• Totus Capital is a Sydney based long short fund manager established in 2012 by Ben McGarry which aims to place equal emphasis on performance and capital preservation.  The Fund invests mainly in Australia, but also in other developed economies, with a primary exposure to equity markets.
• The Totus Alpha Fund's investment strategy is to identify structural themes, and then seek to drive performance by investing in securities that have concentrated exposure to those themes.  Single stock short positions are used to generate alpha, frequently in under researched parts of the market such as the small and mid-cap space. Index derivatives are used to hedge the portfolio's market risk.
• McGarry qualified as a Chartered Accountant with PWC in 1999 and has 14 years market experience, commencing his career covering European building materials and construction sectors at Morgan Stanley in London. Previous experience included analytical roles at Ausbil, a Sydney based $10bn+ long-only manager, and sell side emerging companies experience at UBS. McGarry's emerging company research with UBS included exposure to a range of sectors including energy, materials, industrials, tech, financials, retail and telecommunications.
• The Fund has delivered an annalised return of 28.65% since inception in March 2012 as compared to 13.27% for the ASX 200 Accumulation Index. The standard deviation has been higher than the Index at 14.38% as compared to 11.48% and the Sharpe ratio is 1.65.  

ATTACHED FILESTotus Alpha Fund AFM Fund Review July 2015 (pdf format)

Don't say we didn't warn you!

Every now and again - and frequently more often if the truth be known - we choose, or are forced to look back at what we've said or written previously. Occasionally  - and more often than we'd care to admit - we have to revise our thinking, but hopefully not too often.

One has to remain open to the possibility that we might have been wrong. However as Sir Winston Churchill once famously said, quoting economist John Maynard Keynes, "when the facts change I change my mind. What do you do Sir"?

So having said that I'm now going to say we were right, and in our opinion the facts haven't changed. Back on 11th July in Hedge Clippings we said "if anyone can pull off what the Chinese authorities are trying to do, they can, but we doubt they'll succeed".  At the time we were referring to their ability to control or ban investors putting in sell orders, but it matters not. The Chinese are now realising that as great as their economic growth miracle has been, once it becomes a market economy, the market takes over.

The trouble is that it is not just the Chinese economy that's at stake. So much has the global economy been tied to the Chinese miracle, that now the real slowdown has become apparent, the reverberations have set in.

Australia, having missed the post GFC global slowdown thanks to Chinese demand for our resources, failed to make the most of it, and failed to adjust the rest of the economy whilst it could. Now we're suffering as a result, added to which the liquidity of both the market and the currency makes us easy prey to global capital flows.

Thanks in part to an overheated market (and possibly the irrational valuations of Aussie bank shares on the back of the yield trade) the ASX200 has just suffered its worst monthly return since the height of the GFC in 2008. As we have indicated in previous Clippings, this will sort the fund manager men from the boys (sorry, a little sexist) and the wheat from the chaff. Numbers are scarce to date, but a good example is George Colman's Optimal Australia Trust. Having struggled for the past year in the irrationally exuberant markets which ignored the fundamentals of what was going on, they returned a positive (repeat, positive) return of 1.5% in August, an outperformance of just over 10% for the month.

Two predictions from here: One, that interest rates will now stay lower for longer, both here and in the USA as the authorities have limited room or levers left to pull. Two, that the current volatility will remain as global investment banks, plus the combined effects of ETF's, move markets.

And one more: Volatility, while it may settle down from these levels, is never far away, particularly when you least expect it. High returns may be appealing, but not nearly as comforting as capital preservation.

Specific results received this week include the following PERFORMANCE UPDATES:

FUND REVIEWS released this week: Pengana Absolute Return Asia Pacific Fund; Supervised High Yield Fund;

UPCOMING EVENTS:

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.

Now for Something Completely Different is taking a rest this week, but try to have a good week-end anyway.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

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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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