will be a case of expect the expected.

Which I suppose brings us back to hedge funds, and their core purpose of avoiding risk and the danger of the unexpected. Taken over a range of periods equity hedge funds have consistently outperformed the ASX200 Accumulation index.  Over 2014 they returned 7.6% (vs ASX200 5.61%); annualised over five years 8.84% (vs ASX200 6.75%) and over ten years, 9.71% (vs ASX200 7.55%). Over each time frame that's an excess return of over 2%, which over ten years would leave investors 22% better off. Most importantly this has been achieved with around half the volatility and drawdown of the equity market.

There's no doubt a clever line in there somewhere about hedge funds and the unknown unknowns, but as we noted at the beginning thankfully that fad has passed.

Specific results received this week include the following PERFORMANCE UPDATES:

KIS Asia Long Short Fund returned 0.26% during December and 4.76% for 2014 with a volatility of 2.72%.

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

Last week "Hedge Clippings" noted that while negative, or historically low interest rates around the world caused by QE in the US and European and Japanese Central Bank Intervention (CBI) is working up to a point, it is still a great experiment that we had to have to avoid a complete meltdown during and post the GFC. As such, the end outcome has yet to be determined.

China's economy is still a question mark, although is likely to be a major beneficiary of the lower energy prices - if and while they last. The crackdown on the margin lending which has helped to push the Shanghai market so strongly over the past six months will however be interesting.

Europe won't respond to CBI the way the US did to QE simply because there are 28 different economies and nationalities at work. It is not universal. The world is facing deflation and 0% or negative interest rates, and as we indicated in last week's Hedge Clippings there's likely to be tears before bedtime.

The question is when? Investors will continue to chase whatever yield they can find, and bank deposits aren't where they will find attractive returns for a while. Hence equity markets, and particularly the six great dividend payers in Australia (the big four banks, Wesfarmers and Telstra) although expensive on most counts, will remain well supported, as evidenced by the Commonwealth Bank hitting $90 today.

So there's a significant anomaly: In spite of the risk of concentration in just a handful of stocks, and in spite of the risk of buying assets which on any normal valuation are significantly overpriced, investors are still happily allocating to equities and if the RBA cuts rates again next Tuesday as many expect, are likely to continue to do so. Meanwhile more and more commentators and fund managers are warning of the risks.

They are doing so on the assumption there won't be any shocks to the system, be it an economic or political black swan event, which of course can't be ruled out. For example, oil prices halving in 6 months out of the blue is likely to cause some serious pain in some sectors of the US (shale oil) market and in Russia, even if we can now afford to fill the car's petrol tank.

So what to do? A sensible investor (if they believe the nervous nellies) might buy some insurance in the form of long dated out of the money index put options. Or just continue to dance until the music stops, and hope for the best.

But hope is generally not considered to be the best strategy.

Specific results received this week include the following PERFORMANCE UPDATES:

Paragon Fund returned -0.50% (ASX 200 Accum 2.06%) during December with annual returns at 16.09% (Index 5.61%) with a volatility 15.16% (Index 10.95%).

The Pengana Absolute Return Asia Pacific Fund returned 0.74% in December and 6.20% for the year with a volatility of 2.79% and a Sharpe ratio of 1.29.

Auscap Long Short Australian Equities Fund recorded a return of 0.44% in December with the annual return 23.17% and a volatility of 7.46%.

The Avenir Capital Value Fund returned -4.42% during December 2014 with annual performance of 15.38% and volatility of 11.11% since inception.

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

Over the last week both Switzerland and Denmark announced further cuts to their already negative interest rates.

US$7.3 trillion of government debt in the Eurozone, Switzerland and Japan has a negative yield. It used to be that when you lent someone money, even the government, you received interest. Apparently not any more.

For those investors that are still lending, or considering lending to governments, globally 52% of all government bonds currently yield less than 1%. Australian 10 year bonds are yielding significantly more than that at 2.6%, but even this is at an all-time low.

Not so long ago, a primary source of concern was inflation. Now it's deflation.

