FoFA's twists and turns continue: ASIC's focus on fee disclosure.

Last week's Hedge Clippings jumped the gun by claiming that the much discussed changes to FoFA had become a reality. The real lesson in reality is that at the current time nothing coming out of Canberra can be guaranteed, except perhaps more of the same. As a result the reality is uncertainty, and this uncertainty is only a benefit to the opposition, and the collection of senators in the new Parliament who will control the country's (and the government's) destiny until the next election.

That may come sooner than later.

As we said last week there has been plenty of rhetoric regarding FoFA, and from our reading of the legislation (for the technically minded the Select Legislative Instrument No. 102, 2014) a fair deal of scaremongering along with it. The Explanatory Statement issued by the authority of the Treasurer which accompanied SLI No 102, 2014 ran to nearly 60 pages, or approximately 3 times the length of the actual Select Legislative Instrument, which probably says something in itself.

If the Explanatory Statement from the Treasurer is taken at face value it would appear that, as far as the issue of conflicted remuneration for General Advice is concerned, the proposed situation is pretty clear: In order for benefits to be paid to an individual in relation to General Advice to NOT be considered as conflicted remuneration, a suite of five conditions all need to be met, one of which is that payments commonly known as commissions cannot be paid on products sold as a result of General Advice (see pages 6-8 of the statement).

Not being a lawyer may well mean that I have got the wrong end of the stick on this issue, and FoFA deals with a range of other issues in addition to conflicted remuneration, including definitions between wholesale and retail clients, the need for clients to renew their ongoing fee arrangements (opt in), best interest duties and a range of other issues. As previously stated it sounds as if there are some large and competing interests at play here between the large product issuers and distributors, and the non-for-profit superannuation industry.

Added to which are of course the competing interests of a government that is struggling to win many friends, or take many tricks, either inside or outside of Parliament.

It doesn't help of course that the Commonwealth Bank's compliance woes and failures are also currently front and centre in the media. There were certainly deficiencies in the law when some CBA financial advisers ran riot, but the main issues would seem to have been effective compliance controls at nearly all levels of management.

Changing tack only slightly, this week ASIC also released Report 398 covering Fee and cost disclosure in the superannuation and managed investment product sector. This has only just hit Hedge Clippings' desk so maybe we will park a detailed analysis to another time. Suffice to say that fees and their disclosure will always remain a contentious issue, especially in an industry where asset values are guaranteed to increase dramatically over the next two decades without any corresponding reduction in fees in sight.

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

Morphic Global Opportunities Fund returned 1.07% during June, ahead of the global equity index at 0.46%, and financial year performance of 20.81%.

Performance for the Monash Absolute Investment Fund 2014 financial year was 23%.

Optimal Australia Absolute Trust returned +0.63% in June against the ASX200 which fell -1.5% with the fund's low concentration and risk controls mitigating losses on long positions, while shorts significantly outperformed.

Slightly ahead of the index at -1.5%, Bennelong Kardinia Absolute Return Fund returned -0.66% for June.

Bennelong Alpha 200 Fund returned 0.32% in a weak market (ASX 200 Accum - 1.5%).

In a difficult month for the ASX The Paragon Fund returned 4.9% bringing 12 month performance to 30.0%.

FUTURE EVENTS:

14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different, Ray Jessel, an 84 year old contestant on America's Got Talent may lament his lack of size in certain areas, but makes up for it ... elsewhere.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

THE RETURN OF THE BOILING FROG

This week saw the much discussed changes to FoFA become reality, at the same time as the Senate released its report on poor management controls in the financial planning arm of the Commonwealth Bank. There's been plenty of rhetoric, along no doubt with some behind-the-scenes lobbying, regarding the changes to FoFA, and it is fair to suggest that much of the scaremongering has been just that.

From what we've seen of the new legislation (which is a fair amount having trawled through it along with the relevant sections of the Corporations Act) there would appear to be appropriate safeguards and controls in place to protect retail investors from inappropriate actions by financial advisers. Time will tell of course, but the reality is that no legislation will deter those intent on breaking the law, and as has been seen with the Commonwealth Bank, the risks are not so much with the law, but a lack of effective compliance controls at management level.

So back to markets and risk. This week we read an excellent piece of research by Simon Doyle, Head of Fixed Income and Multi Asset at Schroder Investment Management, entitled 2014: The year of the "Boiling Frog" in which he continued with the theme of heightened risk at the same time as excessive complacency that we highlighted a few weeks ago in George Colman's Optimal Australia performance report.

It is difficult to boil down (excuse the boiling pun) the contents of Schroder's five-page article to a couple of paragraphs, but the essence would seem to be that as valuations rise, so the risk of loss increases, while at the same time volatility, (which implies relaxed and comfortable investors) as measured by the VIX is trading at historic lows.

Doyle's alternative interpretation is that "extra easy monetary policy and reassuring words from central bankers is lulling investors into a false sense of security" and that parallels with the proverbial boiling frog come to mind. As such the temperature may be rising, and the risk to investors more significant than they currently perceive. According to his research and return forecasting framework, Doyle concludes that "valuations in key markets are stretched, future returns are diminishing and the risk of loss is high (and uncomfortably so)".

A link to the full article is included here. Doyle puts the responsibility of the current situation firmly at the feet of central banks and exceptionally easy monetary policy, but at the end of the day it is likely to be investors who are hurt.

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

In the first negative month of the ASX since January the Microequities Deep Value Microcap Fund returned 1.39% and 31.53% for the year.

Fund Reviews released this week included:

Optimal Australia Absolute Trust; Insync Global Titans Fund; Supervised High Yield Fund.

FUTURE EVENTS:

14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different, more details on the boiling frog analagy can be found here.  Please note, no frogs were harmed in the filming of this clip.  Unlike this second clip, but at least they were dead first.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

Earlier this week Hedge Clippings attended the ARRIA Roundtable in Brisbane. For those not familiar with ARRIA it is a relatively recently formed group of investment advisers, generally unaligned or independent from the major banks or product issuers, whose objective is to raise their knowledge of Real Return Investments, and as a result improve the investment outcomes of their clients.

Hence the name ARRIA, which stands for the Association of Real Return Investment Advisers with Real Return defined as "investments or strategies other than long only, buy and hold, Static Asset Allocation (SAA) to traditional asset classes". For pretty obvious reasons Hedge Clippings and ARRIA are pretty much on the same page when it comes to wanting to raise the knowledge of, and to improve, the investment outcomes of such strategies.

However the discussion in Brisbane spent some time discussing whether Real Return was the correct term, or even the correct asset class given that there are a myriad of other terms which are also in use to broadly define the same sector. These include Absolute Return, Hedge Funds and Alternative Investments, none of which necessarily fit into the long only, buy and hold or SSA of traditional asset classes.

Definitions are difficult, especially when one is talking about investment products which don't fit into a neatly defined bucket or group. The investment industry is full of jargon and terminology at best, and as any investor would know there is no such thing as perfection, otherwise everyone would do the same thing. Asset consultants, research houses and the overall advisory industry like or need to be able to pigeonhole products either to make their life easier, or to make their business more defensible.

By necessity ASIC likes to pigeonhole products as well, and defines a hedge fund as having two or more of five specific features. However an increasing number of long only or traditional investment products now include one of these, namely charging a performance fee. Many others now make some use of one of ASIC's other defining features, namely the use of derivatives.

Apart from the confusion that can result, (or in the case of ARRIA's meeting, considerable discussion) there are a number of important and far-reaching results and implications from specific product categories and definitions. ASIC won't allow fund managers to issue a short form PDS for a product categorised as a hedge fund. Many Approved Product List's or APL's use by the retail advisory industry either won't include or limit the use of products which might be termed "Alternatives". The ASX doesn't include long form PDS products as part of it's new mFund offering.

Insurance companies providing professional indemnity cover to advisers take an equally structured view, and thus many advisers are unable to recommend many funds to their clients simply because they are unable to easily tick the right boxes for their APL.

What is often missed in all this debate about product buckets and box ticking is that a large number of the funds in question are not investing in a different asset class at all. Rather they use a different strategy or investment style to invest in the same underlying asset, whether it be equities, commodities or fixed income.

This is inconvenient at best for the investor as many such funds provide what the investor is looking for at the end of the day, namely an attractive return at an acceptable level of risk. Whether this is provided by a Real Return Fund (defined as one targeting an investment return above inflation) or an Absolute Return Fund (defined as targeting a return above zero), a Hedge Fund which seeks to avoid risk or reduce volatility, or a combination of above, the bottom line is Performance and Risk, or a combination of the two.

No doubt none of this will change the debate about which bucket or name to use, but as Harold Geneen from IT and T once said: "Words are words, and promises are promises. Only performance is reality."

For advisers or fund managers who would like more information on ARRIA, their website can be found here, or you can send their General Manager, Philip Reid an email.

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

The KIS Asia Long Short Fund returned 0.21% during May and 11.23% for the year ended May 2014.

May returned a strong 2.60% for the Allard Investment Fund with the annual return coming in at 5.05%.

The Cor Capital Fund returned -0.26% during May and 3.14% for the previous 12 months.

At a volatility of 0.73%, Supervised High Yield Fund returned 0.61% during May bringing annual performance to a solid 7.75%.

With it's annual performance recording 31.12%, the Avenir Value Fund returned 1.41% during May.

The Laminar Credit Opportunities Fund returned 0.62% during May and a sound 11.78% for the prior twelve months.

Insync Global Titans Fund took advantage of stronger equity markets and returned 1.70% during May with the annual return 12.50%.

A sound return in a choppy market, the Auscap Long Short Australian Equities Fund returned a 3.82%, with the full year return at 55.82%.

Aurora Fortitude Absolute Return Fund returned 0.19% during May with annual volatility of 1.00%.

The Microequities Deep Value Microcap Fund has a robust 12 month return of 28.56%.

The 12 month return is now at 42.05% for the Totus Alpha Fund with performance in May of 3.99%.

Fund Reviews released this week included:

Bennelong Alpha 200 Fund, still in it's first year.

FUTURE EVENTS:

14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different. This link outlines the efforts of one well-meaning and well-to-do hedge fund manager in the USA seeking to combine his interest and goats with the interests of the residence of a small part of the city of Detroit. As admirable as that may be he might have missed the fact that goat is one of the most commonly eaten meats in the world, and it may just be that his goats disappear more quickly than he anticipates.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

Fridays can be challenging for all sorts of reasons: Sadly, but probably sensibly, the long lunch is a thing of the past. Nowadays a fair proportion of my Fridays are spent trawling through an assortment of manager's monthly performance reports seeking inspiration for the current week's edition of Hedge Clippings.

Sometimes we are assailed by the antics of a politician of one particular persuasion or another, and at other times the economic or industry landscape provides the necessary spark. This week is different again and we have been gifted by the monthly performance report from George Colman of Optimal Australia. Normally we might borrow a few ideas from such a report, but in this case George encapsulates such an excellent summary of the Australian market and the challenges it is facing that there seems little point in trying to do so.

Therefore, we unashamedly, and I might add with full permission from George, have reproduced in full his commentary below; it is longer than our normal clippings, and considerably more cerebral. Take it away George:

We continue to hold our net risk exposure at close to zero. From this point, it seems madness to us to try to replace fixed income or deposit coupon yield through equity securities at these extended valuations without some form of insurance in place.

The Fed continues to 'taper' its QE program. Why take away the punch bowl at this point? To suggest that this is because QE policies have worked is drawing a pretty long bow in view of 1Q US GDP growth at negative 1%, although the narrative has it that this was only due to bad weather. It seems more likely that even the Fed recognises, belatedly, that they've taken QE too far: "...keeping rates very low - will continue to incentivise investors to reach for yield." (the Fed's Esther George, in classic understatement mode).

With the ECB likely to force a residual element of excess European bank liquidity (the major part has already traded on the signalling, most likely in US Treasuries) into the markets and not, sadly, into the real economy, through negative deposit rates, conditions will likely remain distorted and volatile for some time yet. The warning signs are growing, and it looks like pre-2008 history is repeating itself in several key respects:

In the credit markets, the average quarterly volume of US high-yield debt issuance in 2013 was US$90bn, with 65% of that sold on a covenant-light basis, compared with a quarterly average of US$40bn in 2007 with an average of 28% cov-light. Typical debt to EBITDA leverage in private equity deals has reached similar levels to 2007, at up to 7x, but the junior debt in 2007 was priced at up to 12%, compared to today's 7%.

In Australia, the IPO pipeline has turned into a veritable gusher, with private equity and other sponsors seeking to sell every position not nailed down. Even the deals that failed in late 2013 are now getting done, with no obvious price adjustment, and just prior to large wads of escrowed vendor stock becoming tradeable following June 2014 earnings results.

Finally, the M&A cycle continues to heat up, with KKR launching a conditional offer for the hapless Treasury Wine Estates at $4.70/share, and a counter-bid for developer ALZ, at a 25% premium to NTA.

This is all occurring against a slow deterioration in the economy. As expected, the Coalition Government forecast a $30bn F15 budget deficit, and with the exception of a tax levy on high earners, the budget focused on spending cuts. Having barely noticed the effect of the 2008 global crisis, Australians do not much like the concept of budget austerity, much less the removal of their middle-class welfare entitlements.

Post-budget economic data points are limited, but May's Westpac-MI consumer confidence index declined 7% MoM, with the outlook for family finances and the economy over the next 12 months the hardest hit, plunging 23% and 14%, respectively. Anecdotally, the consumer has been very weak since the budget.1Q's impressive 3.5% YoY GDP growth did not capture the budget effect, and was driven by 4.8% growth in exports, just before bulk commodity pricing fell apart.

As for economic rebalancing in Australia away from mining, a study by UBS showed that since June 2012, 95% of all Australian credit growth has gone into property, and 76% of all business lending has gone into commercial property. This still strikes us as a structurally challenged economy with a richly-valued stock market and currency, both driven by carry money.

For the record the Optimal Australia Absolute Trust has a track record of almost 6 years, having launched the day that Lehman's failed in September 2008. In that time the Fund has returned an annualised 10% and has never suffered a drawdown of more than 1.38%, has an annual standard deviation of 3.49%, and a Sharpe ratio of 1.78.

We think George's opinion is worth listening to.

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

The Optimal Australia Absolute Trust returned 1.40% over May with an annual return of 4.81% achieved with volatility of 1.70%.

May returned 0.36% for the Bennelong Kardinia Absolute Return Fund and over the previous twelve months, low volatility of 4.27% and returns of 7.49% .

The Paragon Fund had a strong month, returning 3.2% and bringing it's twelve month return to 26.19%.

Taking advantage of stronger global markets, Morphic Global Opportunities Fund also had a strong month with performance for May at 3.91% and 21.73% for the prior twelve months.

FUTURE EVENTS:

18 June in Sydney: MAX: the Marketing, Advertising and Sales Excellence Forum and Awards. Forum 8am - 4:30pm; Awards dinner 7-10pm.

14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, sad but true, the latest generation of children can usually play Angry Birds better than they can spell.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

Having given the Treasurer a break in last week's Hedge Clippings, we're going to do the same again this week. After all this missive is called "Hedge Clippings", not "Head Kickings", and however tempting, there's not much that we can add to the debate. Even Clive Palmer is helping to distract attention from the budget.

So back to last week's topic, and the difficult investment markets that hedge funds both in Australia and overseas are currently navigating. While the averages have improved marginally now that most funds have reported, the reality remains that the sector as a whole lost 0.08% in April, while equity-based funds lost 0.17%, against the ASX 200 accumulation index which rose 1.77% for an outperformance of almost 2%.

Although specific corporate action caused some damage to crowded short positions in the likes of Goodman Fielder and Treasury Wine Estates, the broader feedback from a number of hedge funds managers was that the rotation out of quality stocks, and into poorer ones (or as one manager more simply put it "the crap") was making life particularly difficult.

This is also borne out by an interesting chart we saw from Goldman Sachs Global Investment Research in the US which showed the relative long/short performance of those companies with strong balance sheets, versus those with weak balance sheets - in other words "quality versus crap".

Normally one would expect quality to outperform, but given the effects of QE and easy credit, that position has reversed over the past two years to the point where there has been a steady increase (now in the region of 50%) in the outperformance of companies with weak balance sheets. Equally companies that are paying high dividends, as opposed to those reinvesting their profits in building their business, are understandably becoming more attractive given investors' the alternative of leaving money in the bank.

What was apparent talking to fund managers this week was that long/short investing is not nearly as straightforward as simply buying companies you like, and selling those you don't, particularly in the short term when the companies you don't like are sold down to such an extent (and often for a very good reason) that they become compelling or more attractive to private equity players or other corporate activity.

Life, as one ex-prime minister once remarked to his regret, "wasn't meant to be easy", particularly for a hedge fund manager.

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

In a volatile market for it's sectors, the Nanuk Global Alpha Fund returned -2.93% during April with annual performance standing at 17.11%.

Allard's Investment Fund returned 8.84% for the last year with a vol of 6.68%.

The Auscap Long Short Australian Equities Fund returned 0.29% in a volatile month, with annual performance 44.01% to April 2014.

With a very low volatility of 3.3%, the KIS Asia Long Short Fund returned -0.77% during April and 14.33% for the preceding 12 months.

The Pengana Australian Equities Market Neutral Fund returned -1.20% during April with twelve month performance of 12.29% and volatility of 8.43%, while it's Australian Equities Fund had a positive month, returning 1.24%.

Although it had a negative April, the annual performance of Avenir's Value Fund is very strong at 40.16% with a volatility of 8.50%..

FUND REVIEWS updated this week included: 

Optimal Australia Absolute Trust - Insync Global Titans Fund - Monash Absolute Investment Fund

FUTURE EVENTS:

18 June in Sydney: MAX: the Marketing, Advertising and Sales Excellence Forum and Awards. Forum 8am - 4:30pm; Awards dinner 7-10pm.

14-15 August in Sydney: Alternative Investments Conference - Investigating the rise and rise of non-traditional high yield and low risk investment products, strategies and allocation in an era of prolonged volatility and low returns.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week,.. although he passed away in 1989, it would have been Mel Blanc's birthday today, the man of a thousand voices, we thought you might enjoy this clip from the Jack Benny show, it's an oldie but a goodie.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

April was a tough month at the office for Absolute Return and Hedge Fund managers based on the 70% of performance reports received to date.

While the ASX 200 Accumulation Index rose 1.77%, AFM's index of all funds lost 0.23%, with equity-based funds bearing the brunt, down an average of 0.34%. While we are used to, and would expect hedge funds to underperform in strongly rising markets, lagging by 2% and with a negative number to boot is unusual.

While the performance for a single month is disappointing, over 12 months there is little difference across all 333 funds which have gained 10.02% versus the ASX 200 accumulation index at 10.46%. Equity-based funds, which make up 60% of the total have done better, with a 12 month average return of 14.08%.

58% of fund returns to date were positive, against 90% over the past 12 months, while only 15% outperformed the ASX 200 in April, rising to 54% over 12 months.

There are probably a number of reasons for April's disappointing returns: Firstly divergences between large and small cap stocks, with the ASX 200 adding 1.7%, and the Small Cap Index falling 1.2%. As a further indication the ASX Top 20 rose 2.2% for the month, with yields once again driving this segment of the market. Although the absolute return sector is not homogenous it is fair to say that on average they have less exposure to the large end of the market, preferring to seek value down paths that are less trodden by broking analysts.

Secondly there was a sell-off in growth and tech stocks, reflecting the same scenario in the US, which have risen over the past 12 to 24 months to be on unacceptably high future earnings multiples. Once again this has been a happy hunting ground for many of Australia's smaller boutique fund managers, who have benefited significantly from positions in stocks such as Seek, Xero and REA.

Further damage was done to the small cap sector with anecdotal evidence that a couple of large institutional mandates had switched managers, and the change in portfolio holdings had damaged prices as a result of the limited liquidity at this end of the market.

It was interesting to note that some of the best performing funds, which had provided annualised terms of over 30% in the past 12 to 24 months, found April difficult and struggled to produce a positive return. We doubt that April was the start of a new trend, but was more likely to be a month in which various factors, which had previously provided some excellent returns, shifted, and the very nature of their styles will enable them to adjust accordingly.

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

The Totus Alpha Fund has returned a strong 39.11% over the last 12 month with a volatility of 16.37%.

Alpha Beta's Asian Fund recorded a return of -1.23% during April and 10.37% over the prior 12 months with a low volatility of 5.41%.

The Intelligent Investor Value Fund returned -3.44% (Small Cap Index -1.2%) in a weak small cap market with the 12 month result 18.67%.

Aurora Fortitude's Absolute Return Fund returned 0.01% in a choppy month for market neutral funds, bringing its annual return to 5.96%.

The Insync Global Titans Fund returned -1.0% in April with annual performance coming in at 15.97% with a Sharpe ratio of 1.39.

Cor Capital's Fund returned +0.51% for the month of April 2014. The total return since inception in August 2012 is 9.0% or 5.1% p.a.

FUTURE EVENTS: coming up this week

Wednesday 28 May in Sydney: Lunchtime education event presented by AIMA - the panel will explore topics such as Marketing and fund raising for Australian hedge funds & boutiques; Maintaining independence vs aligning with fund incubators / investment partners and more. Speakers include Jarrod Brown from Bennelong Funds Management and John Corr from Aurora.

28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, I'd like this guy on my side - aged 18 and 134 kgs.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

Firstly an apology for an error in our Hedge Clippings two weeks ago (May 2^nd) where it was stated that the Federal budget would be handed down last Tuesday, May 6^th. We were a week early, based on our misguided view that "budget night" was traditionally the first Tuesday in May.

Secondly, an apology for suggesting that the pre-budget leaks were designed to be softening us up, and that the news on the night would not be as bad as expected, and we would all thank the Treasurer for being so kind. The fact is that by and large everything on the day was well telegraphed, and therefore planned, perhaps with the exception of the Treasurers' cigar chomping, disco dancing images that somehow made it into the media.

There's no doubt there needs to be some changes made and medicine to be taken on both the revenue and expenditure side, but we can't help feel the PM's "more pain, more gain" mentality is better suited to his sporting attitude than the gentle art of persuading an electorate that the solutions that have been suggested in the budget are acceptable.

As indicated in the previous Hedge Clippings, the risk is that the spending and welfare cuts will damage consumer confidence which is the lifeblood of the economy. Added to that risk is that the PM's and his government's political goodwill has been damaged to the extent that if the budget bills are blocked in the senate, and a double dissolution is called, he might go down as one of the shorter serving PM's in history.

OK, so enough empty opinion. What's the collective remedy of the kitchen cabinet that met today after the early morning swim at LPAC over a cup of coffee?

GST:

Get on with it! Increase it to 12.5% or 15%, possibly in two tranches. OK a broken promise, but only one, as opposed to many. And it would be a brave opposition that tried to block such a move as it would prevent them increasing GST themselves down the track. The decision on widening the GST to include food, health and education was split 50/50 and therefore deferred as I didn't have a casting vote.

The joy of the GST from the government's perspective is the system is already in place, the revenue would flow almost immediately, and there would be virtually no incremental collection costs. And the higher a persons income the more they are likely to consume, which is why it's known as a consumption tax.

2015 GST revenue estimate: $54 bn. Cost of exemptions for food, health and education etc $17 bn.

Revenue benefit: $27bn in 2015 if raised to 15%, and another $15 to $20bn if broadened to include food, health and education.

Income Tax:

Increase the tax free threshold to provide relief for those on lower incomes as a result of the added costs of the increase in GST. By all means tighten eligibility for some benefits to ensure welfare is delivered to the needy, not the greedy, remembering JFK's inaugural address in 1960 "If society cannot help the many who are poor, it cannot save the few who are rich."

We assumed the tax free threshold increase would cost $10 bn, leaving the net increase from GST at 15% between $17 and $37 billion.

The new tax levy for those earning over $180,000 a year is insignificant, reportedly costing $7 a week, or two cups of coffee at that level, and an insult to those lower down the salary tree feeling the pain. GST at 15% would collect far more from the well off than the new tax levy, as well as being permanent.

Budget estimate for individual income and withholding tax is $178.8 billion.

Company tax:

Budget estimated income: $71.6bn. As a thought, why do higher earning individuals pay higher tax rates, but there's a flat tax rate for companies?

Negative Gearing on Investment Property:

Scrap it, to be phased out over 5 or 10 years to ease any sudden fall in property values. It currently cost the government $4 billion a year and is claimed by 1.2 million tax payers. Possibly retain it on newly built homes only.

Added benefit: Improves housing affordability, especially for first home buyers.

Fuel tax:

No need to break that promise, the increase in GST on petrol sales would generate far greater revenue.

Superannuation:

Now it gets tricky!  

Tax concessions on "super" cost the budget $35bn.  However, properly implemented super should result, as originally intended (over time) in the government not having to fund as many retirees.  Estimated cost of income support for seniors (aged pension) is currently $42 bn, so provided super could only, or mainly be taken as an annuity pension rather than a lump sum, the demand or eligibility for aged welfare would reduce significantly.

As an aside, the kitchen cabinet proposed a portion of all super should be invested in Infrastructure Bonds, paying a defined income stream. More on that another day.

Conclusion:

Would all that fix the deficit estimate of $24 billion?  With some adjustment we thought so, even if the calculations were on the back of an envelope, although with the benefit of the Budget Estimates provided by the government's web site.

Would it fix the PM's credibility?  That might be a tad tougher, but on balance we thought he'd have a better chance with the Senate, and possibly the electorate as well.

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

The Supervised High Yield Fund returned 0.21% for March and 7.74% over the prior twelve months with a vol of 0.74%.

Optimal Australia's Absolute Trust returned 0.57% in a choppy market with annual returns of 4.62% and a volatility of 1.6%.

The Bennelong Kardinia Absolute Return Fund recorded a return of -0.63% during April with the 12 month result 7.53% and a volatility of 3.70%.

Morphic's Global Opportunities Fund returned 0.75% in April, slightly under-performing it's benchmark (MSCI ACWI in $A) and recorded 25.08% over the previous 12 months with notable Sharpe and Sortino ratios.

The Laminar Credit Opportunities Fund returned 1.03% during April and 11.81% for the year, strong returns in a low interest rate environment.

FUTURE EVENTS

19-20 May in Sydney, IBR Conferences presents the Unit Pricing Forum. This is a 2 days forum exploring Unit Pricing operational challenges for 2014 & beyond. Topics include new APRA reporting requirements & implementation; impacts on unit pricing reporting and more.

Wednesday 21 May in Sydney: The Hedge Fund Association, in conjunction with Pricewaterhouse Coopers, is pleased to present an update on key regulatory matters currently affecting the alternative investment industry. A panel of Pricewaterhouse Coopers senior executives will provide a detailed overview of topics, as well as allowing for questions and commentary from attendees.

28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, maybe you saw this on the news, Tara the cat, latest American hero, I wonder if she has some budget suggestions?

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  For more information visit www.cpresearch.org.au or contact me by email.

I have always been of the view that politicians, and probably prime ministers in particular, should fade gracefully from the public eye on retirement, and just be happy with their generous entitlements, and excessively generous travel benefits.

My view is normally compounded whenever I hear Malcolm Fraser holding forth on what should be done by the current government. Having secured the largest majority (55) in federal history in 1975, and the second largest (48) in 1977 at the following election it is often argued that he did little with either prior to losing office in 1983. Notwithstanding that, and inexplicably losing his trousers in Memphis in 1986, he continues to snipe from the sidelines, well into his eighties, some thirty years later.

There are exceptions of course for exceptional PM's, and although Paul Keating has been known to air his views liberally, one has to take notice when he's commentating on Australia's superannuation system, of which he was the architect.  So his comments on the ABC's Lateline program this week on superannuation, the pension age, and the need for a Commonwealth insurance scheme for those who live between 80 and 100 are such an exception.

That interview is 24 minutes long and might be beyond the time limits of our readers, so this brief two minute excerpt from the Guardian.com might give you a flavour. In essence Paul Keating makes eminent sense. Not only did he call for an increase in the superannuation guarantee levy to 12% (in reality it probably needs to be 15%), but he also argues against the current call by Treasury and others for a reduction in the taxation benefits of super contributions.

Keating argues that a large majority of the population will not retire with a large nest egg, and that this will be the domain of those relative few with sufficient foresight and fortune to be able to make additional (tax friendly) contributions. His argument that they should be encouraged, rather than discouraged, stems from his belief that whilst it might be a benefit for the better off, at least it is producing an overall benefit to the economy by reducing their dependence on the system in later life.

More radical however is his proposal to have a national insurance scheme for those over 80. I have heard it quoted that 50% of the children born today are likely to reach 100, and no matter how high the current Treasurer wants to make the retirement age, the demographics of longevity, and the cost to the system, are massive. While not necessarily being the greatest fan of Keating when he was in office, it is hard to fault his logic, or his vision.

The reality is that for the majority of the population a 9% contribution by their employer to superannuation will simply not be sufficient to replace their dependence on welfare when they retire. Hence the attractiveness of not only making additional contributions, but also establishing a Self Managed Super Fund in an attempt to have some degree of control and independence over their financial affairs in retirement. It is little wonder therefore that many such self-directed retirees are supporters and investors in absolute return funds.

And on a slightly different Paul Keating note, one of my favourite little books, published way back in 1992 is a small paperback compiled by a Bookman Press containing 96 pages entitled "Paul Keating's Book of Insults". It's a gem, the colour and shape of a banana in memory of Keating's famous Banana Republic comment. I'm sure the current Speaker of the house Bronwyn Bishop would not have let him get away with many of his Parliamentary insults, but they still raise a chuckle.

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

The Monash Absolute Investment Fund returned -1.3% in a volatile equity market. The Fund's 12 month record is strong at 24.77% with a vol of 9.11%.

In its fourth month of operation, and in a choppy equity market, Bennelong's Alpha 200 Fund returned -0.57% during April.

Updated FUND REVIEWS released this week included:

Insync's Global Titans Fund shows the Fund delivering  an annualised return of 10.36% and annualised standard deviation of 8.53% (since inception in October 2009) with sound risk-reward statistics.

Morphic Global Opportunities Fund - returned an annual return of 27.63%. 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.

Supervised Investments High Yield Fund is characterised by positive returns and very low risk. Since inception (April 2009) the Fund has returned 11.16% pa with a volatility of 2.22%.

FUTURE EVENTS

19-20 May in Sydney, IBR Conferences presents the Unit Pricing Forum. This is a 2 days forum exploring Unit Pricing operational challenges for 2014 & beyond. Topics include new APRA reporting requirements & implementation; impacts on unit pricing reporting and more.

Wednesday 21 May in Sydney: The Hedge Fund Association, in conjunction with Pricewaterhouse Coopers, is pleased to present an update on key regulatory matters currently affecting the alternative investment industry. A panel of Pricewaterhouse Coopers senior executives will provide a detailed overview of topics, as well as allowing for questions and commentary from attendees.

28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, while we talk of our politicians, at least most of us know if our previous leaders are dead or alive. Unlike these Americans.

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Last weekend one of our staff members participated in the Sutherland Shire 24 hour Relay for Life and walked a marathon to raise money for her team (Netty Girls) in memory of family members who have died from cancer. Click here to make a donation or watch a short video to see what all the fuss is about.

1 in 2 Australians will be diagnosed with cancer before the age of 85. All money raised through Relay For Life makes a difference in helping fund Cancer Council's critical research, prevention, education and support services. Relay For Life is a fun, outdoor overnight fundraising event that brings communities together to celebrate and remember the lives of those who have battled cancer. Teams take turns to walk or run around a track whilst enjoying entertainment, activities and heartfelt ceremonies.

This being the last edition of Hedge Clippings prior to the release of the new Treasurer Joe Hockey's first budget next Tuesday, it stands to reason that we may as well join the throng in both guessing what it might contain, and suggesting what it should, or could.

It goes without saying of course that whatever un-pleasantries the budget does contain will not be the fault of the Treasurer, but that of his predecessor from the opposite side of politics. And being his and this government's first budget it also goes without saying that they'll try to get the worst news out of the way as early as possible.

There seems little doubt that the government is intent on making some significant changes on both the income and expenditure side of the ledger, and the convenient timing of the release of the Commission of Audit Report containing 86 significant and in many cases electorally untenable proposals, will enable them to do so if they wish. However there is also a feeling that much of the measures mooted over the past couple of weeks may well just be a case of softening us up so that the news on the night elicits a collective sigh of relief.

There is also little doubt that both the revenue and expenditure lines, or the concepts and logic behind them, are in serious need of a shakeup. Welfare and government assistance should be aimed at the genuinely needy, not the greedy. Unfortunately over the past 20 to 30 years Australia has developed a welfare habit which it is struggling to break. At the same time demographic changes over the next 20 to 30 years will seriously increase government expenditure, particularly in the health and aged care sectors.

One political sacred cow which may, or possibly should, be considered for the chopping block is negative gearing on residential property, particularly given the housing affordability issues currently facing first-time buyers. The Australian superannuation system would also appear to be in the spotlight. While terrific conceptually, it has evolved over the past 20 years to be unwieldy, overly complicated, and as David Murray indicated yesterday in some preliminary comments on his Financial Services Inquiry, is excessively focused on the 40+ year accumulation phase, and not sufficiently on the subsequent 20 to 30+ year retirement phase.

On the income side the complexity of the taxation system, including superannuation, is extraordinary, and only increasing. One would have thought that increasing the GST would be the logical solution, given that Australia's 10% consumption tax rate is way below, and in some cases less than half the prevailing rate in many other developed economies. For some reason that appears not to be on the agenda.

All this is well and good, and I fear I'm likely to be disappointed on Tuesday. The big risk to the economy is not so much that the budget fails to fix the deficit, but that the increased taxation and expenditure cuts are so severe they damage the consumer confidence which is the lifeblood of any economy.

And the big challenge for the Prime Minister and the government is how to convince the electorate that a great big new levy is not in fact a great big new tax.

Specific PERFORMANCE RESULTS received this week include the following:

The Intelligent Investor Value Fund recorded a strong 24.63% over the previous twelve months as compared to the ASX 200 Accum return of 13.46%. 

KIS Asia Long Short Fund returned 0.70% during March with an annualised volatility of 2.67% (Index 11.03%).

The Laminar Credit Opportunities Fund delivered 0.62% during March and 11.52% for the year, with a low volatility of 2.72%.

Pengana Asia Special Events (Onshore) Fund returned 9.27% for the year with an annualised volatility of 3.22% and Sharpe ratio of 1.98.

The Cor Capital Fund returned -1.34% during March and 2.24% for the prior 12 months.

FUND REVIEWS updated this week included:

Bennelong Kardinia Absolute Return Fund - characterised by steady returns and very low risk. The Fund returned 0.87% during March and 13.57% p.a since inception (May 2006).

The Optimal Australia Absolute Trust - very low risk profile with an annualised standard deviation of 3.53% (Index 14.95%) and a Sharpe Ratio since inception of 1.73.

FUTURE EVENTS

19-20 May in Sydney, IBR Conferences presents the Unit Pricing Forum. This is a 2 days forum exploring Unit Pricing operational challenges for 2014 & beyond. Topics include new APRA reporting requirements & implementation; impacts on unit pricing reporting and more.

Wednesday 21 May in Sydney: The Hedge Fund Association, in conjunction with Pricewaterhouse Coopers, is pleased to present an update on key regulatory matters currently affecting the alternative investment industry. A panel of Pricewaterhouse Coopers senior executives will provide a detailed overview of topics, as well as allowing for questions and commentary from attendees.

28-30 May 2014 in Sydney: IBR Conferences presents the Asset Allocation Conference. This event has been designed to both update and educate investors by taking an in-depth look at these more adaptive asset allocation strategies and practices and where the best opportunities for high return lay in the current climate.

If you would like your Event listed in our calendar, please contact us.

And now for something completely different this week, a fascinating look at the Honey Badger and the things that this one will do to escape his enclosure. Having watched it, we are wondering why they don't just let him go.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

This weekend one of our staff members is participating in the Sutherland Shire 24 hour Relay for Life and will be walking a marathon to raise money for her team (Nety Girls) and in memory of family members who have died from cancer. Click here to make a donation or watch a short video to see what all the fuss is about.

1 in 2 Australians will be diagnosed with cancer before the age of 85. All money raised through Relay For Life makes a difference in helping fund Cancer Council's critical research, prevention, education and support services. Relay For Life is a fun, outdoor overnight fundraising event that brings communities together to celebrate and remember the lives of those who have battled cancer. Teams take turns to walk or run around a track whilst enjoying entertainment, activities and heartfelt ceremonies.

This week I read an interview with Timothy Spangler, the US author of a book called "One Step Ahead: Private Equity and Hedge Funds After the Global Financial Crisis," in which he provided some interesting insights into the evolution of the managed funds sector, albeit with a very US centric slant and a focus on hedge funds.

To set the record straight I haven't yet read the book, (Amazon aren't that quick) but the interview covered a range of issues including the negative perception of hedge funds in the media, and thus by the general public; the lifting of restrictions in the US on advertising hedge funds to retail investors; and the difference between the asset managers who see their challenge as building assets, and those who see it as the single minded pursuit of performance.

Elsewhere the article covered the perennial debate between Long Only Benchmark Aware Investing vs. Absolute Returns. Of greater interest however was his view that hedge funds act as an effective magnet for talent, and as such their attraction to certain individuals from the long only, asset gathering side of the industry.

Maybe this struck a chord because this week Sean Webster and I had the opportunity to interview Simon Shields and Shane Fitzgerald from Monash Investors, two highly qualified and successful professionals who after 20+ years in the industry, and each at the top of their tree, took the bold step in mid-2012 of launching their own fund.

What intrigued us was why would two highly paid, award-winning, senior fund managers with excellent track records working for major institutions such as UBS, BT and Colonial First State step outside their comfort zone, both emotionally, professionally, and financially, to launch a long short start-up, and try to raise capital without the infrastructure and support provided at the big end of town?

The first response was probably predictable: They wanted to control their own destiny and make their own decisions away from their previous environments. Underlying this presumably was that as they progressed up the corporate ladder their roles became less focused on investment management, and more focused on internal corporate management.

Secondly, and equally importantly, they believed that long only management was no longer at the cutting edge of the industry, and that absolute return strategies provided greater flexibility to adjust investment styles to suit changes in the underlying market. They saw the ability to invest with true conviction, including the ability to short if necessary, and without the limitations of being fully invested in the market at all times, as being a more rewarding approach.

From a performance perspective it is early days yet for their Monash Absolute Investment Fund. After 21 months their annualised return is in excess of 26% with volatility of 7.53% and Sharpe Ratio of 2.76. Until the last three months this has been in a buoyant equity market, so the real test is yet to come. However having returned 8.32% year-to-date compared with the market's 2.09%, early indications are that their absolute return focus is holding its own.

Shields and Fitzgerald are of course not alone, and the absolute return and hedge funds space is typified by individuals leaving the comfort zone of a large corporate investment manager to strike out on their own and make a difference. Some, such as Sir Michael Hintze at CQS, and Kerr Neilson at Platinum, have gone on to not only provide excellent long-term performance, but also build significant businesses and reputations to match. Others have preferred to remain under the radar and focus less on asset gathering (frequently as a result of their specific strategy) and more on performance.

To come back to Spangler's interview, and presumably in his book when I get to read it, is that the absolute return and hedge fund industry acts as a magnet for talent. Markets may change and strategies may evolve, but it is the talent within the industry that will drive its future and success.

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

Bennelong Kardinia's Absolute Return Fund recorded a reasonable return in a flat market delivering 0.87% with the annual return 9.67%.

The Optimal Australia Absolute Trust returned 0.04% in March with an annual return of 3.30% and standard deviation of 1.89%.

Morphic's Global Opportinuties Fund returned -2.63% for March, slightly above the benchmark ACWI Index (in $A), with annual returns at 27.63%.

The Allard Investment Fund had a sound month returning 0.1% during March (Index -1.9%) and 9.69% for the previous 12 months.

Updated FUND REVIEWS released this week included:

Morphic Global Opportunities Fund, whose 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.

FUTURE EVENTS

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

And now for something completely different, just a week out from Easter. We're not quite sure how the Pope will react to this, or if the Church will now allow Priests to marry?

On that note, I hope you have a safe and happy weekend.

Best wishes,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Australian Fund Monitors are helping to raise awareness to support research into prevention and cure for cerebral palsy.  To celebrate the 20th anniversary of their #CBDGolf Escape! charity golf event, Cerebral Palsy Alliance are holding an online raffle. The prize will be a Toyota Yaris YR Hatch 3 Door, plus many amazing prizes inside the car - A total prize value of $22,000...See more

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