Are we turning Japanese?

The experts are telling us that we are facing the first US rate rise in nearly seven years. However it is worth remembering we've been here before, with expectations for a Fed tightening having been on the cards for at least the past 18 months. Each time they've pulled back from the brink, either because the market reaction was so savage, or a more recent statistic or world event cut them off at the pass.

So we would have to ask the question, will it be any different this time around? And if it is, what's in store beyond the first upward move, considering that interest rate movements rarely, if ever, occur in isolation?

The reality is that the world's economy is in a very different place, and what might have occurred in the past is not occurring now. Maybe we're fixated by the recent past, rather than the distant, or the reality of the present, but the feeling is that as and when US rates do start to climb, they will struggle to get far beyond 1% in the foreseeable future.

Now one percent might not seem much, but given there's been so much debate and consternation about the first 0.25% (or maybe it will only be 0.125%) rise, one percent represents at least four rate rises. Could it be that the Japanese experience of the past 20 years is going to be reflected across the Pacific? 

Japan has effectively had a debt overhang, having never cleared their debts of the '80's. Allied with a demographic problem, Japan has struggled to record any meaningful growth since the early 1990's. The US may be different, but is the world's economy facing the same future as Japan, and are we all turning Japanese as a result.

Performance updates and reviews received this week included the following PERFORMANCE UPDATES:

APN AREIT Fund rose 4.43% in October to bring annualised return since inception to 17.90% p.a.

Insync Global Titans Fund rose 3.5% in October, to take their 12 month return to 22.02%

In October, KIS Asia Long Short Fund rose 2.50%, to bring the Fund's annualised return since inception 15.16%.

Freehold Absolute Return Fund delivered a positive 1.29% for the month of October, to take their 24 month return to 26.97%.

The Supervised High Yield Fund produced a return of +0.54% for the month of October, to bring annualised performance since inception to 9.87% p.a.

FUND REVIEWS released this week:Pengana Absolute Return Asia Pacific Fund; Totus Alpha Fund; APN Asian REIT Fund;

And on that note, I trust you have a safe and enjoyable week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Is the Hedge Fund Fee Frenzy a Furphy?

A cursory glance at the Index table on www.fundmonitors.com gives a stark reminder that while the fees charged by hedge and absolute return funds might be high compared with their "long only" counterparts, and higher again still than the increasingly popular ETF sector, you only get what you pay for.

YTD to the end of October equity based funds in AFM's database have returned 10.66% after all fees, against the ASX200 Accumulation Index (AI) which has returned a meagre 0.53%, and 12.39% over 12 months against a fall of 0.74% for the ASX200 (AI). So while it is easy for the detractors of hedge funds due to their higher fees, and performance fees in particular, when calculating the total cost of those fees to the end investor, the choice would seem pretty simple: Either pay for performance, or pay the price.

Certainly the performance of different funds varies, which is where research, and the ability of the underlying manager comes into play, but 80% of funds have outperformed the ASX200 YTD, and over 12 months that climbs to 83%. It would seem on the surface that the worse the market does, the better hedge funds do by comparison.

Putting aside individual skill for a moment (which we generally do not advise) the reasons behind the out-performance seems pretty obvious. The ability of a fund with a flexible investment mandate, including the ability to short sell, move to cash, or protect investors' capital using risk averse option strategies, provide a clear advantage over those funds which are forced to remain in the market come what may (ETF's), or have limited flexibility in overall stock, sector or asset allocation (long only, index aware).

Figures in today's AFR showed the rise of allocations to ETF's in particular, but why an investor, or their advisor would choose to do so escapes me. Sure the fees are minimal, and certainly they get market performance, but that's not much benefit when the market is going nowhere - or worse.

Price isn't everything: Quality and performance is, otherwise we'd all be eating hamburgers and pizza, and drinking vino collapso out of a cardboard box. So before making a decision based on the cost of an investment product, consider the value of the investment, risk of capital loss, and performance in both positive and negative markets.

FUND REVIEWS released this week: Morphic Global Opportunities Fund; Bennelong Kardinia Absolute Return Fund; Jamieson Coote Bonds Active Fund;  Meme Australian Share Fund; Bennelong Long Short Equity Fund

And on that note, I trust you have a safe and enjoyable week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Title: GST reform firmly and (finally) on the agenda. What's next?

This week it seems the GST hit the press (and hopefully not the fan) in no uncertain terms. Regular readers of "Hedge Clippings" might recall that an increase (and broadening) of the GST has been one of our hobby horses since before Joe Hockey's first budget, so we'd like to think someone has at last been listening, but we might be deluding ourselves on that count. In any event now it is on the front pages it is probably time for us to move on, and leave it to Malcolm Turnbull and Scott Morrison to battle it out with Bill Shorten. As unfair a match as that might be, we will all be heartily sick of the argument by the time of the next election.

So while reform of taxation is on the table, and reform of superannuation concessions a part of that, it is worth re-visiting the argument for tying Australia's super retirement pool to the need for increased spending on infrastructure. Taking some basic figures, the total value of Superannuation assets as at the end of June was just over $2 trillion. Research from Deloitte estimates that this will reach $7.6 trillion by 2033.

The taxation of treatment of superannuation has always been generous, partly as an incentive to encourage its initial adoption, and partly as a gift from John Howard and Peter Costello to reward the faithful along the way. There's little doubt this generosity will come under pressure in any taxation review, but the government could introduce a part carrot/part stick approach to encourage/enforce a slice of all superannuation accounts to invest in the currently underfunded infrastructure sector.

By setting a minimum percentage of all super balances (say 10%) to be invested in infrastructure bonds, with a low but steady return (say CPI plus 3-5%), with an appropriate taxation incentive for doing so, two objectives might be achieved at once. At 10% of all balances it would provide $200 billion at current levels, increasing to $760 billion by 2033. In reality at those levels there would be a shortage of projects by that time, but there could be worse problems to have.

Airports, roads, rail, water and power projects all come to mind. All it takes will be some vision, then political commitment, and finally electoral acceptance. Hopefully we now have the prospect of enough of all three to generate the debate. 

FUND REVIEWS released this week: Insync Global Titans Fund; Supervised High Yield Fund

Finally we hope you enjoyed this week's Melbourne Cup, and congratulations to the first winning female jockey in the Cup's history. Now for something completely different, this news item regarding the obedient, but not too quick on his feet, bank robber in the USA.

And on that note, I trust you have a safe and enjoyable week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Two sides of the confidence coin

There's little doubt that business conditions are not getting any easier based on a number of results and guidances released this week. The share price of electronics retailer Dick Smith has been savaged following an earnings downgrade; Woolworths continues to struggle to return to the glory days of their dominance over Coles, as well as having to contend with the rise of Aldi; and National Australia Bank's margins in the business loan division appear to be declining sharply.

In spite of this business confidence, based on the NAB's monthly survey of around 350 small, medium and large Australian companies, increased to 5 in September from a score of 1 in August, not-withstanding it remains a long way south of the all-time high of 21 in May 2002, but also well north of the all-time low of -31 in January 2009 during the hiatus of the GFC.

To what extent the rise in business confidence is a result of the change in Prime Minister will no doubt depend on one's own political view, but anecdotal evidence would suggest that the two are strongly correlated. In discussions over the past couple of weeks with a variety of fund managers amongst others, the majority of whom one would safely assume to be variously to the right of centre, the mood appears to be universally positive.

To what extent one person can change the Country's outlook, and even more importantly, to what extent that change will affect the eventual outcome, we will have to wait and see. The pertinent point is that even rusted on Liberal voters were deeply concerned with the direction (or should that just be the diction) of the previous leadership, and it now appears that clear confidence in leadership, and clear direction, might be able to overcome difficult economic conditions.

Given that this week-end we will see the Wallabies in the final of the RWC, when just over 12 months ago they were a leaderless, or badly led rabble, and more generally tagged as the "Woefull Wallabies" there's a great message here. Michael Cheika has shown that properly motivated, the same players playing up at the back of the bus can respond to difficult times, and through hard work and plenty of grunt, turn a potential disaster into the possibility of taking the prize.

Irrespective of the outcome of this week-end's final, pride will have been restored both on and off the paddock, win, lose, or heaven help us, draw.

FUND REVIEWS released this week: Morphic Global Opportunities Fund; Pengana Absolute Return Asia Pacific Fund; APN Asian REIT Fund

And on that note, Go! Wallabies, Go! so that at least on this side of the Tasman we can enjoy the week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

FSI endorsed, Mortgage rates rise, and the GFC rolls on... and on.

Although it can't be pinned onto the new government, the fact that nearly all the recommendations of David Murray's Financial System Inquiry were endorsed this week makes a welcome change from the treatment previous administrations gave to similar inquiries. Take for instance the Henry Tax Review which amazingly excluded the GST in the terms of reference in the first place (Rudd), and then cherry picked those they wanted, or the 2009 Johnston enquiry which, where accepted, took six years to implement.