According to Merrill's 83% of global equity market capitalisation is underpinned (or should that be propped up?) by zero interest rate policies. Given that many pension funds around the world are limited, or not permitted to invest in equity markets due to the risk, they are between a rock and a hard place when it comes to asset allocation.

Of course this can't last forever. Eventually interest rates will rise. Given that bond markets are many, many times larger than equity markets, any shift from equities (and their stretched valuations) to bonds to chase yields is likely to be painful.

The issue is when?  At present while the music is playing investors will have to keep dancing, but the issue is how long can the current environment last?

Probably sometime considerable time yet, but we do believe that there will, as they say, be tears before bedtime when it changes.

It will take people far, far smarter than yours truly to answer that, and for one fund manager's view on this and other topics watch this interview we recorded earlier this week with Morphic Asset Management's Jack Lowenstein.

Meanwhile if you haven't yet registered for our AFM/Deloitte lunchtime presentation "Looking Forward, Looking Back" to be held in Sydney on Thursday 12 February, please click here.

Specific results received this week include the following PERFORMANCE UPDATES:

Monash Absolute Investment Fund returned 0.80% during December bringing the 2014 return to 5.40% (ASX 200 Accum 5.61%) and a volatility of 8.10% (Index 10.95%).

The Aurora Fortitude Absolute Return Fund returned -0.74% during December with a volatility of 1.23%.

Optimal Australia Absolute Trust returned -1.53% in December, resulting in a 2014 annual return of 3.24% and volatility of 2.80%.

The Laminar Credit Opportunities Fund returned 0.64% over the month of December and has annual volatility of 0.63%.

Pengana Australian Equities Market Neutral Fund returned -3.90% during December.

The Totus Alpha Fund -2.30% during December bringing year to date return for 2014 to 12.85% with volatility of 9.14%.

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

Here we go again...

Welcome back to Friday afternoons, and Hedge Clippings. Even if you're still on holiday, languishing on the beach, or quietly sipping a glass of something cool and refreshing, you'll be pleased to know that some of us at least are back at the grindstone for another year.

So to kick off the year ahead let's look at the performance of funds and strategies over the past 12 months, and also preview some of the major themes or issues facing markets in 2015.

We need to be a bit careful on some of the numbers below but with just over 59% of December's results in to date, there's a pretty strong trend:

At the individual fund level 12 month performances ranged from -22% through to +54%. The ASX200 itself only rose 1.1% for the 12 months to 31 December, so dividends etc. added 4.5% to investors' returns, and that probably explained the strength of the yield chasing that was going on with interest rates so low - particularly in the banks and stocks such as Telstra.

Overall from an anecdotal perspective most managers found 2015 pretty tough - in fact a number have confided that they found it one of the hardest years they'd experienced. In particular low equity market volatility, although with some notable spikes at specific times, along with the punishment handed out to companies that disappointed analysts and investors, made it a difficult year.

Certainly the best performing funds were either the stock pickers (provided they got their picks right) or those funds investing overseas which had the double benefit of stronger offshore markets, and the A$ as it finally declined in the second half of the year.

Strategy wise there was the usual dispersion of returns, but not as extreme as in previous years, with only Currency (-1.04%) and Commodities/CTA's (-4.29%) posting negative numbers:

Of course the big themes for the year were the slump in commodity prices, record low interest rates, and towards the end of the year the oil price heading towards $50 per barrel.

Overseas the US saw off QE and seems to be prepared for rates to rise, Europe remains a dog's breakfast, and China remains a question mark.

So the big themes - or questions - for 2015?

1. Will the US equity markets actually handle a rate rise without too much of a rush for the exit sign? Valuations are pretty rich, so volatility could rise if the transition isn't smooth.
2. How will the oil price affect global economies - including Russia?
3. Can Europe pull itself out of the doldrums, and will Greece - or perhaps Portugal - exit the EU and create volatility.
4. Will RBA Governor Glen Stevens get his way, and will the A$ continue towards his $0.75c target, possibly driven by a further rate cut?
5. Locally 2014 was a year of missed opportunities and fumbles for the government, and although an expanded and increased GST is being discussed, it's unlikely for the time being. So what's in store for the budget and politics in general?

