Anniversary, yes. Celebration? No!

It is understandable that those who survived the October '87 crash would want to remember its 30^th anniversary, less understandable that many, if any, might be celebrating the event itself. Remembering the past is a useful lesson when trying to avoid making the same mistakes again, although there is no doubt that it is only a matter of time before the next major market event occurs.

October '87 was the most significant market shock since the crash of 1929, but there have been a series of market shocks since, all of which were preceded, to a greater or lesser extent, by irrational buying, thereby creating the necessary asset price bubble before the inevitable pop. While the details of each event differs, the underlying causes do not: Asset pricing ceasing to reflect reality.

Looking at current Australian equity prices it is difficult to argue that the market is in bubble territory, even if valuations in certain sectors are certainly stretched on a historical basis. While the US market has certainly steamed ahead by comparison, a market pullback of 25 to 50% would seem unlikely based purely on stretched valuations. If anything is going to upset this market, (leaving aside Trump or North Korea) one would assume it is going to be driven by excessive debt, a tightening of credit, or higher interest rates, be that in the US, Australia or China.

Having said that, while it seems certain that the next move in interest rates will be up, it is difficult to see rates moving so sharply that they would create an equity market crash. However, with rates having been so low for so long, even a small (say 2 to 3%) increase could magnify the relative effect on a number of asset classes, particularly Australian residential property, and the banking sector as a result.

This is what concerns the RBA, but the difficulty would seem to be how to resolve the dilemma.  As usual it will be those who are over-geared who will pay a price and learn the hard way.

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 - September 2017 (pdf format)

"Same old, same old" vs. "In with the new…."

Over the past 12 months the top 20 ASX stocks - which make up 55% of the market cap of the ASX200 - have risen a paltry 3.45%. The ASX200 index itself has not surprisingly fared little better, rising 4.52%. Dominated as it is by the big four banks and BHP, and now to a lesser degree by Telstra, (the market cap of which has fallen by almost one third over the past 12 months), it is no wonder the Australian market is locked into a tight trading range.

Compared with the S&P500, which has risen 19% over the past 12 months, the local market has been a great disappointment. One of the great differences is that the US market is now dominated by new economy growth stocks, or the so called FANG's, namely Facebook, Apple, Netflix and Google, which have risen 33%, 33%, 97% and 24% respectively over the past year. Not only are these new economy companies, they're new businesses and, with the possible exception of Apple, had hardly been heard of by the average investor 10, and certainly not 20 years ago.

Australia's banks, plus Telstra, are driven and supported by dividend yield - or not in the case of Telstra - which results in the ASX200 having a total return over 12 months more than double that of its simple return based on price. Meanwhile the FANG's reinvest their profits in growing their global and industry domination.

The bottom line would seem to be that any upward driving force for the local market as a whole is limited accordingly. The banks are not only under pressure from Canberra, but their upside would seem to be constrained by a housing market that has been driven by easy credit and offshore property buying. Judging from today's Financial Stability Review published today by the RBA, the outlook for the banks at best is as good as it gets, and faces significant risks, even if the RBA did note the sector was well capitalised. And if the Treasurer is overseas spruiking that our banks are as safe as houses, you can bet your bottom dollar it is because he's not preaching to the converted.

So where do investors look for attractive returns, assuming index managers will be locked into market returns albeit with low fees - although as Hamish Douglass from Magellan points out in today's AFR, there are many active managers "dressed up in drag" charging plenty more while still hugging the index.

The answer surely lies in active management, be it a concentrated long only portfolio, probably outside the ASX100, or market neutral or long/short. Alternatively funds investing offshore, be it in Asia or Globally.  A quick scan of AFM's database of top performing funds demonstrates the benefit of either approach.

OPTIMAL AUSTRALIA ABSOLUTE TRUST

AFM have released the most recently updated Fund Review on the Optimal Australia 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 +8.25%. The Fund's approach to risk is shown by the Sharpe ratio of 1.34 (Index 0.26), Sortino ratio of 2.82 (Index 0.26), 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 - September 2017 (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 large-caps from the ASX/S&P100 Index, with over fourteen-year track record and annualised returns of 16.27% p.a.

• 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 0.98 and 1.60 respectively.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - September 2017 (pdf format)