What is encouraging is that although it will be some time for all the FSI's outcomes to come to pass beforebeing fully implemented, some decisions, such as the increase in bank capital, have flowed through already. Banks had been raising additional capital in anticipation (including as a result of the Basle lll requirements out of Europe) and may need to raise more again in the future, but the immediate effect was an increase in mortgage rates.

It could be argued that having been protected at no cost to themselves during the GFC by the government, the banks should be wearing the costs of increased capital themselves. Be that as it may, it is indicative that the after-shocks, or effects of the GFC continue, as shown by the increase in mortgage rates this week independently of the RBA, which in turn is now being tipped to lower official rates to compensate.

We are not suggesting for one moment that the requirement for the banks to hold more capital is a bad thing as it adds stability to the system in the event of future issues, including a potential down-turn in the property market which already seems to be rearing its head. On that note one of Murray's few recommendations not to be approved was a ban on borrowing by SMSF's for property, and one has to wonder why this is so.

So now we look forward to the outcome from the current thoughts on tax reviews which Malcolm Turnbull has sent back to the bureaucrats for a re-work. While it may take a while, one has to believe that there's a greater conviction for change from this PM and his ministers than we have seen for some considerable time.

And about time too!

FUND REVIEWS released this week:Aurora Foritude Absolute Return Fund; Totus Alpha Fund;Bennelong Long Short Equity Fund; QATO Capital Market Neutral Long/Short Fund

And on that note, enjoy the week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Cayman Funds on the front pages, and an unforseen rate rise

This week hedge funds made the front pages in Australia as the opposition tried to embarrass the newly appointed PM Malcolm Turnbull over his investments there. As usual they didn't let the facts get in the way of a good story, and as it turned out it backfired on them as most who understand the industry thought it would.

The reality is that the "tax free" status of the Cayman's is to all intents and purposes the same as the tax free status of Australian unit trusts. Where they differ significantly is that Australian trusts have to distribute their earnings annually, whereas their Cayman counterparts can accumulate earnings until redeemed. In other respects unit holders, or in the case of the Cayman vehicles, shareholders, are responsible for paying tax in their own jurisdiction a the applicable rate.

As a result of that, and withholding tax, Australian unit trusts aren't that attractive to offshore investors which is why local managers wanting to attract them need to establish an offshore, normally Cayman, vehicle.

Simple enough even for the opposition to understand, as the PM was able to explain to them!

Meanwhile Westpac raised variable interest rates on mortgages this week in a surprise decision given the general view that official rates in Australia are likely to remain flat or possibly fall over the coming months. I guess that is covered by the adage of expect the unexpected!

FUND REVIEWS released this week: Optimal Australia Absolute Trust; Jamieson Coote Bonds Active Fund; Bennelong Kardinia Absolute Return Fund

Apologies to those who enjoy it, but we have nothing completely different to add this week but we hope youenjoy the week-end anyway.

Regards,

Chris
CEO,AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Only Performance is Reality

As you might have noticed Hedge Clippings has been off the air (no comments please) for a few weeks. In a case of either poor timing (or bad management) Clippings has been in the UK, leaving for home just as the RWC was getting under way, and missing the Wallabies' winning performance against England. One swallow doth not a summer make, but there was an improved air of confidence notable both on and off the field.

Which leads of course to the change of PM which also took place in my absence. Having been both vocal and critical over the past few years regarding the performance of a succession of Prime Ministers and their Treasurers of various persuasions, I can only say "welcome" and let's move ahead. Although only three or four weeks has passed since Malcolm Turnbull became PM there seems to a new mood, and once again an improved air of confidence amongst both business and consumers.

Tony Abbott may not be happy, but only performance is reality. Of course the biggest potential loser is probably Bill Shorten.

Enough of politics!  Talking of performance and reality, economies globally have taken a beating as China's inevitable slowdown has taken its toll on markets. The extreme volatility has seen the ASX200 Accumulation Index fall almost 13% from its February high to the end of September, with the September quarter falling 6.6%, although month to date half of that loss has been recovered.

In that volatile environment absolute return and hedge funds have once again proven themselves to be risk averse as opposed to risky. YTD the average equity fund is up 7.31%, an outperformance of 10% vs the market, and over 12 months they're up 9.68%, again 10% better than the ASX200 Accumulation Index. Over 12 months 81% of the funds in AFM's database have outperformed the index, and YTD that number rises to almost 92%.