All these questions and more will be covered at AFM and Deloitte's "Looking Forward, Looking Back" lunchtime seminar on Thursday 12 February in Sydney. We'll have four of the best and brightest fund managers on hand, including Simon Shields, George Colman, John Corr and Monik Kotetcha to give you the benefit of their opinion, so if you would like to attend, please register your interest here.

Specific results received this week include the following PERFORMANCE UPDATES:

Bennelong Kardinia Absolute Return Fund returned 1.53% during December, bringing 2014 performance to 5.77% (ASX 200 Acc 5.61%) with volatility at 4.17% (Index 10.95%).

The Morphic Global Opportunities Fund 2.62% in December bringing the annual return to 13.99% (Global Equity Index 12.57%) with a volatility of 7.75%.

Bennelong Alpha 200 Fund returned -0.13% during December, bringing returns to 2.26% over 2014 (ASX Accum Index 5.61%).

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

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.

This is the last edition of Hedge Clippings for 2014, but rest assured (or should that "be afraid"?) that, barring unforeseen circumstances, we will return in 2015. Although our offices will be closed from Christmas through until 12 January, fund performances on www.fundmonitors.com will continue to be updated, and the phone and emails will be monitored and attended to as required.

Looking back over 2014, and particularly the predictions and forecasts we made last January, we think we got some things right, and hope we got nothing disastrously wrong. However there's no doubt we missed a few significant trends or events. At that time we said that the general view of managers we had spoken to was for a more subdued return from markets in 2014 than in 2013 (which has certainly been the case) but with higher volatility, which with the exception of a few isolated outbreaks, did not eventuate.

We did forecast (correctly) that the Aussie dollar appeared to have further downside potential, but as it had already fallen 16% at that stage, that was probably not too difficult to call. What did surprise us was the stubbornness of the local currency to take the hint from falling commodity prices for a large part of the year.

Our opinion that Australia's economy was likely to see headwinds was correct, although with commodity prices falling further than we had anticipated, we probably also under-estimated the strength of those headwinds. What we also failed to foresee was the difficulties that the government would encounter in the Senate, which were compounded in our opinion by a poorly constructed, or at least poorly marketed, budget.

We suggested that the US recovery would gradually gain pace, and that politicians and policy both locally and overseas would continue to take centre stage. We thought China may or may not avoid a hard or soft landing, which would appear to still be the case, perhaps suggesting that they will manage to avoid the former. Sadly we suggested that the Middle East would continue to hit turbulence, but we certainly could not have envisaged the level of brutality involved.

Having noted the above, there were a few other things we completely missed or managed to forecast. Who would have thought that by the end of the year the price of a barrel of oil would halve, thereby placing significant pressure on the Russian economy, which was of course compounded by the political and military situation in the Ukraine. As noted above we also failed to anticipate the speed at which the new Federal government could lose its political way, thus affecting business confidence, although internally we have divided opinions as to the degree of damage this is doing to consumer confidence.

Of course when looking backwards everything seems relatively clear, but the real challenge will come in January next year when we will gaze once again into our economic crystal ball and try to provide some clarity for the following 12 months. With that in mind we have organised a lunchtime seminar on Thursday February 12 in conjunction with Deloitte entitled "Looking Forward, Looking Back" where a panel of four of the best and brightest fund managers will provide the benefit of their expert opinions. If you haven't already registered, please click here.

Finally this week we have a further video interview with Jack Lowenstein, joint CIO of the Morphic Opportunities Fund discussing his fund and the market's recent performance.

Meanwhile all of us at AFM and Hedge Clippings would like to take this opportunity of wishing you and your families a Happy Christmas and a prosperous and healthy New Year. Stay safe over the holidays, and be kind to each other.

Specific results received this week include the following PERFORMANCE UPDATES:

Bennelong Long Short Equity Fund returned 3.12% in November, outperforming the ASX 200 Accum Index.

The Optimal Australia Absolute Trust returned -0.53% against the ASC 200 Accum Index -3.25% in November with annual returns at 5.41%, and volatility of 2.08%.

Returning 6.14% during November and 15.05% over the prior 12 months Totus Alpha Fund has a volatility of 8.61%.

The Aurora Fortitude Absolute Return Fund returned 0.38% during November and 2.22% for the previous 12 months with a volatility of 1.07%.

In a difficult month for equities the Insync Global Titans Fund returned 5.67%, bringing 12 month returns 12.88% with volatility 8.87%.

The Alpha Beta Asian Fund returned 2.10% during November with annual performance of 6.18% with a volatility of 4.31%.

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

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.

12 months ago the Reserve Bank Govenor Glenn Stevens was trying to talk the Aussie dollar down to US$0.85, and whilst it held stubbornly above that for some time, it looks like he's got his wish. Not content with that however he has now lowered his target to US $0.75 as he looks forward to 2015.

To be fair there has been a significant deterioration to commodity prices, particularly iron ore and coal, on the back of the outlook for Chinese growth, and is difficult to see any rapid rebound in these, certainly not back to the halcyon days of 24 months ago.

More recently of course the oil price has plunged, although driven by a different set of circumstances with the Saudis seemingly intent on spoiling the energy industry in the United States, while at the same time, intentionally or otherwise, putting even further pressure on Vladimir Putin.

It seems pretty obvious that the RBA would rather let commodities, along with some tough talking, push the Aussie dollar down to even more competitive levels rather than cut interest rates further and risk pushing property further upwards as a result. Having said that anecdotal evidence suggests that with Christmas just around the corner a fair amount of the exuberance in certain parts of the property market has already been taken care of.

None of this will necessarily help the Treasurer Joe Hockey as he wrestles with trying to get his May 2014 budget approved through the Senate before he needs to start drafting the next one. It's looking as if there are going to be some significant budget deficits for some time to come, with some forecasters thinking five years or more. Having lost a fair amount of political capital in the last 12 months, the available options, including taking a look at GST and negative gearing, would seem to be diminishing.

What will also be interesting to us next year will be the governments reaction, or at least their resolve, to do anything about David Murray's FSI released last Sunday. In our opinion we couldn't find much wrong with the 44 recommendations in the report, but as we have mentioned before recommendations are easy, implementation is another matter.

Meanwhile a reminder that next year on Thursday February 12^th we are holding a lunchtime seminar for investors and advisers in conjunction with Deloitte entitled "Looking Forward, Looking Back" featuring the opinions and experience of some of Australia's best fund managers, including Simon Shields of Monash Investors, and George Colman from Optimal Australia. Save the date, and reserve your place here.

Next Friday will see the last edition of Hedge Clippings for 2014, and we will then be taking a short break over Christmas and the summer holidays for some welcome R&R. In case you're going away yourself before then, best wishes for a happy festive season, and we look forward to touching base again in 2015.

Specific results received this week include the following PERFORMANCE UPDATES:

November performance brings the Monash Absolute Investment Fund annual return to 4.08% with a volatility of 8.14%.

The Morphic Global Opportunities Fund returned 5.24%, bringing the annual return to 15.35% with a volatility of 8.85%.

Bennelong Kardinia Absolute Return Fund returned 1.31% during November and 5.33% over the previous 12 months with a volatility of 4.08%.

The Paragon Fund performance is in for November with annual returns at 16.72% (Index 4.30%) with a volatility 15.11% (Index 10.84%). .

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

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.

Hedge Clippings is in part concerned, and in part excited by the fact that after today there are only two more Fridays before Christmas. On the one hand there seems an awful lot to do in a short space of time, while on the other a welcome break beckons. Maybe even a chance return of a good old-fashioned Friday lunch, which sadly (or gladly) are not as frequent as they once were.

We are however looking forward to 2015 and all it has to offer, and take this opportunity of giving you a heads up regarding an event we have scheduled in Sydney at midday on Thursday the 12^th of February in conjunction with Deloitte to kick the new year off. The theme will be "Looking Forward, Looking Back" and will feature an expert panel of fund managers, each covering different strategies and geographies, who will provide the audience with their collective wisdom on the economic and market outlook for 2015.

If you want to register your interest in receiving an invitation to the event please click here.

Others who might be looking forward to a welcome break will no doubt include the Prime Minister and his Treasurer, both of whom have endured what could be best described as a 'difficult year', or at least a particularly difficult six or seven months since the budget was announced last May. The fact that there seem to be so many issues still open to resolution in the Senate will not only be causing the government some headaches over the holidays, but will also have some negative effect on consumer confidence, and the very economy the Treasurer is trying to manage.

With the potential, and in some quarters expectations, of a further cut by the RBA to interest rates, there is a strong indication that the economy is not the greatest of shapes. Certainly the commodities boom, while possibly not bust, is not what it was, and only the largest and lowest cost iron ore producers are likely to be operating profitably. None of this is helping the Aussie dollar, but Hedge Clippings has felt for some time that it has been stubbornly overpriced, with probably some further room to fall. No doubt that prediction will be enough to kick some life back into it!

Prior to that David Murray will finally announce the findings of his Financial System Inquiry. All will be revealed this Sunday (you can register for access to the report here), with significant expectations that the Inquiry's recommendations will be wide ranging, and in some cases controversial. As we've mentioned before, previous inquiries such as the Henry Tax Review, and Mark Johnson's 2009 report on the financial sector created plenty of stir, but not much action once the politicians of the day had finished with them.

And on that note, enjoy the weekend, and if you have nothing better to do on Sunday than download the FSI report, Happy Reading!

Specific results received this week include the following PERFORMANCE UPDATES:

It's early days for November results, but those received so far include the Bennelong Long Short Equity Market Neutral Fund, which bounced back with a return of 3.12%, whilst the Bennelong Alpha 200 Fund returned 5.08%.

Supervised High Yield Fund returned 0.41% during October and 6.50% over the prior 12 months with a volatility of 0.74%.

FUND REVIEWS released this week, all with the potential for earning CPD points:

Alpha Beta Asian Fund; Optimal Australia Absolute Trust; Totus Alpha Fund

Best wishes for a happy and healthy weekend,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

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.

Potential is one thing, reality is a greater challenge.

A recent research report by ANZ Bank [entitled "Caged Tiger: the Transformation of the Asian Financial System"] forecast that Asia's share of the global economy will move from 25% currently to 35% in 2030, and then to 50% by 2050.

ANZ's report noted that with the exception of Japan and the newly industrialised economies, Asia's rapid industrialisation of the past 2 decades has not been matched by an extensive development of its financial system. Many Asian countries have relatively closed and highly regulated financial systems, with a dominant banking sector and heavily managed exchange rates.

But in order to move to the next stage of development the financial systems of many Asian economies must be reformed, opened and become less regulated.

The development of the financial system is one part of what is need to move these economies through middle income levels, with other factors including other economic reforms and improved legal structures.

Policy responses to the Asian Crisis in 1997 led to the situation whereby countries built up large foreign exchange reserves, with this surplus recycled back into the international system through the purchase of government bonds. However as these countries liberalise their financial systems they will play a much bigger role in allocating Asian savings to a far broader set of markets and investments.

ANZ modelling estimated that Asian bond markets will grow seven times over the next 15 years, and the capitalisation of equity markets will move from $9 trillion to almost $55 trillion by 2030.

Turning to Australia, in 2010 around 2.5% of China's total foreign investment was invested in Australia. Even if that percentage remains unchanged, the total level of Chinese investment into Australia could reach over A$200 billion, or according to ANZ's estimate, about 15% of Australia's forecast GDP by 2030.

Where are we headed with all this?

In the financial services and fund management sector, currently less than 20% of Australia's funds under management is sourced from offshore. This will continue to grow as Asia's transformation progresses, with Sydney likely to be the largest beneficiary. However it is not clear if the benefits to all capital market activities will flow equally, with debt, trade finance and insurance likely to face competition from other Asian financial centres such as Singapore and Hong Kong, and no doubt Shanghai at some stage in the future.

The point is that in spite of the opportunities facing Australia's banking and financial sector, it must be remembered that opportunity and reality are often significantly different. Australia has a wealth of educated talent in place, with plenty more experienced expats keen to return home, a regulatory system that is generally first class, and passably sound infrastructure (NBNCo notwithstanding).

The key will be the Government's role, and those who know Hedge Clipping's views will not be surprised that this is where potential and reality can come unstuck. The government - of whichever persuasion - needs to put the correct tax, structural and regulatory policies in place to ensure the framework is created to allow Australia to compete in the Asian, and global financial marketplace.

In the next week or so David Murray's Financial System Inquiry (FSI) report is due to be released. We can only hope that this government grasps that opportunity, and not waste it in the way the previous Henry Tax Review, or Mark Johnson's 2009 report were squandered.

Specific results received this week include the following PERFORMANCE UPDATES:

The Auscap Long Short Australian Equities Fund recorded a return of 2.25% in October with the annual return 29.93% and a volatility of 6.95%.

Alpha Beta Asian Fund returned -0.51% during October with annualised performance since inception of 7.58% with volatility of 5.24%.

The Aurora Fortitude Absolute Return Fund returned -0.29% during October bringing annualised performance since inception to 7.55%.

Allard Investment Fund recorded a performance of 0.60% during October bringing the annual return to 13.30%.

FUND REVIEWS released this week, all with the potential for earning CPD points:

Microequities Deep Value Microcap Fund; Bennelong Kardinia Absolute Return Fund; Supervised High Yield Fund

Best wishes for a happy and healthy weekend,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

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.

In this week's Clippings: FoFA, the Senate circus, and budget deficits as far as the eye can see.

Irrespective of the rights or wrongs of either side's opinions and arguments over the Government's Future of Financial Advice (FoFA) reforms, this week's about-face in the Senate seems to confirm a number of thoughts:

Firstly that the government has done a pretty average job of selling their proposed changes to the original legislation. Secondly, the Senate, which had seemed to be much like a circus looking for some new clowns, appeared to have found them; and thirdly that the level of uncertainty created as a result is simply unacceptable.

As far as the government's sales job goes this is hardly surprising given the success of their other PR and communication efforts over the past six months. What is surprising is that many commentators still seem to think that commissions for dodgy financial advice were still on the table. As far as we could see the new legislation made it absolutely clear that this was not the case.

That's not to say that everything in the government's changes were perfect, but it was pretty plain that financial advisers had to act in their client's best interests, and that conflicted remuneration had been banned. However given the various misdemeanours in the financial services industry, large and small, over the past few years most minds had a really been made up, irrespective of the facts.

As for the Senate, it is somewhat ironic that Clive Palmer, who has been known to do the odd ungainly reverse somersault in the past, found himself subject to some of his own behaviour.

What will be interesting will be to see what compromises are made between now and June next year, because undoubtedly compromise will be required. But the really important part is the confusion created both within the industry, and presumably in the minds of the average investor, the very people who the legislation is designed to protect. Uncertainty benefits nobody.

Changing subjects, Hedge Clippings attended the Ernst & Young (EY) Global Hedge Fund Symposium this week for a presentation on the findings of their 2014 Hedge Fund and Investor Survey. Apart from a presentation on the results of the survey, which were of significant interest to the industry, there was an excellent keynote speech made by John Daley, the CEO of the Grattan Institute.

This was fascinating stuff, and entertainingly presented, even if the overall impression was that State and Federal budget deficits are likely to remain a serious problem for the foreseeable future irrespective of which political party is in power, and in spite of their rhetoric about fixing the problem.

The bottom line seem to be that in order to fix the problem issues such as the taxation of superannuation, GST, and negative gearing all need to be raised as potential solutions. With all of these there is likely to be significant pain not only for the current beneficiaries, but also for the politicians who try to implement them.

Specific results received this week include the following PERFORMANCE UPDATES:

The Paragon Fund returned -2.50% (ASX 200 Accum 4.43%) during October with annual returns at 23.80% (Index 6.39%) with a volatility 14.39% (Index 10.33%).

Totus Alpha Fund returned 0.87% during October and 15.65% over the prior 12 months with a volatility 8.94%.

The Avenir Value Fund returned -1.92% during October with annual performance of 18.68% and volatility of 9.00%.

Bennelong Kardinia Absolute Return Fund returned 1.22% during October and 4.31% over the previous 12 months with a volatility of 4.02%.

The Laminar Credit Opportunities Fund returned 0.51% in October with the 12 month return coming in at 9.28% with a volatility of 0.62%.

FUND REVIEWS released this week, all with the potential for earning CPD points:

Morphic Global Opportunities Fund; Monash Absolute Investment Fund; Bennelong Alpha 200 Fund

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

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.

In this week's clippings: Not the G20, ASX top 20 concentration, Bank Valuations, the Property Market, and a new Fund in Focus video interview.

We'll leave any comment on the G20 well alone this week (apart from mentioning that we won't go there, either physically or metaphorically) firstly because it hasn't happened yet, and secondly because it has little to do with absolute return. Unless we could find an analogy with Tony "Shirt Front" Abbott's comments on Vladimir Putin and things making an absolute return bite you.

But we will spare you that.

Instead we'll draw on more words of wisdom from Optimal Australia's CEO George Colman who noted in his October performance report that the ASX top 20 index now represents 68% of the ASX200, compared the with 55% just prior to the 2007 market peak. Within that banks are now 31% of the ASX 200 index and the financial sector overall represent 47% - an all-time high.

Optimal's view is that investors in the Australian stock-market are assuming concentration risk of unprecedented levels, and that this skew in index concentration typically occurs at market extremes. However his view also is that he should save his breath, as YAAP, or yield at any price, continues to push these stocks up irrespective of the risk.

Other factors also highlight that bank prices possibly represent an "as good as it gets" scenario at current levels irrespective of the attractiveness of their yields. What was interesting in the recent round of bank results was that two thirds of their growth in earnings came from reductions in bad and doubtful debts, to record low levels of just 0.15% of gross loans.

As we said, it might look as if bank prices are as good as they get, so maybe Gail Kelly's departure from the top job at Westpac is smart indeed.

Bank prices are obviously closely tied into the current property market, and we took the opportunity of bouncing this off a well respected and trusted developer who knows much more about these things than we do. His view was that whilst the market is undoubtedly buoyant he thinks Armageddon is unlikely, rather that there are more likely to be long periods of low growth than the doomsday outlook of a property crash.

His logic was that affordability significantly drives property prices, and this in turn is driven by two key factors, namely unemployment and interest rates. Provided the former remains at reasonable levels, homeowners and borrowers will go to extraordinary lengths to maintain ownership of their home.

It's not only the banks that are enjoying the current property boom, with real estate agents, whose commission rates don't seem to have been trimmed in spite of the significant increase in prices, also enjoying the flow. State and local governments must be loving it too, with our favoured developer estimating that on a 20 unit block of two-bedroom apartments in Brisbane he is paying a total of well over $1 million in stamp duty, fees and taxes, and net GST to governments of various hues, on top of which the buyers also have to pay stamp duty.

Elsewhere this week we interviewed Jack Lowenstein from the Morphic Global Opportunities Fund, who gave an interesting overview of the fund's performance in October's global markets, which he described as the most difficult environment he had experienced since launching the fund two and a half years ago. You can view the video by selecting the image below, or the Fund's profile and the AFM Fund Review are here.

UPCOMING EVENTS:

25-27 March 2015 Digital Marketing for Banking and Financial Services Summit.

Specific results received this last fortnight include the following PERFORMANCE UPDATES:

Morphic Global Opportunities Fund returned 1.12% during October bringing the annual return to 15.62% with a volatility of 8.62%.

The Bennelong Alpha 200 Fund returned -2.49% during October with a net exposure of 1.2%.

Optimal Australia Absolute Trust returned -0.71% in October with annual returns at 5.42%, with a volatility of 2.08%.

The Cor Capital Fund returned -0.13% during October bringing the annual return to 1.72% with a volatility of 3.43%.

Best wishes for a happy and healthy weekend,

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.