Bernanke can't seem to decide which pedal to push

Ben Bernanke's comments overnight certainly set the US market alight, no doubt much to the delight of investors around the globe. However they seem at odds with the comments he made just a few weeks ago that tapering of QE could be expected in the not too distant future.

His previous comments put the skids under the equity market, pushed up bond yields along with the US dollar, and as a result further weakened the $A. However the tapering scenario didn't seem too illogical even if somehow it took many market participants by surprise, which in itself was surprising given most must recognise that QE can't continue forever.

The difficulty for investors of course is to know whether Ben Bernanke's next remarks are going to have the equivalent effect of him hitting the brakes, or the gas. I'm sure he's not doing this intentionally, and after all he should be the person with all the data at his fingertips, but having started the difficult process of weaning markets off QE, putting them back on again would seem to be not only sending mixed messages, but also delaying the inevitable.

The situation in both Europe and China is not helping. Parts of Southern Europe remain what is best termed economically as basket cases, with politics (or politicians being re-elected) having as much influence on economies and markets as anything else. Meanwhile in China there seems ongoing confirmation that the glory days are over, even if hopefully growth will continue at more sustainable levels.

All this highlights the rising market volatility, as noted by George Colman from Optimal Funds Management in his most recent report to investors, when he pointed out that the typical ASX daily trading range since 2000 has been around 0.9%. More recently daily trading ranges of plus or minus double that figure have become almost frequent, making investment decisions difficult to say the least.

In spite of this, albeit with just under 50% of fund returns for June to hand, returns have been significantly better than the market, even if the average return of equity based funds has been negative at 0.90%. To date, 72% of returns have outperformed the ASX 200 Accumulation Index (which fell 2.32%), and 29% provided positive returns. A full breakdown can be found here.

Some more specific results received this week include the following Performance and News Updates:

The Optimal Australia Absolute Trust returned -0.18% in June as the ASX200 Accumulation Index suffered its second successive monthly loss as investors continued to sell AUD risk assets. The Manager particularly noted the increasing equity market volatility, with recent daily trading ranges of over 2% significantly higher than the typical range since 2000 of around 0.9%, and the distortion on valuations created by QE policies which they believe may persist for years.  

Insync Global Titans Fund returned 0.91% in June as bond yields rose on the prospect of a tapering of QE. The Fund's return was assisted by holdings in companies driven by consumer spending such as BSkyB, Macdonald's, Reckitt Benckiser, Nestle and Roche.

The Bennelong Kardinia Absolute Return Fund returned -0.46% during June (for only it's second negative month in the past 2 years) with a net equity exposure at month end of 35.5% including derivatives (46.7% long and 11.3% short).

Morphic Global Opportunities Fund returned 1.84% during June. The Fund's top stock contributors this month came from individual stocks in a variety of countries, plus a few successful macro-economic tilts based on the Manager's belief that US government bond rates would rise, and the Australian dollar would continue to fall.

And finally, for something completely different, a clever shadow theatre act brings a tear to the eye.

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

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Focus on the Facts

May's performance data is behind us, but reflecting on it will serve to show the risk averse nature of absolute return funds in general. Against the ASX 200 accumulation index which fell 4.5%, (cutting year-to-date performance to just 5.4%) AFM's index of all funds rose by 0.36%. 

Drilling down through this data on a regional basis is not quite as compelling, with funds investing domestically in Australia losing an average of -1.53%, although still an outperformance of 3% above the index. However it does bear out our previous view that with the A$ falling out of favour, local investors would benefit by looking for funds investing offshore.

Although just 7% of June fund returns are to hand, June performance is not looking as positive, with an average fall of 0.91% against the ASX 200 accumulation index fall of 2.32%. However it again indicates the potential defensive nature of the sector.

With that in mind we are always surprised that hedge funds are typified as risky. Certainly there are some that have shown significant risk, while there are others that have performed in line with expectations, and some outstandingly. Over 12 months fund returns in AFM's index have ranged from -59% through to +66%.

Recently to overcome the misconception that that there was limited choice of funds for retail investors we analysed the performance of funds with minimum investments of $50,000 or less on behalf of Alan Kohler's Eureka Report. The facts are that over 50% of the funds in AFM's database have minimum investments of $50,000 or less, and of those three quarters have minimum subscriptions of $25,000 or less. Full details of the analysis are available here.

The issue for retail investors therefore is not so much availability, as suitability, with the more complex investment strategies demanding greater understanding by investors, and therefore additional research and due diligence. Unfortunately the quality of some research recommendations available to retail investors has in our opinion been lacking, and in some cases out of date.

Guaranteeing or even predicting the future performance of managed funds is difficult, if not impossible. Analysis of their past performance, and in-depth analysis of processes and systems, while easier, provides some indications, but still requires a critical and quantitative approach. On the occasion of the Guardian newspaper's 100th anniversary in 1921 the editor C P Scott wrote "comment is free, but facts are sacred", a tag line the newspaper retains to this day.

Unfortunately some research on managed funds focuses excessively on comment (and opinion), and insufficiently on the facts.

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

8IP Asia Pacific Partners Fund returned -1.36% during May and 18.58% for the last twelve months. The Fund's exposure in Australia and Japan detracted from performance as the small resource stock exposure continued to suffer and the Japanese financials experienced profit-taking.

The BlackRock Multi Opportunity Fund returned -0.16% during May and 8.98% since inception. The fund delivered a small negative performance in May with Global Equity Market Neutral, European equity long/short, and International Alpha Transport strategies adding value. Australian Equity Market Neutral, Global Macro, and Fixed Income Global Alpha strategies detracted.

AFM Prism Active Equity Fund returned 1.66% during May with the ASX 200 Accumulation Index down 4.5% over the same time. Of the five underlying funds, three had a positive month in May, and two had negative returns. One of the funds delivered a remarkable performance of 9.49% and this was the major contributor to the fund's performance.

The Bennelong Long Short Equity Fund returned 1.1% during May bringing it's since inception (Feb 2002) return to 21.03%. The Manager expects recent volatility to persist as markets and investors grapple with a potential change in ultra-loose monetary policy which has been in place for so long now.

You may also like to watch this most recent episode of Opalesque.TV, discussing Australian Hedge Fund Strategies, attractive liquidity terms and investors.

Now for something completely different, an unruly dog creates havoc in Richmond Park, sparking a host of parodys around the globe.

On that note I wish you a happy and healthy weekend.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

In this Opalesque.TV BACKSTAGE video, Chris discusses:

• The wide range of strategies offered by Australian hedge funds
• The strength of the Australian regulator
• Attractive liquidity terms and general outperformance of Aussie hedge funds
• Who invests into Australian hedge funds?
• High net-worth / self directed superannuation funds: the most attractive investor base for hedge funds

Chris Gosselin has been in the financial markets since 1986, initially in equities broking in Sydney and Melbourne prior to focussing on information distribution. He has been in the hedge fund sector since 2003, and established Australian Fund Monitors in 2006. Australian Fund Monitors provides a range of research services including due diligence, analytics and fund rankings, servicing both local and offshore investors.