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

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.

Jack Lowenstein, the Joint CIO of the Morphic Global Opportunities Fund talks about how the
Fund performed in October 2014 and was positioned at the end of the month.

Watch AFM's other videos.

The Choice: Tip Top Returns, or Capital Protection?

For a while it looked as if October's equity market performance was set to continue September's fall of over 5%, but a "V" shaped recovery mid month saw markets bounce back into positive territory, no doubt to the relief of most Fund Managers and their investors, particularly those in the long only category.

In Australia that saw the ASX200 Accumulation Index rise 4.43%, recouping some, if not all of September's 5.38% fall, while the US market, which hadn't suffered as much in September (for example the S&P500 had only fallen 1.4%) rose 2.44%, although broader global indices such as the MSCI All Country Index only managed a positive return of 0.25% in A$ terms.

Meanwhile, at this stage it is too early to tell how Australian absolute return funds fared in October with only a handful of results to hand. However looking back at September most earned their keep, with the average avoiding almost all of the market's fall, by posting an average return of -0.17%. Within that average the usual wide spread of returns was evident, with the best up 7.6%, and the worst down -13%.

On a year to date basis the average equity based fund had returned 4.97% to the end of September, outperforming the ASX200 Accumulation Index which had returned 2.42%, a far cry from the buoyant returns of 2012 and 2013. Over the past 12 months the same pattern emerged, with equity based funds up 10.8% vs the Index at 5.93%, and with 75% of all funds outperforming the market.

Often criticised for being risky, this puts hedge funds' performance in unmistakable perspective: Absolute return funds (on average) provide better risk adjusted returns than the underlying markets, albeit that in particularly strong periods they may lag them. As capital protection takes precedence over performance in most investors' minds this makes a good case for both the funds, and the industry as a whole.

However, not all funds are alike, so make sure you select the right fund!

UPCOMING EVENTS:

Don't miss out! Thursday 13 November in Sydney Best Cellars Night of Global Investment Themes.
Presented by Insync Funds Management, enjoy an evening presentation on some of the powerful global investment themes that will help to build your wealth offshore, together with a tasting of some truly interesting wines from all corners of the world.

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

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

The Allard Investment Fund returned 3.20% in September, ahead of the benchmark MSCI Asia Pacific ex Japan (A$) at -1.0%, with 12.96% annual return.

Microequities Deep Value Microcap Fund returned 1.66% during October as equity markets rebounded, with 12 month performance at 16.37% and a volatility of 7.41%.

The Monash Absolute Investment Fund returned -0.3% in October with 12 month performance at 4.83% with a volatility of 8.02%.

CPD points are available for all FUND REVIEWS released this week including:

Insync Global Titans Fund; Totus Alpha Fund; Bennelong Long Short Equity Fund; Nanuk Global 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.

Global Megatrends and Innovations not available in Australia

13 November at Sydney Royal Exchange

Insync Funds Management would like to cordially invite you to an evening presentation on some of the powerful global investment themes that will help to build your wealth offshore together with a tasting of some truly interesting wines from all corners of the world.

Join us and learn:

• In a post-GFC economy what are some of the mega-trends that will shape the global economy over the next decade;
• The importance of investing in the knowledge leaders who are driving product innovation in their respective industries;
• What exceptional opportunities can be found offshore to complement your Australian shares portfolio.

Venue: The Royal Exchange of Sydney, 1 Gresham Street , Sydney

Date:    Thursday 13th November 2014

Time:    5.30 - 7.30pm

RSVP:    Click here to RSVP or call David Johns from Insync Fund Managers on 0412 679 136

ATTACHED FILESBest Cellars Night of Global Investment Themes (pdf format)

NANUK GLOBAL ALPHA FUND

Attached is our most recently updated  Fund Review on the Nanuk Global Alpha Fund.

CPD Points are now available for all AFM Fund Reviews. Read the review and answer 5 questions to earn half a point toward your continuing professional development.

• Nanuk's strategy is based on increased economic development, the limitations of conventional energy sources and proliferating energy security issues that are leading to long-term structural shifts in the way energy is generated, managed and consumed. Similar pressures are causing changing landscapes for food, water and environmental management.  These developments present a range of innovative and compelling investment opportunities.
• Nanuk has identified a large, diverse global universe of companies positively exposed to these shifts. Nanuk combines deep fundamental research into these companies with detailed analysis of technological development, policy direction and related economics within each of the relevant sectors to identify profitable trends and opportunities suitable for inclusion in the Fund.
• Nanuk's principal strategy is to invest, long and short, in securities that are mis-priced on an absolute or relative basis. The Fund aims to achieve long term capital appreciation while reducing volatility of returns and risk of capital loss through appropriate hedging and risk management strategies. 

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

Sean Webster

Research and Database Manager

Australian Fund Monitors

ATTACHED FILESNanuk Global Alpha Fund AFM Report September 2014 (pdf format)