BENNELONG ALPHA 200 FUND

Jack Lowenstein, the Joint CIO of the Morphic Global Opportunities Fund discusses the Fund's performance in January 2015 and condition of the market.

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Difference of opinion is what makes a market.

AFM's "Looking Forward Looking Back" seminar, held yesterday in conjunction with Deloitte provided attendees with a reasonably universal view of the economic world and the challenges facing it, but some significantly different opinions on the level of risk faced, and the eventual outcomes.

The introductory presentation addressed, and we hope answered, the question of whether hedge funds are risky or risk averse? The facts plainly speak for themselves, with the sector providing 1 to 2% higher returns than the ASX 200 accumulation index over each of one, five and 10 years, but on average with half the market's volatility.

Following this Michael Thomas from Deloitte Access Economics provided a presentation on the Australian economic outlook, following which he joined a panel of fund managers including Simon Shields from Monash Investors, John Corr from Aurora Funds Management, Monic Kotecha from InSync Funds Management, and finally George Colman from Optimal Australia.

As indicated above there was generally a standard view of where the world stands, and the challenges (particularly low growth, low to negative interest rates, high levels of central bank intervention, and the potential for deflation) which it faces. That's about where the consensus ended, with significantly different views on what might happen when, or if the music ever stops.

The most bearish of the participants was George Colman from Optimal Australia, who interestingly noted that they launched their fund in 2008 on the same day that Lehman Bros filed for bankruptcy. In spite of that the fund has managed to return an annualised 9.23% over the following 6 1/2 years, during which time their largest drawdown has been just 2.75% (against the market's largest drawdown of 33%) George was of the opinion that 2014 was one of the most difficult years he had experienced in his 25 years in the financial markets.

George was unequivocally of the view that the distortion to financial markets caused by the unprecedented levels of central bank intervention, and the stretched valuations that have occurred as a result, could only end in tears once interest rates started to rise.

Sharing George's negative view was John Corr from Aurora Funds Ltd, who also added his concern regarding the ongoing political instability in Australia. While political instability in Australia takes a different form to that experienced in many other parts of the world, his concern was the level of influence exerted by minor parties, which along with a fickle electorate was preventing electing governments from making the hard decisions necessary to resolve structural problems within the economy.

John also felt the market was expensive, and although he did not feel that a large pullback was imminent he did note concern around the stretched pricing of the financial sector. For the record Aurora's Fortitude Absolute Return Fund has returned 7.38% over 10 years, all of which have provided positive returns with a largest drawdown of 2.09% and volatility of just 2.71% against the market's volatility of 13.88%.

Monik Kotecha from InSync's Global Titans Fund (annualised returns of 11.22% over five years with the largest drawdown of just 4.39%) had a somewhat different view of the outcome, possibly as a result of his investment universe being global mega stocks. His feedback was that company management continues to report business conditions as being very difficult, particularly in Europe where sales growth is flat, although the weaker Euro is expected to improve export opportunities.

Of interest was the fact that InSync normally runs put protection at about 25% of the portfolio, whilst at the current time it is around 80% even though much of this is largely due to the fact that put protection is currently very cheap - at odds with the general concerns about risk.

Finally the most positive of the four was Simon Shields from Monash Investors, whose Absolute Investment Fund has returned 16.6% per annum (over a shorter time frame than the other panellists albeit with a slightly higher volatility). Whilst noting that the market overall is quite expensive Simon still felt it offered opportunities, feeling that any pullback was not imminent, and in any event was unlikely to be as severe as predicted by his more bearish panel members.

One reason provided by Simon for his view was the rise of the global middle-class as a major economic factor, and his feeling that this demographic change had some time to run, whilst he was also bullish on technology and its impacts on the economy.

Whether one's prediction of the outcome sits at the bearish end as outlined by George Colman and John Corr, or the more opportunistic approach from Simon and Monik will depend on one's view of the world, but what did not seem to be in question was that we are living in in unprecedented economic times - with risks that are high, and the outcome uncertain.

Specific results received this week include the following PERFORMANCE UPDATES:

Morphic Global Opportunities Fund rose 4.42% in January 2015 (Global Equity Index 3.27%) with a volatility of 8.68%.

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter

MONASH ABSOLUTE INVESTMENT FUND

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