BENNELONG KARDINIA ABSOLUTE RETURN FUND

Attached is our most recently updated Fund Review on the Bennelong Kardinia Absolute Return Fund.  

We would like to highlight the following aspects of the Fund:

• Kardinia is a boutique Australian based Fund Manager established in August 2011 in conjunction with the Bennelong Group to continue the management of the Herschel Absolute Return Fund.
• Long biased, research driven, active equity long/short strategy investing in listed ASX companies with a six year track record and an annualised return of 14% net of fees.
• Portfolio Managers Mark Burgess and Kristiaan Rehder have significant market experience, while the Bennelong Group provide infrastructure, operational, compliance and distribution capabilities.
• Consistent top decile long short equity sector performance. Key Performance and Risk Statistics indicate an attractive risk/reward profile, and a strong focus on capital protection in negative markets.

Sean Webster

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESFund Review: Bennelong Kardinia Absolute Return Fund (pdf format)

News article from Investor Daily today is a worthwhile read.

The implication of this is potentially significant for Australia's absolute return and hedge funds sector - assuming they qualify under the SIV rules, and assuming they are sufficiently well organised to market to the UHNW Chinese market.

There still appears to be some question marks around the use of derivatives which might make qualifying difficult for many hedge funds, and the sector has never had the benefit of an industry wide marketing or communications plan which it needs.

Read the entire article here.

Further details of the new MySuper rules emerged this week, even if drowned out somewhat by other announcements from Canberra. However in principal the thrust of MySuper is admirable, if the stated objectives are achieved:

• creation of a simple, low cost default superannuation product
• cheaper and easier processing of transactions, and
• strengthen the governance, integrity and regulatory settings of the superannuation system, including SMSF's.

Anything that simplifies Super, or creates a lower cost structure, particularly for super accounts with lower balances, is to be applauded. In this regard, the push for more transparency can only assist. However the risk is that the focus falls more on the fee structure than the actual risk adjusted returns after fees.

While it is easy to point to high fees as a destroyer of an investment's value, performance has a far greater effect, particularly in negative markets. Hopefully the new MySuper transparency and reporting regime will recognise this.

Elsewhere, we noticed a good article in InvestorDaily quoting Pengana's CEO Russel Pillemer, who (correctly in our view) points to the flawed logic of placing many hedge and absolute return funds into the "alternatives" bucket. All too often anything that can't be categorised easily ends up as an alternative, with no real analysis of its return profile or correlation to other asset classes.

Russel's suggestion is to allocate to a category called "uncorrelated", as that is what most investors are seeking from a true alternative investment. In our opinion, the majority of equity long/short strategies might then more correctly fit in the equities bucket, or at least active equities.

At the end of the day simply having a low correlation to equities doesn't really work 100% of the time. What investors want, or need, is an asymmetric return profile where the fund captures the market's upside (a high up capture ratio) and avoids the downside (a low downside capture ratio).

Easier said than done in a single fund, and not always easy when constructing a portfolio, but worth the effort. 

Performance and News Updates on www.fundmonitors.com this week:

The Pengana Australian Equities Market Neutral Fund had a good March 2013 returning 3.2% bringing it's since inception (September 2008) return to 9.21% pa with a zero correlation to the market of -0.02.

BlackRock Multi Opportunity Fund had a sound March 2013 with a return of 1.09% and a twelve month return of 9.70% with positive returns in each of the 3 months of the quarter.

The Pengana Asia Special Events (Onshore) Fund returned 0.83% for March 2013 and 3.28% for the quarter to end-March.  Notably the Fund has a volatility of 6.7% as compared to its benchmark volatility of 17.8% (since inception).

Pengana Australian Equities Fund had a flat March with a return of 0.0% but strong 12 and 24 month returns, delivering 22.5% and 33.06% respectively to the end of March 2013. At month-end cash (including notes and preference shares) represented 32% of the Fund.

The K2 Australian Absolute Return Fund had a strong April 2013 delivering 4.54% with its annual return to the end of April, 23.99%.

Continuing our successful Meet the Manager presentation series, on Thursday 16 May, AFM is holding a city lunch time briefing featuring Jack Lowenstein from Morphic Asset Management. The Morphic Global Opportunities Fund is a global equity long/short manager with a macro-economic overlay. The Fund's portfolio construction has a long bias and favours value based and momentum strategies, with a strong emphasis on risk management. If you would like to join us for the presentation, please reply to this email.

And finally, for something completely different, we bring you a short clip from Cancer Council NSW on Relay for Life.  This weekend our Administration Manager Alexis will be camping out and walking for 24 hours out at the Sutherland Shire Relay and we support her in this worthy cause.  

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris Gosselin
CEO, AUSTRALIAN FUND MONITORS

"MySuper product providers will be required to disclose investment risk, the dollar value of fees and their investment performance in an easy to read way, the Minister for Financial Services and Superannuation, Bill Shorten revealed today.

The Government has issued draft regulations that represent the final stage of the Government?s MySuper reforms and are aimed at helping Australians better understand how their fund is performing".

You can read Mr Shorten's comments here.  And the draft Regulation is published on the Treasury site.

We recently reviewed an article in The Economist which provided an excellent summary of the challenges of establishing a hedge fund in the current environment, even if the article's title, "Launch Bad" left a little to desired, assuming it wasn't a simple typo. Actually the first sentence was somewhat off the mark also, claiming that when starting a hedge fund "bar inheritance or winning the lottery, there are few swifter paths to immense riches".

However, back to the excellent article which (excluding the title and the first sentence) does paint an accurate picture of the challenges facing not only any aspiring fund manager, but the vast majority of the existing funds as well.

Although the Economist's focus was naturally on the challenges in the US and Europe there are many parallels in Australia for aspiring managers, with increased due diligence, a focus on fees, and regulations all featuring to a greater or lesser degree.  What is interesting to us is that there have been a number of start up funds in the past 12-18 months, with the trend being towards better levels of strategic thought, business process, and risk management than in the past.

As a result the investors who back early stage managers continue to do so partly because research shows that while not without some risks, early stage, smaller or boutique fund managers provide significantly better returns, better transparency and more personal investor relations. Read the balance of our review here.

Performance and News Updates on www.fundmonitors.com this week:

Magellan Global Fund was up 1.92% in March 2013 taking its 12 month performance to 19.78% as compared to an index (MSCI World Net) return of 11.1%. All stocks in the portfolio produced positive local currency returns and the portfolio was fully invested.

Auscap Long Short Australian Equities Fund had a strong return of 1.46% over March with an average next exposure of 116.5%. Performance benefited from exposure to property trusts, healthcare and materials sectors and avoiding the mining sector

Allard Investment Fund fell 2.1% over March impacted by the $A and generally weaker Asian markets. Twelve month performance was 6.72% and since inception performance 8.47% net compound annual return. Notable is the Funds low volatility at around two-thirds of the MSCI Asia Pacific ex Japan Index.

Monash Absolute Investment Fund returned a solid 2% over March bringing its six month return to 17.17%, achieved with an average net exposure of 62%. The portfolio avoided defensives, Telstra, consumer staples and utilities.

Continuing our successful Meet the Manager presentation series on Thursday 16 May, AFM is holding a city lunch time briefing featuring Jack Lowenstein from Morphic Asset Management. Contact us to reserve your seat.

As a tribute to yesterdays ANZAC Day, we would like to show this short clip of The Last Post from the Sydney Symphony.

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

A recent article in The Economist provided an excellent overview of the challenges of establishing a hedge fund in the current environment, even if the article's title, "Launch Bad" left a little to desired, assuming it wasn't a simple typo. Actually the first sentence was somewhat off the mark also, claiming that "bar inheritance or winning the lottery, there are few swifter paths to immense riches".

It is estimated that there are over 20,000 absolute such funds globally, variously described as absolute return, alternative or hedge funds. There are no doubt some which have made their founders immensely wealthy, but in spite of their profile they are a significant minority, and almost none have done it swiftly. The Economist should know better.

However, back to the excellent article (excluding the title and the first sentence) which does paint an accurate picture of the challenges facing not only any aspiring fund manager, but the vast majority of the existing funds as well.

The article focuses on the increased level of due diligence and compliance which institutional investors in particular focus on, an area that is frequently difficult for new and emerging managers to tick the appropriate boxes. Bernie Madoff of course made things more difficult in this regard, but with the increased institutional investment, plus the risk averse post GFC world,  this was always going to be the trend.

Along with due diligence from prospective investors the current crop of new managers also face increasing regulatory hurdles, particularly in the USA and UK/Europe. Australia's regulations have remained reasonably constant and consistent, (short selling bans aside) but that may be because they were better to start with.

Fees remain under pressure, but that is probably consistent with margins in most other industries, and particularly in financial services. In addition, any industry that emerges into the mainstream is always going to face competitive pricing pressure.

The initial capital raising process is certainly more difficult than it was seven or eight years ago. Back then the big investment banks would toss anywhere from $50 to $500 million to a star trading team wanting to leave the desk and set up on their own, just to ensure they could feed on the fees from prime brokerage operations including leverage, brokerage and stock lending.

Now many start ups have little other than choice of the three F's (friends, family and fools) or a couple of seed investors with which to build the three year track record that most institutions, asset allocators and research houses demand. Umbrella groups or incubators in Australia such as Bennelong, Ascalon and Pengana generally prefer a decent track record prior to risking their capital and reputation by investing in an early stage or start up manager.

There are exceptions, mainly those former star portfolio manager with a prior high profile who gain the backing of an institution or distribution house, but they are certainly in the minority.  All this leads to the question, why bother?

For some it's the opportunity, some a necessity as the big banks close their proprietary trading desks as a result of the Volker Rule in the US. For others, the challenge, or wish to prove their own worth after ten or twenty years under the perceived security of a broad corporate roof.

But what of the investors who back them and take the risk of allocating to early stage manager? Reduced fees certainly don't make the difference, but all the research shows that early stage, smaller or boutique fund managers provide significantly better returns, better transparency and more personal investor relations.

It is open to debate if this improved performance is due to the alignment of interests, managing smaller pools of capital, or lower levels of bureaucracy, but it hasn't changed much over the past decade.   

So much so that the big end of town is trending back to funding start ups, but with the added incentive of sharing the revenue when they're successful.  As in the past however, and in spite of the impression given by The Economist, only a handful make it to the front pages, and almost all will take a decade at least to confirm their position. 

Hardly swift or overnight success, and only if they provide their investors their promised, or hoped for, returns.

Chris Gosselin
CEO, Australian Fund Monitors

Alternatives category 'meaningless'

By Katarina Taurian, Investor Daily

Mon 22 Apr 2013

Pengana recommends 'uncorrelated' category

Placing investments into an alternatives category because they vary from standard categories is a "flawed logic", according to Pengana Capital. 

Some portfolio constructors have created an alternatives category to hold investments that differ from standard categories, resulting in that category becoming "meaningless", according to Russel Pillemer, chief executive officer at Pengana Capital.

"If you're using it as a category to throw in all orphan investment opportunities - everything that doesn't fit anywhere else - then you just end up with a collection of strategies where there's no logic for them to be together," Mr Pillemer told InvestorDaily.

ATTACHED FILESAlternatives category "meaningless" (pdf format)

Risk comes roaring back.

Over the past few weeks we have ignored market risk, focusing instead on the risk facing the retirement incomes of more Australians than the treasurer would have us believe.

This is a good lesson, as investors generally ignore risk at their peril. Looking back through March editions of 'Hedge Clippings' we were pointing to the historically low levels of the VIX 'fear index' and the tendency for markets to wobble when that occurs.

Of course low volatility might not cause markets to fall, but it does indicate that investors as a whole are optimistic enough to put risk to the back of their minds. Cyprus gave investors some cause to pause, and then it was back to the fray. However as the past week or so has shown, while it takes a while for investor confidence to build, it can evaporate very quickly.

March performance from Australia's absolute return sector reinforced its risk averse nature. With 80% of all returns to hand the average fund fell -0.15%, against the ASX200's fall of -2.7% or the ASX200 Accumulation's decline of -2.27%. Overall 91% of funds in the database outperformed the index, and 55% were in positive territory.

It is too early to call the ASX200 as negative in April, but if it turns out that way it will be two in a row, heading into 'sell in May and go away'. The real issue seems to be the exit from the resources sector, which will only create more focus on the yield and defensive areas, particularly while rates seem destined to stay low for some time to come.

Performance and News Updates on www.fundmonitors.com this week:

Insync's Global Titans Fund was up 1.17% in March, and 14.5% for the past 12 months as global markets were mixed with rises in the US and Japan offset by subdued returns in Europe thanks to Cyprus, China and Hong Kong.

Optimal's Australia Absolute Trust was broadly flat in March with small losses on long positions being offset by similar gains on their shorts. The manager continues to be confounded by the performance gap between defensive industrials and resources stocks, and finding difficulty finding value at current pricing

BlackRock's Australian Equity Market Neutral Fund was up 1.29% in March after being caught in the first half of January by the sharp rally in specific sectors such as building materials and diversified financials.

Platinum's Unhedged Fund returned +0.69% in March, taking 12 month performance to +8.33%, in line with annualised performance of 8.25% since inception in January 2005. As above, and in common with many other manager's comments, Platimum noted that complacency was creeping back into markets.

And now for something completely different, a short clip showcasing one of the greatest magicians in the world, the Great Flydini!

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris

CEO, AUSTRALIAN FUND MONITORS

In last week's Hedge Clippings on the latest changes to Australia's superannuation system I remarked that "few comments seen so far have been negative". What has transpired of course is that on closer inspection the numbers and assumptions provided by Treasurer Swan were to put it politely, a touch rubbery.

Swan proudly claimed that the new 15% tax on superannuation pension incomes over $100,000 would only affect those with fund balances of $2 million. His assumption was based on a fund returning 5% per annum, which coincidentally is the annualised return from the ASX 200 over the past 10 years. What most investors would recognise is that this return is not only unattractive, but that for the first five years the return of the ASX 200 averaged closer to 20%. The following three years are seared into most investor's memory, and the return in the past 12 months has yet again hit 20%.

So in six years in the last decade a relatively modest retirement balance of $500,000 could have triggered the new 15% tax, assuming an allocation of 100% to equities and that the market's gains were realised. Swan also claimed, or tried to have everyone believe, that all this was fair and reasonable based on taxing the rich who were ripping the system off. He was also aghast at any comparisons between his initiatives (although many believe they will be unlikely to come into force prior to the election in September) and the haircut that investors in Cypriot banks have just taken.

It is worth remembering that funds allocated to superannuation during the 40 year accumulation phase are locked in. People commit, willingly or otherwise, to superannuation over a long period of time and should be able to expect that the basis for doing so remains intact without politicians of the day, who have been unable to make their books balance, raiding it. Retrospective tax changes, which in effect is what Swan is proposing, are not as far away from Cyprus as he would have us believe.

Meanwhile on to fund performance in March. Against a backdrop of the ASX 200 accumulation index which lost 2.27%, and with just over 40% of fund returns to hand, the average return was minus 0.25% with 54% of funds providing positive returns, and 85% outperformed the index. View full details here.

Performance and News Updates on www.fundmonitors.com this week:

Platinum Asset Management's International Fund's overweight position in Japanese equities continued to contribute to the Fund's recent six-month performance of 12.17%, much in line with their annualised performance since inception in April 1995 of 12.08%.

Morphic Asset Management's Global Opportunities Fund, which was launched in August 2012 and is headed by industry veteran Jack Lowenstein (ex Hunter Hall deputy CIO) returned 0.99% in March, taking six month performance to 9.34%. The new fund invests in globally listed shares with a macro overlay.

The Aurora Fortitude Absolute Return Fund returned 0.42% in March. The Fund has the distinction of providing positive returns every year since inception in 2005, and in every month during the GFC in 2008.

SEI Knowledge Partnership release their sixth annual survey of 107 global institutional hedge fund investors ranging in size from less than $500 m to more than $20 billion in assets. The survey concludes that "while it is clear that the hedge fund industry is here to stay, there is no doubt that the industry's value proposition is being seriously questioned, and not only by investors".

Bennelong Kardinia's Absolute Return Fund continued its consistent long term performance track record. The fund's March return was +1.42%, taking 12 month performance to 14.4% and their annualised return since inception in May 2006 to 14.44%.

Meanwhile Bennelong stablemate, the market neutral Bennelong Long Short Equity Fund (BLSEF) returned 0.69% in March taking 12 month performance to 15.46% and an annualised return since inception in January 2003 of 20.33%. The BLSEF remains closed to new investors.

And now for something completely different, while on the subject of Cyprus and just in case you thought the "best of" anything awards really mean that.

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris

CEO, AUSTRALIAN FUND MONITORS

Superannuation Update

Treasurer Swan and Superannuation Minister Shorten must have been well aware of the potential electoral backlash from major changes to superannuation judging by their announcement today, a month out from the budget. Although the changes will affect those on the top tax bracket, they are not nearly as ferocious as many, yours truly included, were expecting.

Few comments seen so far have been negative. A 15% tax rate on retirement incomes over $100,000 remains attractive, even if not as generous as zero % on everything. Generally speaking the changes seem to pass the "fair and reasonable" test, although they won't do much to fill Swan's budget problems, nor the government's electoral chances if it comes to that. Maybe it was the realisation that if they tinkered too much with everyone else's retirement incomes it might put too much focus on their own overly generous pension arrangements.

And so back to markets and fund performance. March was only the second negative month for the ASX200 since December 2011, ending a significant rally since last July of almost 25% during which risk averse absolute return funds underperformed, and the more concentrated long biased funds made up some of the ground lost in the previous three or four years. Early indications from funds that have reported March results indicate they have performed well, with positive returns confirming their value in negative markets.

Meanwhile the Japanese market continues to rally, now at a four and a half year high and 57% above the low hit in late July, while the Yen continues to weaken, as intended by their version of QE1, 2 and 3. Other Asian economies and markets may not be so happy about that, but may have to grin and bear it.

On that happy note, I wish you a happy, healthy and carefree week end.

Regards,

Chris

CEO, AUSTRALIAN FUND MONITORS

Meet the Manager

Due to an overwhelming response, our Wednesday 10 April Meet the Manager briefing with Insync Fund Managers is fully booked. We will be holding a second briefing for Insync and will release our next Fund Manager lunch briefing soon. Stay tuned for updates.