Looking back over previous issues of "Hedge Clippings" we frequently mention the subject of demographics and the challenges ahead for Australia's and the world's economies, and society. Maybe that's an indication of the fact that in one way, as a member of the over '50's generation, advancing age, like an option's time decay, affects me more as I approach expiry. High on our list of concerns is the challenge facing governments regarding the expansion of the ageing population, longevity and the cost of lengthening retirements.

With that in mind this week we attended an excellent Deloitte's presentation of the findings of their research and forecast into the Dynamics of the Australian Superannuation System.  Space doesn't permit listing all the findings or recommendations, so you can find a copy of the presentation here.  However some pertinent facts include the projection that over the next 20 years:

• The value of assets in Australia's superannuation system will grow from the current $1.6 trillion to $7.6 trillion by 2033.
• This growth is based on the super guarantee level rising to 12% (deferring the introduction of the 12% level makes little difference) and an average annual return rate of 6.8%.
• Increasing the retirement age by 5 years from the current 65 to 70 would add a further $1 trillion.
• SMSF's, already the largest market segment will remain so, are forecast to grow to $2.25 trillion, with over one third of that held in post-retirement assets.
• For every three (tax paying) workers in 2033, there will be more than one retiree, most of whom will be on a government pension.
• While overall population growth is forecast at around 27%, it will exceed 100% in the age brackets of 75-80, 80-85, and 85+.

Meanwhile 50% of all children born today will live to be 100, and the life expectancy of a 65 year old retiring today is 85, and rising. Consider the fact that when the aged pension was first introduced in Europe, if you retired at 65 you were unlikely to live more than 3 more years.

Governments meanwhile are between a rock and a hard place, needing to fund the ageing and increasingly long lived and expensive retirees, but reluctant to take the unpopular decisions to do so.

So what's my point, apart from the fact that although technically correct that I'm a member of the over '50's generation, I am sadly beyond that milestone as well? Firstly given the above statistics, the 12% SGL is insufficient to fund most peoples' retirement.

Secondly, as far as investment strategy and asset allocation are concerned, finding a home for the $7.6 trillion in super over the next 20 years will force, or encourage, greater investment in global markets. 

And finally, although hard to achieve, a return of greater than 6.8% per annum will be required to fund a reasonable retirement, and in our (possibly biased view) that's more likely to be achieved through an increased allocation to absolute return strategies.

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

The Totus Alpha Fund returned a very strong 14.2% for October bringing the since inception (April 2012) annualised return to 32.83%. The Fund has a Sharpe ratio of 1.76 and a Sortino ratio of 5.70 indicating a sound risk-reward ratio. The comparative data for the ASX 200 Accumulation is 1.42 and 2.14.

Auscap's Long Short Australian Equities Fund recorded a strong 5.46% during October bringing the six month return to 26.66%. The Fund's up and down capture ratios are notable at 1.02 and -0.62 respectively. The Fund's average gross capital employed was 122.8% long and 24.3% short. Average net exposure over the month was +98.4%. At the end of the month the Fund had 24 long positions and 7 short positions. The Fund's biggest exposures at month-end were spread across the consumer discretionary, financials, healthcare and telecommunications sectors.

The AFM Prism Active Equity Fund returned 1.29% (e) for October and has returned 6.08% p.a. with a volatility of 2.43% since inception.  The Fund is characterised by very low risk with a standard deviation of 2.43% as compared to the ASX 200 Accumulation Index number of 10.75%, a maximum draw-down of -1.42% (Index -6.72%) and a worst month performance of -0.62% (Index -4.50%). The Sharpe ratio was 1.27 and the average monthly return in negative markets was 0.49%. All statistics are since inception in October 2012. The Fund has re-allocated to three new funds to provide more upside exposure in buoyant markets while maintaining an ongoing focus on targeting low volatility. 

Aurora Fortitude's Absolute Return Fund returned 0.28% during October and 6.82% for the latest 12 months with a volatility of 1.67%. The Fund continues to deliver steady returns within a low risk framework with 88% positive months, a maximum draw-down of 2.09% (ASX 200 Acc Index 47.19%) and downside deviation of 1.31 (Index 10.80) since inception in March 2005. 

Yield was the best performing strategy for the month (+0.14%) and the Long/Short strategy also had a strong month (+0.11%).  As with many of the stronger monthly market moves, the Options strategy was again a draw-down (-0.12%). The S&P/ASX200 index puts and calls were a cost to the Fund as realisable volatility was lower than the implied volatility paid to own the market protection.

