MORPHIC GLOBAL OPPORTUNITIES FUND

ATTACHED FILESMorphic Global Opportunities Fund (pdf format)

It seems as if Janet Yellen's approach to keeping the US market's momentum intact is somewhat similar to Mario Draghi's approach to saving the Euro. Namely "whatever it takes".

There's no doubt ongoing QE is great for equity markets, and probably consumer confidence. In due course it may even fix the employment issue as it is designed to do. In the meantime it is a little surreal, and we wonder if QE will ever end? After all in the short term it is not costing the Fed anything other than paper and ink to keep the printing presses turning. There's no actual hard cost - that will presumably come later, but who knows when?

So US equities look cheap on a relative basis while interest rates remain close to zero. Company profitability is underpinned to a degree, even if forward earnings estimates are reducing. Just when or how the market is going to wean itself off QE is an issue that will need to addressed eventually. And in the meantime, as equities continue to rise so does risk.

Australia's equity market has broadly kept pace over the past 12 months with the ASX200 rising 25.4% on a total return basis. There's no surprise that taken as a whole the absolute return sector has lagged over the past 12 months. Overall 28% of funds in the database have outperformed the ASX, with equity based funds providing 21.65% on average, and equity long, and equity 130/30 well ahead of the pack, and equity long short not far behind.

On another tack John Daley, Chief Executive of the Grattan Institute wrote an interesting article in the October issue of the institute's magazine, linking the futures of the superannuation industry and the Australian economy. Follow this link to read his view on the challenges of the federal budget, an ageing population and increased costs of healthcare and the aged pension.

This week, now for something completely different takes a more humorous look at the challenges facing the rest of the community as a result of the ageing population.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

The Allard Investment Fund recorded 0.3% for October. Since inception (July 2003) the Fund has returned 8.74% with a low volatility of 8.00% pa as compared to 13.8% for the MSCI Asia Pacific ex Japan (A$) Index and a maximum draw-down of 18.29%. 

At month-end the Fund was 70.7% invested in equities with the remaining 29.3% in cash and fixed income. In terms of portfolio concentration the Top 5 holdings were 41.2% and the next 5 at 16.9% with remainder totaling 12.6%. Industry break-down in terms the largest exposures are Financial Services 15.4%, Conglomerates 12.3% and Telco's at 8.6%. 

Bennelong Kardinia's Absolute Return Fund  recorded a sound performance of 2.17% during October with a net exposure of 71%. Twelve month performance was 15.37% with a volatility of 2.68%. The Fund's longer term record demonstrates the low risk investment approach with the five year performance record showing an annualised standard deviation of 7.15%, 52% of the ASX 200 Accum Index, and a return of 12.84% pa (11.08% Index). 

The domestic market was focussed on the AGM season with trading updates and commentary generally cautious. Banks performed strongly with ANZ and NAB reporting solid results and increased dividends.

The Insync Global Titans Fund  returned 1.47% over October and 20.7% over the previous twelve months with a very low volatility of 6.12%. The Fund continues to show lower risk characteristics with a since inception (October 2009) volatility of 8.26% p.a., maximum draw-down of 4.39% and downside capture of - 0.42. Comparative ASX 200 Accum Index stats are a volatility 12.33% p.a. and maximum draw-down 15.13%. Notably the Fund has moved its holding of cash and puts to 9.9% from 2.2% the previous month. 

Signs of modest economic recovery continue and the US earnings season has been broadly supportive. Although revenue growth is still hard to come by earnings have more often than not surprised on the upside, particularly in the more cyclical sectors such as Consumer Discretionary. Forward guidance by companies is still generally conservative and share prices have risen faster than earnings, making markets look fully priced. 

The Fund's unit price increased by 1.47% in October, with the largest positive contributions coming from our holdings in CR Bard, Reckitt Benckiser, Wyndham Hotels, British Sky Broadcasting and Sanofi. The main detractors for the month included Coach and Dr Pepper Snapple. 

Pengana Australian Equities Fund  returned 2.29% during October with a cash weighting of 22% at month-end. Over the last 12 months the Fund has returned 23.93% (25.48% Index) with a volatility of two-thirds of the ASX 200 Accum Index. The top five holdings by value were: DUET Group, ANZ Bank, Telstra, Resmed and NAB. 

The Fund increased its existing holdings in Resmed (post the sharp reaction to its lower than expected turnover growth by the US market), McMillan Shakespeare, Summerset, Mermaid Marine and David Jones. In addition the Fund acquired a new holding in new listing Australian Industrial REIT (a well-managed high quality industrial property group on an attractive yield). The Fund's exposure to non Australian dollar earnings streams (inclusive of companies with global earnings profiles such as Resmed and Fox Group, NZ based companies and US dollar exposure) stood at 22%. 

The Optimal Australia Absolute Trust returned 0.32% for October 2013 bringing its five year performance to 10.84% p.a. (11.08% pa ASX 200 Acc Index) with a volatility of only 3.66% (13.57% Index). Notably the Fund's maximum draw-down since inception in September 2008 is 1.38% as compared to the Index maximum draw-down of 33.11%, indicating the Manager's strong aversion to capital losses. 

The Manager comments "In our view, a lot of the easy money in equities has been made. Those investors who backed central banks to either print money forever, or to eventually create decent economic growth, have done very well, and continued to do well in October. From here, however, it gets harder. Financial repression has driven equity valuations to levels that require a sharp acceleration in growth for stock prices to hold, and there are still many questions over the degree and sustainability of that acceleration. We believe that we are reaching a point at which the market has to make up its mind as to whether or not QE policies may finally work. While resources stocks have finally stopped falling, the compound under-performance of this group over three years certainly suggests that investors remain sceptical on growth."

FUND REVIEWS updated this week include:

The Morphic Global Opportunities 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. 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.

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 annualised standard deviation of 8.71% (10.01% ASX 200 Accum Index) and maximum drawdown of -1.57% (6.72% Index) and downside deviation of 1.74 (5.30 Index).

EVENTS

Limited places are still available for IPARM Australia 2013 in Sydney next week on 18-19 November. The conference will cover Investment Performance Measurement Attribution and Risk. Speakers include Dr Thomas Gillespie from Aurora Funds Management.

Also on 19 November, at the Renaissance Hotel in Hong Kong - the Art of Asset Management - free for senior asset management professionals from both global and local asset management firms. View the agenda here.

On that note, enjoy the week-end!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Investment Performance Measurement, Attribution & Risk Management 2013 Forum

18-20 November - 2013, Grace Hotel, Sydney

ATTACHED FILESiPARM Australia 2013 (pdf format)

Bubble bubble, toil and trouble?

The S&P 500 is within a whisker of all-time highs, broadly driven by the recovery story but even more broadly driven by Quantitative Easing and government bond purchasing on both sides of the Atlantic. In this extraordinary situation good economic news is considered bad news for equity markets, while bad economic news seems to be welcomed. I'm not admitting to being confused, just a little bemused.

Meanwhile Twitter completed its IPO this week, with an issue price of $26 providing a valuation for the whole company of $14 billion. Not to be outdone after the first day's trading Twitter is now valued at $24 billion. Not bad for an unprofitable company with one fifth as many users as Facebook, which slumped post its own recent IPO. Dare one utter the word 'bubble' or am I just being a sceptic?

What was interesting to see this week were figures from the US showing NYSE margin lending debt balances in excess of $420 billion, above the levels of July 2007. As a percentage of GDP margin debt balances (2.71%) tell the same story and are only a fraction off the all-time highs of 2.81% reached in March 2000 at the time of the tech bubble. There's that bubble word again.

Closer to home there is talk (especially from some US-based fund managers) that Australia's real estate sector is in bubble territory, thereby making the big four Australian banks an ideal shorting opportunity. While certainly true that much of the impetus over the past 12 months which has seen the ASX200 rise over 25% has been from the banks, and there's certainly more spring in the steps of most real estate agents, there does seem a way to go before both residential property and the banking sector reach bubble territory. That's not to say either are cheap, but both would seem to be underpinned, real estate by demographics, and the banking sector by a thirst for yield.

Specific results received this week include the following PERFORMANCE and NEWS UPDATES:

The Monash Absolute Investment Fund has returned 18.07% year-to-date and 37.30% for the last 12 months. October performance was 3.00% with a net exposure at month-end of 97% and a beta of 0.52. The Manager notes that October was another interesting month. There was no slackening in the number of placements and IPOs, which are taking advantage of improving investor confidence. Evidence of a recovering risk appetite is also shown by global fund flow data. After 5 years of strong flows into cash and bond funds and outflows from equity funds the trend has now reversed.

Morphic Asset Management's Global Opportunities Fund  rose 3.14% in October while the Fund's benchmark (MSCI AC World Total Return in Australian Dollars) rose 2.71% providing an out-performance of 0.44%. Since inception in August 2012, the Fund is up 43.69% net of all fees, against benchmark returns of 43.54%. 

The Fund started the month with hedges in place for a worst case outcome on the US budget face-off. As it became clear the market was mispricing the prospect of a last minute deal, the Manager bought call options on US markets, which soared when the President prevailed. The Fund ended the period still underweight the US and overweight Japan, Europe and Emerging Market - and fully invested, but not without some caution after the strong returns of global markets year to date and with some signs of frothiness in valuations now appearing. 

The most likely trigger for a sell-off would seem to be a resurgence of anxiety about US monetary policy. To mitigate this risk the Manager has established a number of short term positions over US fixed income futures. As any tightening in US monetary policy will probably see the US dollar rise, the Manager has hedged part of the Fund's European exposure back in US dollars.

The Bennelong Long Short Equity Fund  returned 1.88% during October bringing its 12 month return to 22.02% and the since inception return (Jan 2003) to 21.20% p.a. as compared to the ASX 200 Accumulation Index return of 10.30% p.a. over the same time frame. Notably the Fund's largest draw-down was only 12.22% (47.19% Index) over the same period. 

The long portfolio solidly out-performed the performance detraction from the short book. Intra-month performance was very strong but drifted toward the latter part of the month as markets rallied. Stock specific news centred on the Annual General Meeting updates of company earnings outlook guidance and a few quarterly reports, both of which marginally contributed to portfolio performance.

FUND REVIEWS updated this week include:

The Aurora Fortitude Absolute Return Fund has an 8 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.

 Strong use of low risk "long" derivatives and option overlays has provided positive returns with low volatility during periods of market dislocation. Over 87% of monthly performances have been positive, with no losing months in 2008 and a largest drawdown of -2.09% since inception as compared to the ASX 200 Accumulation Index largest drawdown of 47.19% over the same time frame.

BlackRock's Multi Opportunity Fund offers broad diversification across asset classes including equities, fixed income, currencies and commodities with an attractive risk profile, having provided double digit returns in 2009 through 2012 with a very low volatility. 

The current strategy has seen the Fund record only three negative months since May 2010, leading to annualised returns over the past 48 months (to September 2013) of 11.68% and an annualised volatility of 2.10% pa. The four year Sharpe Ratio is 3.60, indicating an excellent reward-to-risk ratio.  

BlackRock's Active Scientific involves extensive research into every aspect of the investment process starting with the identification of fundamental investment insights. These are thoroughly tested to ensure that the outcome consistently adds to performance: Quantitative analysis is also applied to balance both performance and risk ensuring the position is only taken when the potential for reward is adequate.  Only insights meeting this multi level process are implemented into portfolios.

EVENTS

In Hong Kong, the 26th Annual AVCJ Private Equity and Venture Form is at the Four Seasons Hotel from 12-14 November 2013.

IPARM Australia 2013 is being held in Sydney on 18-19 November on Investment Performance Measurement Attribution and Risk. Speakers include Dr Thomas Gillespie from Aurora Funds Management.

Also on 19 November, at the Renaissance Hotel in Hong Kong - the Art of Asset Management - free for senior asset management professionals from both global and local asset management firms. View the agenda here.

And now for something completely different, Top 25 Other uses for CocaCola.

On that note, enjoy the week-end!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook