NEWS

24 Nov 2017 - Hedge Clippings, 24 November, 2017
The RBA is good, but not a good forecaster!
The superannuation ideas of the super-rich were heavily featured in today's media, and we can't disagree that Australia's super pool, the fourth largest in the world, (which is significant not only in itself, but particulary against the fact that Australia only has the 13th largest economy) creates an extraordinary pool of capital which could benefit other sections of the economy.
While we wouldn't disagree that it could be used as a source of capital for Australian businesses, this in itself would create a number of issues regarding eligibility and security of the funds. Hedge Clippings has no doubt that these issues could be resolved, but we would still argue that the allocation of a portion of superannuation funds to much-needed infrastructure projects would make an even better fit.
One such reason is that the long-term funding requirements of infrastructure projects ideally meets the investment timeline of superannuation funds. Another is that a relatively steady income stream of around 5%, or cash +3% would be attractive to both the project and the superannuation fund, particularly that portion currently held as cash or in government bonds.
Finally, if there were to be approved infrastructure bonds, any superannuation fund, including the SMSF sector which makes up over 30% of the total, could invest an appropriate portion, possibly with a taxation carrot or stick attached. Given that the allocation of SMSF's to cash is reportedly high at around 25% or more, funding for Australia's much-needed infrastructure requirements could be met with a win/win/win outcome.
Elsewhere this week a speech by Philip Lowe, Governor of the Reserve Bank at the Australian Business Economists Annual Dinner caught our attention, and gave an insight into the difficult balancing act that the RBA has been facing. Entitled "Some Evolving Questions", and referring to a previous speech he had given in 2012 entitled "What Is Normal", the Governor admitted that the RBA is still searching to understand: What is normal?
However on the economic front things are anything but normal, with low unemployment and solid employment growth, an increase in the wage price index of only 2% over 12 months, and an increase in average earnings per hour barely above 1%. As a result consumer confidence is low, particularly given that the level of household debt to income ratio is forecast to top 200% within a year or so.
The RBA is keen to raise interest rates next year but is unlikely to be able to do so. Even a small increase will put further pressure on consumers who are already struggling, although businesses are continuing improve margins on the back of low rates and productivity and technology improvements. But most of all, as a result of high household debt levels, the already cooling property market would have difficulty with any rate increase without any increase in household incomes.
Finally, the RBA is currently forecasting consumption growth of 3% over 2018 and into 2019 but what is normal is that the RBA's forecasts are overly optimistic! For the past seven years they seem to have been fixated by a forecast in consumption growth of around 3.5%, with actual consumption growth failing to achieve it on each occasion.
And while talking of "What is Normal", 10 years ago today Kevin Rudd took over as Prime Minister, the first of five we have had since then. Maybe the new "normal" is a revolving door at The Lodge?

24 Nov 2017 - Performance Report: MHOR Australian Small Cap Fund
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Fund Overview | MHOR looks for investment that exhibit the following set of characteristics: -Opportunity - to take advantage of growth and positive alignment with industry themes and trends. -Quality business - competitively advantaged product or service offering. -Financial flexibility - appropriately resourced to capture its opportunity. -Management - with the vision and capability to bring it all together. -Fundamentally undervalued. MHOR also considers labour standards, environmental, social and ethical considerations when making investment decisions but only to the extent that these factors impact the assessment of risk or return. The minimum suggested investment timeframe is 3-5 years. |
Manager Comments | Positive contributors in October included Alliance Aviation Services (AQZ), IPH Ltd (IPH) and G8 Education (GEM). The key detractor were Xenith IP Group (XIP) which, as MHOR noted, provided a disappointing trading updated citing lower than anticipated earnings from the newly acquired Griffith Hack business. MHOR thinks these integration issues will likely be transitory rather than systematic while valuation remains supportive at these levels (sub 10x PE, 7% yield). The Fund entered October with 36 stocks and 6.7% cash, exiting the month with 33 stock and 13.5% cash. MHOR's view is that synchronised global economic growth continues to underpin a constructive outlook for equity markets. Monetary policy is expected to normalise, however, MHOR only anticipate a gradual tightening cycle considering stubbornly low wage inflation and relatively high household debt levels. Domestically, MHOR remain cautious on retail and property, preferring to play resources, mining services and technology whilst remaining disciplined on valuation. The Fund's relatively high cash levels provides them MHOR with ample flexibility to capitalise on investment opportunities over the coming months. |
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24 Nov 2017 - Performance Report: KIS Asia Long Short Fund
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Fund Overview | Whilst the Fund's primary strategy is focused on long/short equities, the ability to retain discretionary powers to allocate across a number of other investment strategies is reserved. These strategies may include, but not be limited to: convertible bond investments, portfolio hedging, equity related arbitrage, special situations (e.g. merger arbitrage, rights offerings, participation in international public offerings and placements, etc.). The Fund's geographic focus is Asia excluding Japan, but including Australia). The Fund may invest outside of this region to the extent that: 1. The investment decision is driven from the Asian region or; 2. The exposure is intended to mitigate risk or enhance return from factors external to the Asian region. |
Manager Comments | The gains on the portfolio were driven by long positions this month, on aggregate the Fund made 1.4x as much money on long positions as the losses it suffered on the short. Positive contributors included MedAdvisor (+0.31%), Fairfax Media (+0.24%) and Base Resources Ltd (+0.21%). Detractors included Range International Ltd (-0.39%), HSCEI Index (-0.23%) and a2 Milk Company Ltd (-0.22%). The Manager's report highlights the advantages of running a carefully risk managed portfolio in the face of a protracted bull market. KIS noted that the largest drawdown experienced by an investor in the Fund since inception was -2.6%, this is contrasted against drawdowns experience over the same period by several indices - S&P ASX200 -17.7%, Hang Seng -32.1%, HSCEI -45.1% and S&P500 -17%. |
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22 Nov 2017 - Performance Report: Glenmore Australian Equities Fund
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Fund Overview | The main driver of identifying potential investments will be bottom up company analysis, however macro-economic conditions will be considered as part of the investment thesis for each stock. |
Manager Comments | Positive contributors in October included Praemium Limited (+37.2%), Pioneer Credit (+20.5), HFA Holdings (13.8%) and Macquarie Atlas Roads (+9.8%). Glenmore's outlook on each of these companies over the next 3-5 years is positive. The only detractor of note was Pacific Current (-8.7%) after it sold its 40% stake in Investors Mutual (IML), the company's largest earnings contributor, to Natixis Global Asset Management at a sale price which was below market expectations. However, Glenmore's view is that Pacific Current remains attractively priced despite near-term uncertainty. |
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21 Nov 2017 - Performance Report: Touchstone Index Unaware Fund
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Fund Overview | The portfolio is constructed using Touchstone's Quality-At-a-Reasonable-Price ('QARP') investment process. QARP is a fundamental bottom-up process, however, it also incorporates a top-down risk management framework designed to successfully manage the portfolio during varying market conditions and economic cycles. The Touchstone Fund is concentrated, typically holding between 15-20 stocks. No individual stock will ever make up more than 10% of the portfolio at any one time. The Investment Manager may temporarily exceed the exposure limits of the Fund occasionally, particularly during periods of market volatility, to allow for holdings in excess of this 10% limit where the increase in value of the underlying security is due to market movement. The Fund may also hold between 0-50% of the portfolio in cash. The Fund has a high level of associated risk, therefore, the minimum suggested investment time-frame is 5 years. |
Manager Comments | Over the past 12 months, the Fund has outperformed the ASX200 Accumulation Index by +1.58%. The Fund's up-capture and down-capture ratios indicate that the Fund has, on average, outperformed in both rising and falling markets. The Fund's Sharpe and Sortino ratios for performance over the past 12 months are also superior to those of the Index; the Fund's Sharpe and Sortino ratios are 2.01 and 6.37 respectively, compared with the Index's Sharpe ratio of 1.94 and Sortino ratio of 4.48. |
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20 Nov 2017 - Performance Report: Bennelong Australian Equities Fund
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Fund Overview | The Bennelong Australian Equities Fund seeks quality investment opportunities which are under-appreciated and have the potential to deliver positive earnings. The investment process combines bottom-up fundamental analysis with proprietary investment tools that are used to build and maintain high quality portfolios that are risk aware. The investment team manages an extensive company/industry contact program which helps identify and verify various investment opportunities. The companies within the portfolio are primarily selected from, but not limited to, the S&P/ASX 300 Index. The Fund may invest in securities listed on other exchanges where such securities relate to the ASX-listed securities. The Fund typically holds between 25-60 stocks with a maximum net targeted position of an individual stock of 6%. |
Manager Comments | At the end of the October, the portfolio's weightings were decreased in the Industrials, Utilities and Financials sectors and were increased in the Discretionary, Consumer Staples and Materials sectors. The portfolio's weightings in Health Care, IT, Telco's, Energy and REIT's remained the same as they were at the end of September. The Fund's portfolio characteristics, as shown in the latest report, are in line with the Fund's objective of investing in high quality businesses with strong growth outlooks and underestimated earnings and momentum prospects. At the end of October the Fund held 28 stocks, the top 5 being CSL, Westpac, Aristocrat Leisure, NAB and Treasury Wine Estates. |
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17 Nov 2017 - Hedge Clippings, 17 November, 2017
Ethics as an option?
Dr Simon Longstaff of The Ethics Centre (formerly the St James Ethics Centre) was quoted this week as saying he felt he'd been trying to sell umbrella's in a drought for the past 30 years, but that maybe it is now starting to drizzle.
Hedge Clippings presumes he means that organisations are starting to understand that ethics are important, and as such his wisdom and advice is now being appreciated - in some quarters - at least more than it was.
It is unfortunate of course that this has probably only come about as a result of some failures and the resulting embarrassment in the banking sector in particular, with the media having a field day with the CBA's money laundering, and various examples of market manipulation and rate rigging amongst the other banks. Suffice to say that if the rules on market manipulation in those markets were the same as insider trading in equities, there'd be some significant "holidays" being handed out by the courts, rather than hefty fines being paid by long suffering shareholders.
It is however a sad reflection on the real world of business that the good Doctor Longstaff and The Ethics Centre even exist. Most intelligent and reasonably educated business people - banker or otherwise - know the difference between right and wrong. The problem is they just don't feel the normal ethical rules apply to them, or that the reward is such that they couldn't care anyway.
We long remember the term "Commercially Naïve" being applied to anyone who put ethics ahead of profitability - and it was not meant as a compliment. That Dr Longstaff is now managing to offload a few of his stock of umbrellas is encouraging, but disconcerting that it is only to avoid the recipient getting wet, rather than not needing one in the first place.

17 Nov 2017 - 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 | Performance during the month reflected a broad spread of positive contributions across two thirds of the portfolio. Losing pairs made small contributions with long Ramsay/short Primary and Healthscope the only one of significance. Long BlueScope/short Sims Metal was the biggest contributor driven by a recovery in BlueScope from a depressed level. Elsewhere, AGM trading updates have been broadly positive for the Fund. The Manager's view is that share markets remain well bid at present with improved earnings and sentiment overcoming any valuation concerns from inevitable policy normalisation. They also noted the recent rally in the local market has taken it to the upper bound of its trading range of between 5,000 - 6,000 for the last 4 years. |
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16 Nov 2017 - 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 | Positive performers in October included Afterpay Touch (+25%), BlueSky Alternative Investments (+28%), AxsessToday (+11%) and Motorcycle Holdings (+15%). The only detractor was cyber safety business Family Zone (-8%), however, the Manager noted the Fund had been reducing its holding as the stock rose and hence the recent retracement was immaterial to the Fund's overall return. Cyan noted that, in recent months, the small cap market has been conducive to making money and they believe there's no sign of it slowing at this stage. That said, Cyan noted one of their ongoing focal points is the risk/reward metric and they therefore retain a relatively high proportion of cash. The Fund is well diversified, with 22 individual holdings and no position accounting for more than 9% of the total fund. |
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15 Nov 2017 - Performance Report: NWQ Fiduciary Fund
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Fund Overview | The Fund aims to produce returns, after management fees and expenses of between 8% to 11% p.a. over rolling five-year periods. Furthermore, the Fund aims to achieve these returns with volatility that is a fraction of the Australian equity market, in order to smooth returns for investors. |
Manager Comments | The Manager noted that following strong performance in September, in which the equity market fell along with the bond market, the 'all weather' strategy of the fund delivered another strong showing in October as the overall market reversed course and rallied strongly. Fund performance was broad based for the month, with strong contributions from both Beta (25% of the portfolio) and Alpha managers (70% of the portfolio). |
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