The Pengana Asia Special Events (onshore) Fund returned 1.10% for October with a long term performance (since Oct 2008) of 12.01% pa (Index 7.99% pa) and a low market correlation of -0.1. The Fund's risk statistics are sound with a volatility of 6.28% (Index 14.73%), maximum draw-down of 4.05% (Index 25.80%) and a down capture ratio of -0.46. The positive contribution from M&A positions dominated the performance for the month, and this continues to be the most significant component within the Fund's strategic allocation. Australian and Hong Kong / Chinese markets proved particularly profitable while solid gains were also made in India and Thailand. All strategies made positive contributions for the month. The Fund maintained an average net and gross exposure of 11% and 155% respectively. 

BlackRock's Australian Equity Market Neutral Fund returned 1.12% in October bringing its since inception (Oct 2001) return to 12.01% pa (ASX 200 Acc Index 8.80% pa) with a volatility of 5.67% (Index 13.18%). Notable are the Fund's maximum draw-down of 12.41% (Index 47.19%) and down-side capture ratio of -0.60. The Manager notes that the Fund's performance benefited from an overweight to iron ore producers versus other miners as the iron ore fines price remained above market expectations. Short positions in mining services companies were also profitable with further downgrades across the sector. Other outperforming positions were over-weights in wealth managers which continue to run due to exposure to the rising market, and positive stock selection within the healthcare sector. The main performance detractors came from short positions in domestic cyclicals such as building materials, retail and media.

FUND REVIEWS updated this week include:

The Optimal Australia Absolute Trust Optimal Australia is a specialist Australian equity investment manager and the Fund has a long/short equity strategy typically with a low but variable net market exposure comprising 40 to 65 stocks broadly selected from within the ASX200. The Fund has recorded out-performance of the market since inception in September 2008 with approximately 84% of monthly performances having positive returns and the largest drawdown -1.38%.

Bennelong Kardinia's Absolute Return Fund The Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with a seven year track record. Since inception in May 2006 the Fund has returned 14.24% p.a. as compared to 4.93% (S&P/ASX 200 Accumulation Index) with a volatility of 7.81% p.a., around one-half of the ASX volatility of 14.76% p.a. The Bennelong Kardinia Absolute Return Fund rose 2.17% in October. 

The Insync Global Titans Fund The Global Titans Fund invests in a concentrated portfolio of 15-25 stocks, targeting exceptional, large cap global companies with a strong focus on dividend growth and downside protection. The Fund's unit price increased by 1.5% 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. Portfolio selection is driven by a core strategy of investing in companies with sustainable growth in dividends, high returns on capital, positive free cash flows and strong balance sheets. Emphasis on limiting downside risk is through extensive company research, the ability to hold cash and long protective index put options.

EVENTS

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

Now for something completely different, something completely different... Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy. Although we usually like to include a humorous clip every week, we were moved by watching Gavin's Bridge Climb and urge you to take a few minutes to see it for yourself.

Did You Know?

• Did you know that every 15 hours an Australian child is born with Cerebral Palsy, that means 1 in 500 babies. 
• Did you know Cerebral Palsy is the most common physical disability in children.
• Did you know that 1 in 3 children with cerebral palsy cannot walk; 1 in 5 children cannot talk; 1 in 4 children have epilepsy and 1 in 2 children live with chronic pain every day.
• The Cerebral Palsy Alliance Research Foundation was established in 2005 and over half of the most effective treatments have been discovered since then.
• Before 2005 less than $1 million per year was being spent in Australia on relevant research. 

For more information visit www.cpresearch.org.au or contact me by email [email protected]

On that note, enjoy the week-end!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

INSYNC GLOBAL TITANS FUND

ATTACHED FILESInsync Global Titans Fund (pdf format)

BENNELONG KARDINIA ABSOLUTE RETURN FUND

Attached is our most recently updated Fund Review. You are also able to view the Fund's Profile. 

The Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with a seven year track record. Since inception in May 2006 the Fund has returned 14.24% p.a. as compared to 4.93% (S&P/ASX 200 Accum Index) with a volatility of 7.81% p.a., around one-half of the ASX volatility of 14.76% p.a. The Bennelong Kardinia Absolute Return Fund rose 2.17% in October.

The Fund also has a strong focus on capital protection in negative markets. Portfolio Managers Mark Burgess and Kristiaan Rehder have significant market experience, while the Bennelong Group provide infrastructure, operational, compliance and distribution capabilities.

For further details on the Fund, please do not hesitate to contact us.

Sean Webster

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESBennelong Kardinia Absolute Return Fund (pdf format)

OPTIMAL AUSTRALIA ABSOLUTE FUND

Attached is our most recently updated Fund Review on the Optimal Australia Absolute Fund.  

We would like to highlight the following:

Optimal Australia is a specialist Australian equity investment manager and the Fund has a long/short equity strategy typically with a low but variable net market exposure comprising 40 to 65 stocks broadly selected from within the ASX200. The Fund has recorded out-performance of the market since inception in September 2008 with approximately 84% of monthly performances having positive returns and the largest drawdown -1.38% 

The investment team comprising George Colman, Peter Whiting and Stephen Nicholls have close to 90 years combined experience in equity markets.

For further details on the Fund, please do not hesitate to contact us.

Sean Webster

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESOptimal Australia Absolute Trust AFM Review - October 2013 (pdf format)

The Government kicked off an overhaul of Australia's financial system this week by announcing the appointment of David Murray, the former CEO of the Commonwealth Bank and inaugural Chairman of the Future Fund to lead the inquiry promised during the election. It has been 16 years since the last major inquiry into Australia's financial system, and with this one due to report to the Treasurer by November 2014 it will be 17 years, and it will then no doubt take some time to implement - assuming the recommendations are accepted.

Given the changes in technology and financial markets since the Wallis inquiry of 1997, on top of the GFC and the ongoing changes to the world order, the report will be interesting. One hopes that the terms of reference are sufficiently broad, and the findings accepted (unlike the previous Government's Henry tax review). Submissions for the draft terms of reference are being accepted by the Government up until Thursday 5th of December 2013.  If you want to have your say, click here.

Meanwhile Business Insider is reporting on a speech by Larry Summers, who until he withdrew from the race was a strong chance to be the next Chairman of the US Federal Reserve. In the speech, Summers raised the issue that in the past the Federal reserve cut short-term interest rates during recessions to spur economic growth, but this time around the Fed has cut rates to zero, but there is still only a slow recovery.

The problem, argues Summers is that "the natural interest rate - were investment and savings bring about full employment - is now negative. However the Fed cannot cut the nominal rate below zero because people will choose to hoard money instead of putting it in the bank." The risk therefore being how would the Fed combat further weakness when rates are already at zero?

There is no doubt that the US recovery is going to take longer than anyone hoped or expected. Meanwhile Bloomberg are reporting that the ECB is considering charging banks 0.10% on their overnight cash deposits, in an effort to encourage them to lend the money instead. If the US recovery has a way to go one gets the feeling that Europe will be some way behind. And if this seems unlikely consider how long it has taken Japan to overcome their financial crisis over 20 years ago.

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

The Pengana Australian Equities Market Neutral Fund delivered 1.0% for October and 8.5% for the last 12 months with a beta of -0.03 with the equity market.  Over the last 60 months the Fund has delivered an annual return of 9.23% as compared to the ASX 200 Accumulation Index return of 11.08%. However the Fund's low risk is indicated by a volatility of 8.03% (13.57% Index), maximum draw-down of 13.47% (15.13% Index) and downside deviation of 5.00 (8.95 Index). 

The Fund's fundamental Earnings Revisions factor rebounded during October as a raft of profit warnings including AMP and Qantas hit the market. Quality was once again favoured as risk appetite remained flat over the month. Against this the Value factor sold off slightly as investors headed back towards stronger balance sheets and more certain cash flows with dividend yield once again being sought out by the market.

Intelligent Investor Value Fund returned 2.5% during October bringing the 12 month return to 50.89% with a volatility of 9.93% p.a. The Fund has a four year track record returning 15.47% p.a. (Index 8.64% pa) since inception in October 2009 with a volatility of 13.86% p.a. (Index 12.38% p.a.) and a Sharpe Ratio of 0.83 (Index 0.42).

The Manager comments 'Buoyed by investor optimism, the market has gained 24.7% over the past 12 months (including dividends). It was significant helpings of luck and, we hope, some skill that allowed the Value Fund to return 50.9% over the same period. It's been a good year, but please don't get accustomed to these returns because they won't be repeated regularly, if ever again".

FUND REVIEWS updated this week include:

The Bennelong Long Short Equity Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large cap stocks from the ASX/S&P100 Index, with a ten year track record and annualised net returns of over 20%. Since inception in January 2002 the Fund has had positive annual returns each year, including an 11.95% return in 2008 and 20.6% in 2011, both of which were negative years for the ASX200. The Fund's risk statistics are also sound with maximum drawdown of 12.22% and 71% positive months. Both the Sharpe Ratio at 1.27 and the Sortino ratio at 2.23, indicate a high reward-to-risk ratio. The consistent returns across the investment history indicates the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market.

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. 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), maximum drawdown of 1.57% (6.72% Index) and downside deviation of 1.74 (5.30 Index). 

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 

EVENTS

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

This week, now for something completely different wishes Jamie Curtis a happy birthday. Here she is in our favourite A Fish Called Wanda clip with another great actor, John Cleese.

On that note, enjoy the week-end!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook