Volatile global bond markets unsettle markets

While equity markets usually grab the business headlines, it is the global bond market which really carries the punch. The past month has seen some extreme, and worrying moves on bond markets, with German 10 year bonds moving from 0.05% to 0.90% in an unprecendented period of volatility, in part driven by dwindling liquidity.

Other markets have followed suit, with the US 10 year rate moving from 1.80 to 2.30%, and Australia's from 2.30 to 3.05%. 

The background for the situation has been created in part by central bank intervention which has pushed interest rates to unsustainably low levels on the back of QE, and in part by regulators forcing, or at least discouraging, banks from participating as market makers though legislation such as the Volker Rule contained in the Dodd Franks Act.

Expect to hear and feel much more of the outcome of these moves over the weeks to come, with bond markets reportedly 3 times the size of equities. As George Colman from Optimal notes in his monthly note "Beware the bonds: Central banks may just have lost control". Regular readers of Hedge Clippings will note we are prone to quoting George, who has been on the bearish side for some time, but having returned 2% for each of the past two months it is more than possible that his views are worth listening to.  

Australia's situation is somewhat different, although no less worrying, in spite of Treasurer Hockey's describing those concerned about the economy as "clowns" for being negative. No sooner had he done so than flat retail sales figures for April were released, possibly indicating who was really wearing the clown's outfit.  

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

Supervised High Yield Fund rose 0.52% during April to bring the Fund's annual return since inception to 10.18% aganst the RBA Cash Rate return of 3.47%.

QATO Capital Market Neutral Long/Short Fund  although down -2.96% in April has still returned 16.93% over the last 6 months.

The Insync Global Titans Fund fell -0.40% in April, with 12 month performance 19.27%.

Signature Quantitative Fund returned -2.10% for April, to bring the annual performance since inception to 13.11%.

The Cor Capital Fund was down 0.65% in April to bring annual performance since inception to 5.55% p.a., compared to the RBA cash rate of 2.68% p.a.

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn and Twitter

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.

• 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 1.06.

• 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 Fund Review April 2015 (pdf format)

MORPHIC GLOBAL OPPORTUNITIES FUND

ATTACHED FILESFund Review: Morphic Global Opportunities Fund April 2015 (pdf format)

Boombustology

The title of today's Hedge Clippings comes from a book of the same name by Vikram Mansharamani. As the name (the book's, not the author's) suggests, it explores the almost inevitable cycle between history's booms and their ensuing busts. 

Last week's Clippings explored two different opinions on the Chinese economy, with the bearish view referring to debt levels identified in an article in the Chinese language version of the People's Bank of China's (PBoC) first-quarter Monetary Policy Report. We also noted the risk created by the levels of margin lending at both street and corporate level.

Thursday's fall of over 6% on Chinese equity markets, reportedly on the back of a tightening of margin lending levels, possibly came a little faster than we had expected, but still reinforced the concept of boom-bust-ology. History has shown that for every irrational boom there is an inevitability that there will be an ensuing bust. It might be too early to call -6% a bust, but the speed and suddenness of the move would have to signify the potential for one.

Closer to home it would be a stretch to describe Australia's economy in the bust phase following the mining boom, but it is certainly struggling with the transition. Hence Philip Lowe, the Deputy Govenor of the Reserve Bank of Australia, in a speech entitled Managing Two Transitions, last week described the difficulty the economy is facing.

The problem is that Australia's manufacturing sector is not taking up the slack from the mining boom. As strong as the housing and property markets are, they are insufficient to prop up non-mining business investment. This is inspite of historically low interest rates, with Lowe making the point that Australian businesses have not reduced the hurdle rate of return required for making new investment decisions in line with lower rates.

Obviously investment decisions are driven by far more factors than interest rates, however when interest rates are high the hurdle does rise. The paradox for the economy is that the same is not true when they fall. As a result capital expenditure is falling, and is likely to continue to do so in spite of the RBA's requests.

To what extent the government (and opposition) are responsible for the lack of business confidence remain to be seen, and difficult to pinpoint, but it has been some years since either side of the political fence in Canberra provided any cause for optimism.

Specific results received this week include the following LATEST PERFORMANCE UPDATES:

KIS Asia Long Short Fund rose 4.04% during April, bring the Fund's annual return since inception to 15.48% p.a.

The Laminar Credit Opportunities Fund returned 0.54% over the month of April, bringing its annual performance since inception to 19.13%.

Morphic Global Opportunities Fund rose 0.02% in April as its benchmark (MSCI AC World Total Return in Australian Dollars) fell 0.33%, resulting in outperformance of 0.35%.

The Avenir Value Fund returned -3.57% in the month of April compared to the  ASX 200 Accumulation Index -1.70%.

Aurora Fortitude Absolute Return Fund  rose 0.34% as the market experienced higher volatility over the month of April.

The Paragon Fund returned 1.10% versus the ASX 200 Accumulation's -1.70%, for the month of April 2015. The Fund's annual return since inception has been 21.24% p.a. versus the Index's 10.60% p.a.

Totus Alpha Fund was down 4.5% in April compared to the ASX200 Accumulation Index's -1.70%. However the Fund's annual performance of 24.74% (ASX200 Accumulation Index 14.70% p.a.) has been strong.

Chris

CEO

AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn and Twitter

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.