Boring bonds vs. Volatile equities

Australia seems to be a bit player in a wildly fluctuating equity market, with daily swings in either direction of between 2 and 4%, or if you're in China, double that. What's been more difficult to fathom are the intraday swings on the Dow of 400 points - or up to 2% on the day.

It is hard to work out what is really driving the market's volatility, but it certainly seems sound logic is not. There may be an element of buying the dips, and with high yielding stocks such as Commonwealth Bank off around 20% that might not be surprising. However the more likely answer is a combination of a lack of liquidity, a surplus of fear, combined with quant/ETF trading and traders moving the market while having to negotiate the mayhem.

What is amazing is how quickly markets have become disorderly, and how quickly equity investors have come around to understanding that while equities might take up the majority of the financial media, they're not always orderly.

This week Hedge Clippings met with Charlie Jamieson and Angus Coote of (the appropriately named) Jamieson Coote Bonds, who reminded us of the Economics 1.01 lesson that bonds remain a cornerstone asset class in both European and US markets, provide stable income plus return of principle if held to maturity, plus some potential for capital gains (or losses) if realised before their stated maturity. 

One problem for Australian investors is that there's minimal understanding of these low risk "boring" fixed income and bond markets and how they operate. Globally the bond market is many, many times larger, and in many ways far more influential, than the equity market. Another is that there has been much negative press around fixed income and bonds in the face of rising US interest rates. In spite of this bond returns remain positive, and with low volatility. In fact last Monday and Tuesday bond prices rose significantly as equities suffered substantial losses. 

Are bonds without risk? Of course not, as investors in Greek Government Bonds would no doubt agree. However, like any market, different security selection comes with differing risk profiles of credit quality and liquidity dynamics. However bonds can generate a significant counter weight to equity portfolios, bringing low volatility and excellent liquidity from high quality issuers such as Governments or highly rated corporates. In fact the 10 year Australian Government bond (often referred to as the risk free rate) returned over 15% in 2014 from a combination of capital appreciation plus paid interest income. 

Last week Hedge Clippings advised that August would become a critical test for many equity investors and managers. Evidence to date is that while many have performed well in protecting investors' capital, others will have failed the test. We await the final returns with interest. However for investors not prepared to accept the current levels of market volatility, a dose of boring bonds might just be the answer.

Bonds: Stirred maybe, but not shaking!

Specific results received this week include the following PERFORMANCE UPDATES:

FUND REVIEWS released this week: Bennelong Kardinia Absolute Return Fund; Optimal Australia Absolute Trust; Aurora Fortitude Absolute Return Fund

UPCOMING EVENTS:

26 - 28 August 2015 - The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

17 September 2015 - The 14th Annual Hedge Fund Rock and Australian Hedge Fund Awards 2015 as the industry lets its hair down with some drinks, music and great videos. All proceeds go to Redkite helping childern with cancer and their families.

And Now for Something Completely Different: I try to avoid parking fines - sadly with limited sucess. But when I do get them I usually find it easier to pay them than spend the time and frustration of fighting the bureacrats. Not this fellow...

On that note, have a good week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

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• The Aurora Fortitude Absolute Return Fund  (AFARF) has a 10 year track record investing in ASX listed equities. A Market Neutral overlay is used across a multi strategy approach which allows for flexible asset allocation to maximise returns and minimise risk under a variety of market conditions and cycles.CIO John Corr has over 20 years financial market experience with a strong focus on risk.

• Significant use of low risk "long" derivatives and option overlays has provided positive returns with low volatility during periods of market dislocation. Risk statistics are impressive and shows the Funds risk philosophy; over 85% of monthly performances have been positive with no losing months in 2008, the Fund's largest drawdown is -2.09% and the Sharpe ratio 1.07.

• ASX listed Aurora Funds Limited was established on the merger of three existing fund management businesses, managing approx. $230m on behalf of more than 2,500 retail and wholesale investors.

ATTACHED FILESAurora Fortitude Absolute Return Fund Review June 2015 (pdf format)

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;

• Optimal Australia 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 supported by Stephen Nicholls and Justin Hay have over 100 years combined experience in equity markets.

• The Fund's approach to risk is shown by the Sharpe ratio of 1.38 (Index 0.24), Sortino ratio of 3.04 (Index 0.23), both of which are well above the ASX 200 Accumulation Index and has recorded 80% positive months.

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

Australian Fund Monitors

ATTACHED FILESFund Review: Optimal Australia Absolute Trust July 2015 (pdf format)

• The Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with an nine year track record. 

• The Fund has significantly outperformed the ASX200 Accumulation Index since its inception in April 2006 and also has significantly lower risk KPI's. The Fund has an annualised return of 12.84% p.a. with a volatility of 7.29%, compared to the ASX200 Accumulation's return of 5.37% p.a. with volatility of 14.18%.

• The Fund also has a strong focus on capital protection in negative markets. Portfolio Managers Mark Burgess and Kristiaan Rehder have significant market experience, while Bennelong Funds Management provide infrastructure, operational, compliance and distribution capabilities.

ATTACHED FILESFund Review: Bennelong Kardinia Absolute Return Fund July 2015 (pdf format)