Of course these are averages, with the best doing considerably better than that. Over 12 months: Totus Capital, up over 30%; Bennelong Long Short, up 27%; QATO, up 24%, to name just a few.

In spite of this there remains a small section of the media, probably prompted either by lack of hard facts, and passive index funds, driven by vested interests that continue to sing the "risky and expensive" tune, although in times like these as above, Only Performance is Reality.

FUND REVIEWS released this week: Totus Alpha Fund; Supervised High Yield Fund; Meme Australian Share Fund; APN Asian REIT Fund; QATO Capital Market Neutral Long/Short Fund; 

And now (and about time) for something completely different: Malcolm Turnbull!

And on that note I wish you an enjoyable week-end. It's good to be back, and Go! The Wallabies against Wales at Twickenham!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Don't say we didn't warn you!

Every now and again - and frequently more often if the truth be known - we choose, or are forced to look back at what we've said or written previously. Occasionally  - and more often than we'd care to admit - we have to revise our thinking, but hopefully not too often.

One has to remain open to the possibility that we might have been wrong. However as Sir Winston Churchill once famously said, quoting economist John Maynard Keynes, "when the facts change I change my mind. What do you do Sir"?

So having said that I'm now going to say we were right, and in our opinion the facts haven't changed. Back on 11th July in Hedge Clippings we said "if anyone can pull off what the Chinese authorities are trying to do, they can, but we doubt they'll succeed".  At the time we were referring to their ability to control or ban investors putting in sell orders, but it matters not. The Chinese are now realising that as great as their economic growth miracle has been, once it becomes a market economy, the market takes over.

The trouble is that it is not just the Chinese economy that's at stake. So much has the global economy been tied to the Chinese miracle, that now the real slowdown has become apparent, the reverberations have set in.

Australia, having missed the post GFC global slowdown thanks to Chinese demand for our resources, failed to make the most of it, and failed to adjust the rest of the economy whilst it could. Now we're suffering as a result, added to which the liquidity of both the market and the currency makes us easy prey to global capital flows.

Thanks in part to an overheated market (and possibly the irrational valuations of Aussie bank shares on the back of the yield trade) the ASX200 has just suffered its worst monthly return since the height of the GFC in 2008. As we have indicated in previous Clippings, this will sort the fund manager men from the boys (sorry, a little sexist) and the wheat from the chaff. Numbers are scarce to date, but a good example is George Colman's Optimal Australia Trust. Having struggled for the past year in the irrationally exuberant markets which ignored the fundamentals of what was going on, they returned a positive (repeat, positive) return of 1.5% in August, an outperformance of just over 10% for the month.

Two predictions from here: One, that interest rates will now stay lower for longer, both here and in the USA as the authorities have limited room or levers left to pull. Two, that the current volatility will remain as global investment banks, plus the combined effects of ETF's, move markets.

And one more: Volatility, while it may settle down from these levels, is never far away, particularly when you least expect it. High returns may be appealing, but not nearly as comforting as capital preservation.

Specific results received this week include the following PERFORMANCE UPDATES:

FUND REVIEWS released this week: Pengana Absolute Return Asia Pacific Fund; Supervised High Yield Fund;

UPCOMING EVENTS:

17 September 2015 - The 14th Annual Hedge Fund Rock and Australian Hedge Fund Awards 2015 as the industry lets its hair down with some drinks, music and great videos. All proceeds go to Redkite helping childern with cancer and their families.

Now for Something Completely Different is taking a rest this week, but try to have a good week-end anyway.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Boring bonds vs. Volatile equities

Australia seems to be a bit player in a wildly fluctuating equity market, with daily swings in either direction of between 2 and 4%, or if you're in China, double that. What's been more difficult to fathom are the intraday swings on the Dow of 400 points - or up to 2% on the day.

It is hard to work out what is really driving the market's volatility, but it certainly seems sound logic is not. There may be an element of buying the dips, and with high yielding stocks such as Commonwealth Bank off around 20% that might not be surprising. However the more likely answer is a combination of a lack of liquidity, a surplus of fear, combined with quant/ETF trading and traders moving the market while having to negotiate the mayhem.

What is amazing is how quickly markets have become disorderly, and how quickly equity investors have come around to understanding that while equities might take up the majority of the financial media, they're not always orderly.

This week Hedge Clippings met with Charlie Jamieson and Angus Coote of (the appropriately named) Jamieson Coote Bonds, who reminded us of the Economics 1.01 lesson that bonds remain a cornerstone asset class in both European and US markets, provide stable income plus return of principle if held to maturity, plus some potential for capital gains (or losses) if realised before their stated maturity. 

One problem for Australian investors is that there's minimal understanding of these low risk "boring" fixed income and bond markets and how they operate. Globally the bond market is many, many times larger, and in many ways far more influential, than the equity market. Another is that there has been much negative press around fixed income and bonds in the face of rising US interest rates. In spite of this bond returns remain positive, and with low volatility. In fact last Monday and Tuesday bond prices rose significantly as equities suffered substantial losses. 

Are bonds without risk? Of course not, as investors in Greek Government Bonds would no doubt agree. However, like any market, different security selection comes with differing risk profiles of credit quality and liquidity dynamics. However bonds can generate a significant counter weight to equity portfolios, bringing low volatility and excellent liquidity from high quality issuers such as Governments or highly rated corporates. In fact the 10 year Australian Government bond (often referred to as the risk free rate) returned over 15% in 2014 from a combination of capital appreciation plus paid interest income. 

Last week Hedge Clippings advised that August would become a critical test for many equity investors and managers. Evidence to date is that while many have performed well in protecting investors' capital, others will have failed the test. We await the final returns with interest. However for investors not prepared to accept the current levels of market volatility, a dose of boring bonds might just be the answer.

Bonds: Stirred maybe, but not shaking!

Specific results received this week include the following PERFORMANCE UPDATES:

FUND REVIEWS released this week: Bennelong Kardinia Absolute Return Fund; Optimal Australia Absolute Trust; Aurora Fortitude Absolute Return Fund

UPCOMING EVENTS:

26 - 28 August 2015 - The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

17 September 2015 - The 14th Annual Hedge Fund Rock and Australian Hedge Fund Awards 2015 as the industry lets its hair down with some drinks, music and great videos. All proceeds go to Redkite helping childern with cancer and their families.

And Now for Something Completely Different: I try to avoid parking fines - sadly with limited sucess. But when I do get them I usually find it easier to pay them than spend the time and frustration of fighting the bureacrats. Not this fellow...

On that note, have a good week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

When the going gets tough....

Regular readers of Hedge Clippings will know that our commentary frequently varies from a focus on fund or industry returns. This week however, given the volatility in markets and the uncertainty that prevails, we will take a look at how actively managed funds as a whole have performed in recent times.

Prior to doing so however it's worth just reflecting on some of the factors disappointing markets. Firstly in Australia the reporting season has been less than stellar, with more disappointments evident than surprises to the upside. Elsewhere the overnight news from Greece was probably a surprise, but it's doubtful if anyone outside Greece is taking much notice any more.

China and the USA remain the big issues driving markets, with two big questions arising: Will the Chinese authorities have a Mario Draghi moment and actually come out and declare that they'll do "whatever it takes", or have they already indicated that they'll do so by their actions? Meanwhile in the US we are getting closer and closer to the day when interest rates will finally rise, and this week has shown that while most understand that, when it actually happens there will be a significant impact on the market.

And so back to the performance of absolute return and actively managed funds. There have been plenty of comments in the press over the past few years that as a whole active managers have not performed sufficiently to justify their fees. In somecases that may well have been the case, but it's difficult to outperform in a strongly rising market, while still protecting the downside.

However, it is evident that when markets begin to underperform, or become volatile, absolute return funds come into their own. Over the past 12 months to the end of July the ASX 200 Accumulation Index has risen 5.68%. When one considers that the index includes dividends, the ASX 200 (excluding dividends) has risen just 1.18%.

Over the same 12 month period equity-based funds in AFM's database have risen 13.43% on average, with 63% of funds outperforming the ASX 200 Accumulation Index. Taking June returns by themselves, when the market fell 5.3% funds significantly protected investors' downside, albeit that they also fell 1.88%. That's still an outperformance of almost 3.5 percent, with 85% of all funds outperforming the market.

Specific results received this week include the following PERFORMANCE UPDATES:

FUND REVIEWS released this week: Monash Absolute Investment Fund; Morphic Global Opportunities Fund; Bennelong Long Short Equity Fund

UPCOMING EVENTS:

20 - 21 August 2015 - The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 - The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

17 September 2015 - The 14th Annual Hedge Fund Rock and Australian Hedge Fund Awards 2015 as the industry lets its hair down with some drinks, music and great videos. All proceeds go to Redkite helping childern with cancer and their families.

And Now for Something Completely Different. Koala's are renowned for all sorts of things, but generally for being cute, cuddly and sleepy, I'm told becasue they're stoned on the gum leaves they munch all day. Not this one.

On that note, have a good week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook