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

BLACKROCK MULTI OPPORTUNITY FUND

ATTACHED FILESBlackRock Multi Opportunity Fund AFM Fund Review - September 2013 (pdf format)

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESAurora Fortitude Absolute Return Fund (pdf format)

With equity markets continuing to power ahead, as shown by the ASX200 adding 3.97% in October, and 25.5% over the past 12 months, and the S&P500 doing even better at 4.6% and 27.2% respectively, there is no surprise that, even before we see fund performances for October appearing, equity-based strategies, and particularly 130/30 and equity long, have been significant beneficiaries.

The S&P 500 of course is at all-time highs, whereas the ASX 200, although at post 2007 highs, still has some way to go. The challenge for markets from here will be for actual 2014 earnings to match the forward earnings estimates and of course to survive the effects of QE tapering when that eventually takes place.

Meanwhile there were some notable awards for Australian fund managers at the recent AsiaHedge Awards held in Hong Kong last week. Platinum Asset Management took out the 2013 Management Firm of the Year award, while PM Capital's Absolute Performance Fund won the Global Equity category, and LHC Capital's Australian High Conviction Fund won the Single Country award.

For the record PM Capital's Absolute Performance Fund returned 59.94% for the 12 months to the end of September with a Sharpe ratio of 3.22, while the LHC Capital High Conviction Fund returned 45.03% with a Sharpe ratio of 3.66%.

Platinum's funds have been no less impressive. For example the Platinum Japan Fund provided twelve-month returns of 69%, while their flagship Platinum International Fund which has $8.7 billion in FUM rose 40.21% over the same period.

Congratulations to all concerned!

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

The Totus Alpha Fund returned 6.48% during September bringing the annual performance to 32.2% (ASX 200 Accum 24.2%).  The Fund had a significant positive contribution from a small cap long position in the mobile payments space that was up strongly during September. The Manager trimmed the position slightly for risk management purposes but remain upbeat about the company's prospects over the medium term. There have been a number of notable success stories in this space in the USA and the investment is an early mover in the Australian market.

Since inception in July 2004 the BlackRock Multi Opportunity Fund has returned 8.65% pa with low volatility of 4.18%. The comparative numbers for the ASX 200 Accumulation Index are 9.07% and 14.01% indicating the Fund's risk controls. During September the Fund returned -0.17%. The Fund's absolute return mandate is shown by the maximum draw-down of 9.45% and 80 % positive months as compared to the Index of draw-down of 47.19% and 65% positive months.

The Aurora Fortitude Absolute Return Fund  recorded 6.28% over the last 12 months with a volatility of only 1.82%. During September the Fund returned 0.53%. Within the Fund, the Convergence strategy was the largest positive contributor for the month +0.26%. The main driver was the Wesfarmers Partially Protected shares against the underlying Wesfarmers shares. The Long / Short strategy, whilst not generally a large part of the Fund's exposure, was profitable (+0.12%) while the Mergers and Acquisitions strategy also performed well (+0.19%).  The Options portfolio was a large drawdown on the monthly return (-0.20%) as realisable volatility remained low despite the potential political and global macro catalysts.

Pengana's Australian Equities Market Neutral Fund has returned 9.4% pa (ASX 200 Acc 5.00% pa) since inception (Sept 2008) with an annualised standard deviation of 7.97% pa (15.37%). The Fund recorded -0.2% in September.  The Fund's lower risk is indicated by a downside deviation of 4.96% and largest draw-down of 13.47% as compared to 11.57% and 33.11% for the Index respectively.

The Cor Capital Fund has returned 6.00% pa since inception (August 2012) with a volatility of 6.64%. The September return was -1.49%. Over the last quarter all the Fund's asset classes of equities, gold, fixed interest and cash delivered positive returns for total return of 5.36%. 

The Manager notes that the Fund is currently earning about 4 per cent on portfolio cash. The Fund's fixed interest investments were slightly positive on a total return basis over the quarter as US long-term bond yields moved higher. Whether that continues due to a possible 'tapering' of Fed buying or because investors are becoming concerned about the absolute size of buying (government borrowing) will become clearer over time.

Allard's Investment Fund has returned 8.8% pa over the last five years with a volatility of 9.09% as compared to the ASX 200 Accumulation comparative data of 7.29% and 14.78%. The September return was -0.1%. The Fund's low risk exposure to Asia equities is shown by the largest draw-down of -18.29% and a downside deviation of 5.5% with the Index comparative data of -47.19% and 9.97%. 

At end-September the geographic breakdown was HK/China 32.6%, Singapore 13.3% and Korea 9.2%. Cash and Fixed Income holdings were 31.5%. The industry breakdown was Financial Services 13.8%, Conglomerates 12.4% and Telco's at 8.7%.

EVENTS

Hedgeopolis New York is being held on 4 November at the Metropolitan Club. Use AFM's discount code "fundmo" to obtain a discount, or contact Adriana Costov for additional information.

Back 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.

We lost another great rocker this week, so we tribue this week's "and now for something completely different" to Lou Reed and Take a walk on the wild side, this particular clip from Farm Aid 1985.

On that note, enjoy the week-end!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook