NEWS
13 Jun 2014 - Hedge Clippings
Fridays can be challenging for all sorts of reasons: Sadly, but probably sensibly, the long lunch is a thing of the past. Nowadays a fair proportion of my Fridays are spent trawling through an assortment of manager's monthly performance reports seeking inspiration for the current week's edition of Hedge Clippings.
Sometimes we are assailed by the antics of a politician of one particular persuasion or another, and at other times the economic or industry landscape provides the necessary spark. This week is different again and we have been gifted by the monthly performance report from George Colman of Optimal Australia. Normally we might borrow a few ideas from such a report, but in this case George encapsulates such an excellent summary of the Australian market and the challenges it is facing that there seems little point in trying to do so.
Therefore, we unashamedly, and I might add with full permission from George, have reproduced in full his commentary below; it is longer than our normal clippings, and considerably more cerebral. Take it away George:
We continue to hold our net risk exposure at close to zero. From this point, it seems madness to us to try to replace fixed income or deposit coupon yield through equity securities at these extended valuations without some form of insurance in place.
The Fed continues to 'taper' its QE program. Why take away the punch bowl at this point? To suggest that this is because QE policies have worked is drawing a pretty long bow in view of 1Q US GDP growth at negative 1%, although the narrative has it that this was only due to bad weather. It seems more likely that even the Fed recognises, belatedly, that they've taken QE too far: "...keeping rates very low - will continue to incentivise investors to reach for yield." (the Fed's Esther George, in classic understatement mode).
With the ECB likely to force a residual element of excess European bank liquidity (the major part has already traded on the signalling, most likely in US Treasuries) into the markets and not, sadly, into the real economy, through negative deposit rates, conditions will likely remain distorted and volatile for some time yet. The warning signs are growing, and it looks like pre-2008 history is repeating itself in several key respects:
In the credit markets, the average quarterly volume of US high-yield debt issuance in 2013 was US$90bn, with 65% of that sold on a covenant-light basis, compared with a quarterly average of US$40bn in 2007 with an average of 28% cov-light. Typical debt to EBITDA leverage in private equity deals has reached similar levels to 2007, at up to 7x, but the junior debt in 2007 was priced at up to 12%, compared to today's 7%.
In Australia, the IPO pipeline has turned into a veritable gusher, with private equity and other sponsors seeking to sell every position not nailed down. Even the deals that failed in late 2013 are now getting done, with no obvious price adjustment, and just prior to large wads of escrowed vendor stock becoming tradeable following June 2014 earnings results.
Finally, the M&A cycle continues to heat up, with KKR launching a conditional offer for the hapless Treasury Wine Estates at $4.70/share, and a counter-bid for developer ALZ, at a 25% premium to NTA.
This is all occurring against a slow deterioration in the economy. As expected, the Coalition Government forecast a $30bn F15 budget deficit, and with the exception of a tax levy on high earners, the budget focused on spending cuts. Having barely noticed the effect of the 2008 global crisis, Australians do not much like the concept of budget austerity, much less the removal of their middle-class welfare entitlements.
Post-budget economic data points are limited, but May's Westpac-MI consumer confidence index declined 7% MoM, with the outlook for family finances and the economy over the next 12 months the hardest hit, plunging 23% and 14%, respectively. Anecdotally, the consumer has been very weak since the budget.1Q's impressive 3.5% YoY GDP growth did not capture the budget effect, and was driven by 4.8% growth in exports, just before bulk commodity pricing fell apart.
As for economic rebalancing in Australia away from mining, a study by UBS showed that since June 2012, 95% of all Australian credit growth has gone into property, and 76% of all business lending has gone into commercial property. This still strikes us as a structurally challenged economy with a richly-valued stock market and currency, both driven by carry money.
For the record the Optimal Australia Absolute Trust has a track record of almost 6 years, having launched the day that Lehman's failed in September 2008. In that time the Fund has returned an annualised 10% and has never suffered a drawdown of more than 1.38%, has an annual standard deviation of 3.49%, and a Sharpe ratio of 1.78.
We think George's opinion is worth listening to.
Specific results received this week include the following PERFORMANCE and NEWS UPDATES:
The Optimal Australia Absolute Trust returned 1.40% over May with an annual return of 4.81% achieved with volatility of 1.70%.
May returned 0.36% for the Bennelong Kardinia Absolute Return Fund and over the previous twelve months, low volatility of 4.27% and returns of 7.49% .
The Paragon Fund had a strong month, returning 3.2% and bringing it's twelve month return to 26.19%.
Taking advantage of stronger global markets, Morphic Global Opportunities Fund also had a strong month with performance for May at 3.91% and 21.73% for the prior twelve months.
18 June in Sydney: MAX: the Marketing, Advertising and Sales Excellence Forum and Awards. Forum 8am - 4:30pm; Awards dinner 7-10pm.
14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.
If you would like your Event listed in our calendar, please contact us.
And now for something completely different this week, sad but true, the latest generation of children can usually play Angry Birds better than they can spell.
On that note, I hope you have a safe and happy weekend.
Best wishes,
Chris
CEO, AUSTRALIAN FUND MONITORS
Connect with me on LinkedIn Twitter Facebook
| Registration to AFM is free and provides information and performance data on Absolute Return, Hedge Funds and Alternative Investments, plus detailed infomation on Featured Funds. | Fund Managers and paid Subscribers also have access to details on Individual Managers and Funds, with historical results, key performance indicators, latest news and performance reports. | Tune into Sky Business on Foxtel every week on Monday at 2:10pm for AFM's weekly comment on Hedge Funds. |
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.
13 Jun 2014 - Morphic Global Opportunities Fund
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| Manager Comments | At month-end the Fund exposures were 167% gross and 101% long with a VaR of 1.06%. Up and Down Capture ratios were 0.62 and -0.86 over the prior year. The Fund closed the month still fully invested, with limited regional biases other than the overweight in India, reflecting the manager's preference not to have large regional positions currently. The continuing rise of the Australian dollar is being partially offset by the Fund having hedging over part of its offshore exposure. The recent move by the European Central Bank to impose negative rates on excess bank deposits and start money printing suggests the local unit's rally may be even more resilient than we expected a month ago. |
| More Information | » View detailed profile of this fund |
12 Jun 2014 - The Paragon Fund
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| Fund Overview | Paragon accepts that markets are not always efficient in pricing information into securities and that no one investment style works in every stage of the investment cycle. Subsequently Paragon adopts a top down thematic led approach to identify companies exhibiting sustainable or improving returns on capital driven by volume growth, pricing power and competitive advantages. Paragon utilises both quantitative analysis to provide probability weighted high/low/base case valuations and qualitative analysis in assessing management, the business model and likely direction of returns. Paragon will allocate assets to each investment opportunity based on a risk/reward profile. Positions have defined investment parameters and risk limits, which are then monitored on an ongoing basis. |
| Manager Comments | The Sharpe ratio was 2.46 (Index 1.49) and the Sortino ratio 4.88 (Index 2.92) were well ahead of the Index, also over the last 12 months. The Up and Down capture ratios were notable at 0.89 and -0.54 respectively. At month-end the Fund was 74.1% long and 2.9% short for net exposure ratio of 71.2%. The top 5 stocks were 25.6% of the Fund. The Fund Update covers two Fund holdings and is available on the AFM website under the Fund Profile. |
| More Information | » View detailed profile of this fund |
11 Jun 2014 - Bennelong Kardinia Absolute Return Fund
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| Fund Overview | The Fund consists of a concentrated long/short portfolio typically comprising 20 to 50 ASX300 listed stocks, generally with a long bias aligned to the overall market direction. There is a slight bias to large cap stocks in the long side of the portfolio, although in a rising market the portfolio will tend to hold smaller caps, including resource stocks, more frequently. On the short side, the portfolio is particularly concentrated, with stock selection limited by both liquidity and the difficulty of borrowing stock in smaller cap companies. Short positions are only taken when there is a high conviction view on the specific stock. The Fund uses derivatives in a limited way, mainly selling short dated covered call options to generate additional income. These typically have less than 30 days to expiry, and are usually 5% to 10% out of the money. ASX SPI futures and index put options can be used to hedge the portfolio's overall net position. |
| Manager Comments | The Fund's net equity market exposure including derivatives was reduced to 29.5%(49.7% long and 20.2% short). The Bennelong Kardinia Absolute Return Fund rose 0.36% in May. Long positions in Oil Search, CSL and Ansell were the largest positive contributors, whilst short positions in Treasury Wine Estate and Share Price Index Futures (hedging long exposures) were the largest detractors. |
| More Information | » View detailed profile of this fund |
10 Jun 2014 - Optimal Australia Absolute Trust
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| Fund Overview | The Fund's bias is likely to be net long under normal market conditions, with the core strategy being to construct a portfolio of listed equity securities priced at levels that do not adequately reflect their underlying value. The Fund will seek to boost returns and limit potential market downside by selective short selling of individual stocks which are priced at levels that are viewed as materially above their underlying value. The Fund will also use certain trading strategies both within its core portfolio (through rebalancing stock weights and overall market exposure in response to price movements) and in certain other situations (typically of a shorter-duration and/or opportunistic nature) with the objective of further increasing returns. |
| Manager Comments | The Fund continues to hold net risk exposure at close to zero. From this point, it seems madness to try to replace fixed income or deposit coupon yield through equity securities at these extended valuations without some form of insurance in place. As for economic rebalancing in Australia away from mining, a study by UBS showed that since June 2012, 95% of all Australian credit growth has gone into property, and 76% of all business lending has gone into commercial property. This still strikes the Manager as a structurally challenged economy with a richly-valued stock market and currency, both driven by carry money. |
| More Information | » View detailed profile of this fund |
6 Jun 2014 - Monash Absolute Investment Fund
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| Fund Overview | The fund seeks to identify opportunities in the share market to make positive returns (long and short) irrespective of market conditions. It is style agnostic, as compelling investment opportunities exist across all investment styles from time to time. The Fund places a high priority on capital preservation, and has an absolute return focus in accepting market risk. The Manager's experience across value, growth and discounted cash flow styles allows them to use a comprehensive approach to investment decisions that applies all three. They also have the patience to seek out only compelling opportunities, rather than settling for relative value. The portfolio is somewhat concentrated, looking to diversify across industries and themes, rather than by trying to stay near an index. The portfolio may at times have a large amount of cash or other protection. However once investments are made turnover may be relatively high in order to lock in gains and avoid losses. |
| Manager Comments | The Sharpe ratio is high at 2.31 and the Up and Down capture ratios of 0.65 and -0.17 are sound. In May the fund was down -0.5% after fees against the backdrop of a small positive return by the Australian equity market. Risk controls continued to serve the Fund well, with the portfolio weathering poor news from four stocks. The portfolio return was also helped by a number of our stocks continuing to do very well. Net exposure was lower by the end of the month as the Fund continued to trim the weights of stocks that had risen strongly, and also exited stocks that were no longer compelling. |
| More Information | » View detailed profile of this fund |
5 Jun 2014 - Bennelong Alpha 200 Fund
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| Fund Overview | The core investment strategy of the Fund consists of the active selection of a series of paired long/short investments in Australian listed equities based upon the Investment Manager's fundamental research. The strategy seeks to capture stock Alpha whilst limiting portfolio exposure to market risk by adopting a dollar neutral portfolio market exposure position with the tactical capability to take net exposure of up to +/- 20% of gross assets. Stock selection is based on fundamental analysis to derive a view of a pair of individual stocks. The Investment Manager is style neutral in determining the stock's positioning. This primary 'pairs' strategy may be enhanced by other complementary strategies, including event driven, security and takeover arbitrage, thematic and momentum trading. The paired stock positions comprise long and short correlated securities that are in most cases simultaneously opened. A portfolio of approximately 30-100 stocks will be selected and actively managed in 15-50 pairs to comprise the core minimum (60%) of the Gross Asset Value. Up to a maximum of 40% of the portfolio's Gross Asset Value may be invested in uncorrelated securities and/or uncovered (long and/or short) positions. These 'satellite' positions are intended to enhance returns and to balance overall portfolio risk. In this regard, the Investment Manager recognises that it is not always possible to achieve a suitable paired profile within the S&P/ASX 200, and that a high conviction long or short stock idea might not always have a suitable pair. |
| Manager Comments | At month-end fund leverage was 2.6 times, long exposure was 51.4 and short exposure 48.6%. The Fund's exposure to ASX 100 stocks was 55.1%. Fund performance was satisfactory in a flat market. Post budget weak consumer sentiment, M&A and the weak iron ore price had limited influence on our performance. One of our short positions benefited from a downgrade. Financials and Materials contributed most of the months performance, Consumer Staples and Consumer Discretionary were minor negatives. |
| More Information | » View detailed profile of this fund |
2 Jun 2014 - Supervised High Yield Fund AFM Review May 2014
We would like to highlight the following aspects of the Fund;
- The Supervised High Yield Fund (SHYF) has a 5 year track record investing in fixed interest investments. The Investment strategy aims to deliver returns with zero correlation to equity markets by investing in debt securities with minimal default probability and offering a premium return above the risk free rate.
- The Fund is managed by Philip Carden whose experience in debt and capital markets spans 32 years, including time with JB Were's Capel Court Securities and Macquarie Bank, where he was the Executive Director responsible for the Debt Markets Division.
- SHYF is an Alternative Income fund which invests in Global and Australian debt markets, with all foreign currency receivables hedged back to Australian dollars.
- The Fund utilises a top down analysis of the economic environment and market to screen and identify debt market opportunities which it believes offer low risk with high yield. The next stage is the development of a risk matrix and investment strategy, following which detailed research is undertaken on specific investment opportunities which meet the pre-defined criteria established in the investment strategy.
- Prior to approving an investment for the Fund each potential investment is subject to two stress tests. The first of these is for credit and default risk, in which the investment is stress-tested to ensure that in a worst case economic environment it can repay 100% of its principal and interest obligations case scenario for the asset by examining the highest margin over the risk rate that the investment has previously experienced in a crisis situation. Any decline in value under the stress test that exceeds 10% of the Fund's value is avoided The second test examines market risk. In this case Carden looks at the worst case scenario for the asset by examining the highest margin over the risk rate that the investment has previously experienced in a crisis situation. Any decline in value under the stress test that exceeds 10% of the Fund's value is avoided.
- Annualised return since inception is 11.07% with a very low standardised standard deviation of 2.21%. Other risk statistics are impressive and show the Fund's risk philosophy; over 98% of monthly performances have been positive, the Fund's largest drawdown is -0.12% and the Sharpe ratio 3.18.
Sean Webster
Research and Database Manager
2 Jun 2014 - Fund Review: Morphic Global Opportunities Fund April 2014
MORPHIC GLOBAL OPPORTUNITIES FUND
AFM has updated the Fund Review on the Morphic Global Opportunities Fund.
Key points include:
- The Fund is a global equity long/short manager with a long bias and a macro-economic overlay. The mandate allows the Fund to short sell, use derivatives and invest in assets such as commodities & currencies.
- Portfolio construction is stock selection agnostic with a bias to value based and momentum strategies. Risk management is a primary consideration in portfolio construction and the strong emphasis on risk is evidenced by the Fund's since inception annualised standard deviation of 9.49% (9.91% ASX 200 Accum Index), maximum drawdown of 4.93% (6.72% Index) and downside deviation of 3.04 (5.36 Index).
- The Fund had a net exposure of 101% and a gross exposure of 153% at April month-end with a VAR of 1.17%.
- Morphic's philosophy is that only funds with flexible investment and hedging strategies will be able to deliver acceptable, steady, real, absolute returns over the investment cycle.
- The Fund is an early stage, boutique, Sydney-based fund established in 2012 with experienced CIO's, and an investment team of 6 including a risk manager.
- The Board has a majority of independent members with significant risk and investment experience.
For further details on the Fund, please do not hesitate to contact us.
Sean Webster
Research Manager
Morphic Global Opportunities AFM Monthly Review April 2014 30 May 2014 - Hedge Clippings
Having given the Treasurer a break in last week's Hedge Clippings, we're going to do the same again this week. After all this missive is called "Hedge Clippings", not "Head Kickings", and however tempting, there's not much that we can add to the debate. Even Clive Palmer is helping to distract attention from the budget.
So back to last week's topic, and the difficult investment markets that hedge funds both in Australia and overseas are currently navigating. While the averages have improved marginally now that most funds have reported, the reality remains that the sector as a whole lost 0.08% in April, while equity-based funds lost 0.17%, against the ASX 200 accumulation index which rose 1.77% for an outperformance of almost 2%.
Although specific corporate action caused some damage to crowded short positions in the likes of Goodman Fielder and Treasury Wine Estates, the broader feedback from a number of hedge funds managers was that the rotation out of quality stocks, and into poorer ones (or as one manager more simply put it "the crap") was making life particularly difficult.
This is also borne out by an interesting chart we saw from Goldman Sachs Global Investment Research in the US which showed the relative long/short performance of those companies with strong balance sheets, versus those with weak balance sheets - in other words "quality versus crap".
Normally one would expect quality to outperform, but given the effects of QE and easy credit, that position has reversed over the past two years to the point where there has been a steady increase (now in the region of 50%) in the outperformance of companies with weak balance sheets. Equally companies that are paying high dividends, as opposed to those reinvesting their profits in building their business, are understandably becoming more attractive given investors' the alternative of leaving money in the bank.
What was apparent talking to fund managers this week was that long/short investing is not nearly as straightforward as simply buying companies you like, and selling those you don't, particularly in the short term when the companies you don't like are sold down to such an extent (and often for a very good reason) that they become compelling or more attractive to private equity players or other corporate activity.
Life, as one ex-prime minister once remarked to his regret, "wasn't meant to be easy", particularly for a hedge fund manager.
Specific results received this week include the following PERFORMANCE and NEWS UPDATES:
In a volatile market for it's sectors, the Nanuk Global Alpha Fund returned -2.93% during April with annual performance standing at 17.11%.
Allard's Investment Fund returned 8.84% for the last year with a vol of 6.68%.
The Auscap Long Short Australian Equities Fund returned 0.29% in a volatile month, with annual performance 44.01% to April 2014.
With a very low volatility of 3.3%, the KIS Asia Long Short Fund returned -0.77% during April and 14.33% for the preceding 12 months.
The Pengana Australian Equities Market Neutral Fund returned -1.20% during April with twelve month performance of 12.29% and volatility of 8.43%, while it's Australian Equities Fund had a positive month, returning 1.24%.
Although it had a negative April, the annual performance of Avenir's Value Fund is very strong at 40.16% with a volatility of 8.50%..
FUND REVIEWS updated this week included:
Optimal Australia Absolute Trust - Insync Global Titans Fund - Monash Absolute Investment Fund
18 June in Sydney: MAX: the Marketing, Advertising and Sales Excellence Forum and Awards. Forum 8am - 4:30pm; Awards dinner 7-10pm.
14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.
If you would like your Event listed in our calendar, please contact us.
And now for something completely different this week,.. although he passed away in 1989, it would have been Mel Blanc's birthday today, the man of a thousand voices, we thought you might enjoy this clip from the Jack Benny show, it's an oldie but a goodie.
On that note, I hope you have a safe and happy weekend.
Best wishes,
Chris
CEO, AUSTRALIAN FUND MONITORS
Connect with me on LinkedIn Twitter Facebook
| Registration to AFM is free and provides information and performance data on Absolute Return, Hedge Funds and Alternative Investments, plus detailed infomation on Featured Funds. | Fund Managers and paid Subscribers also have access to details on Individual Managers and Funds, with historical results, key performance indicators, latest news and performance reports. | Tune into Sky Business on Foxtel every week on Monday at 2:10pm for AFM's weekly comment on Hedge Funds. |
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.
