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

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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

As Australia's financial year draws to a close, so to it would seem does the outlook for any extension of quantitative easing in the USA; the resources boom in Australia; the Aussie dollar at parity or above; and possibly China's growth trajectory.

Over the past two months the uncertainties created as a result of these will still result in a positive year for Australian equity markets, even if some of the gloss has been taken off the top as rationality returned.

For the record it looks as if the ASX 200 will record one of its better years in the 12 months to June, up nearly 18%, although the second half, since January will struggle to show a gain of 4%.

A comment from one of the fund managers we recently talked to focused on the degree of involvement that politicians have had in global markets over the past three or four years.

Politically it also ends one of the more turbulent years (or three) in Australian politics, although local politicians have had less of an impact on the market than their overseas counterparts.

Looking forward there are significant changes on the horizon for the financial services industry, most notably the introduction of the FOFA legislation relating to the provision of financial advice to retail investors. While it is often considered that absolute return funds and retail investors are, or should be, like oil and water, the reality is that approximately 50% of the funds in our database are open to investment by retail investors, and slightly more than that have minimum investments of less than $50,000 and daily liquidity.

Elsewhere we believe the absolute return industry is gaining considerable traction, while at the same time maturing. AIMA, or the Alternative Investment Management Association has recently indicated that its Australian arm, under the leadership of industry veteran Paul Chadwick is taking a more proactive and outward looking approach.  At the same time the US Based Hedge Fund Association or HFA, has recently established an Australian chapter and is being represented by Adriana Kostov.

The Hedge Fund Association, is a US founded, International not-for-profit industry trade and nonpartisan lobbying organisation devoted to advancing transparency, development and trust in alternative investments, and is made up of hedge funds, funds of funds, family offices, high net worth individuals and service providers.

There is no doubt that competition between the two organisations will benefit all industry participants whether they be service providers, fund managers or investors. For too long the industry has been seen as a collection of boutiques without a single voice, and raising its profile is a step in the right direction.

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

Auscap Long Short Australian Equities Fund returned -4.05% during May and 10.51% for the last six months. This compares with the benchmark return of 0.24%. Average gross capital employed by the Fund was 162.3% long and 31.2% short. Average net exposure over the month was +131.1%. At the end of the month the Fund had 25 long positions and 14 short positions.

The Totus Alpha Fund returned 1.84% during May and one year rolling returns are 17.34%. Since inception the fund has averaged returns of +1.45% (net) during months in which the ASX was up and +1.63% (net) during months in which the ASX was down. The fund's short positions in second and third tier mining and mining services stocks continued to deliver strong returns during May while the (more) recently added domestic cyclical shorts also contributed nicely to performance.

BlackRock Australian Equity Market Neutral Fund returned -2.12% during May and 6.09% for the preceding twelve months. Fund performance was hurt by the rebound in small/mid cap resources which had been sold down heavily in April, by the outperformance of USD exposed stocks, and by several significant stock specific profit warnings.

The Pengana Australian Equities Market Neutral Fund returned -1.7% during May bringing its since inception (Sept 2008) return to 8.27% pa. Earnings Revisions was the best performing investment theme in the Fund's model followed by Momentum and Value, while Quality detracted from performance for the month.

AUI Wingate Global Equity Fund returned 8.95% over May and 23.81% over the preceding twelve months. Performance was supported by the weaker Australian dollar as the portfolio's assets are unhedged. Successful stock selection contributed to relative outperformance notwithstanding the Fund's lower than average equity weight.

Fund Reviews were also completed on Insync Global Titans Fund and BlackRock Australian Equity Market Neutral Fund.

Now for something completely different, this week one of Rowan Atkinson's characters visits the bank.

On that note I wish you a happy and healthy weekend and look forward to a prosperous new financial year starting on Monday.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

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INSYNC GLOBAL TITANS FUND

ATTACHED FILESInsync Global Titans Fund Review - May 2013 (pdf format)

QE's has to end sooner or later.

Nothing lasts forever (except true love, so they say) and QE3 will be no different. The question of course is whether Dr Bernanke, or his successor, can manage the taper from the US $85 billion a month of QE life support through to a reasonably healthy and self supporting economy without investors pulling the rug out from underneath the market?

Based on last night's performance from New York and Europe, it seems not, but surely any reasonably sensible market participant would be able to work out that sooner or later the QE theme tune has to end as the US economy recovers.  However, investors being what they are, history shows that nearly everyone hangs around thinking they'll be able to exit painlessly.  Memories of '87, the "tech wreck" of 2000, and even the great credit bubble leading up to 2008 don't seem to last too long.

China seems to be following the same way, and although the staunch believers are committed to the "stronger for longer" theme, it's worth reminding them again that nothing lasts forever, at least not without some imbalances being created along the way.

Japan, the world's third largest economy, is learning the hard lessons of trying to kick start a moribund economy to life. For a start Japan's demographics will create significant difficulties, with its workforce forecast to fall to just half the population by 2050, down from 70% in 1990.  Japan's experiment is just starting, and it may well work, but the risks along the way are significant.

And finally on the "nothing lasts forever" theme the Aussie dollar's flirt with parity against the US$ seems to have come to an end, in spite of some still believing the current fall is just a temporary blip. Falling interest rates at home, rising one's in the US, a slowdown in resources (price and volume) and repatriation of capital from the carry trade of the past few years make any meaningful rally unlikely.

Volatility is back, and as we suggested back on February 22 when we warned of the historically low levels of the VIX, that's often an indication of the lull before the storm.

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

Aurora Fortitude Absolute Return Fund returned 0.78% during May and 5.79% over the last 12 months. The Fund is characterised by it's very low volatility at 2.84% pa (since inception) as compared to the S&P/ASX 200AI volatility of 14.58%.

The Pengana Australian Equities Fund recorded -1.3% during May and 25.66% for the last twelve months. As at 31st May, cash (including notes and preference shares) represented 31% of the Fund. The top five holdings by value were: DUET Group, Caltex, ANZ Bank, Telstra and Resmed.

Pengana Asia Special Events Fund recorded 1.63% during May and has a twelve month performance record of 11.79%.

The Monash Absolute Investment Fund returned -1.1% during May and 13.87% for the last six months. Despite a difficult month for stocks in Australia the portfolio fell only 1.1% in May and is up 17.3% for the financial year.

And finally there is no "for something completely different" this week as we mentioned above, nothing lasts forever (except as we noted true love, so they say).

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

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESFund Review: Aurora Fortitude Absolute Return Fund (pdf format)

Last week's "Hedge Clippings" included some comments defending hedge and absolute return funds against some of the broader criticism they receive, particularly when the market is rising strongly. Our logic was twofold:

Firstly the sector, often included as part of the "alternative" asset bucket, is made up of such a diverse range of strategies that comparison (apart from bottom line performance) is nigh on impossible. It's also worth noting that many equity long short strategies should, in our opinion, not be categorised as alternative at all, but rather should be termed active equities.

Secondly the diversity of performances are equally large, even between funds with similar strategies or geographic mandates. Taking May's single funds' performance numbers to date (based on 45% of those received so far) they range from -12.44% through to +15%, with an average of +0.92%, against the ASX200 Accumulation index which fell -4.50%.

Over 12 months the range becomes even greater: -62% through to +75% with an average of +14.22% against the cumulative return of the ASX200 of +26.41%.

As we've noted many times before, with diversity such as that, it's easy to prove your hedge fund point of view, positive or negative.

Taking a look at May performance numbers also proves the point that while volatility normally leads to negative market returns, it provides the opportunity for hedge funds (or at least the best of them) to show their defensive characteristics in falling markets. While there is a way to go yet, the ASX200 accumulation index is down a further 4.67% in June, taking it almost 10% off the high reached just a month ago.  Year to date (January) the Index is up only 2.92% while hedge funds, which had been lagging, are up 6.85%.

Having said that of course, we're falling into our own problem of calculating averages from a significantly diverse set of numbers.

Moving on, we were pleased to be able to host Opalesque's founder and CEO, Matthias Knab, along with a selected group of local fund managers to the 2013 Opalesque Australian Round Table to discuss issues affecting the local industry. The full transcript is available here.

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

Optimal Australia Absolute Trust achieved 1.22% during May with a since inception (September '08) return of 11.48% pa.  Major contributors to the Trust's return for the month were driven by a return from both long investments (+0.22% attribution) and shorts (+1.25% attribution).

The Allard Investment Fund returned 6.30% during May with its twelve month return standing at 14.59%.  At the end of May the Fund was 67.3% invested and in terms of country exposures the largest was HK/China 31.4%, followed by Singapore at 13.0% and Korea at 10.3%.

Morphic Global Opportunities Fund recorded 6.77% for May bringing its since inception (Aug 2012) return to 28.70%.  Taken as a whole, global stocks in local currency terms were volatile, but largely unchanged by month end.

The Insync Global Titans Fund delivered 4.8% during May bringing it's since inception (October 2009) return to 9.5% pa.  However, the main driver of the Fund's return in May came from the 7.7% depreciation of the Australian dollar against the US dollar.

And finally, for something completely different, how the power of words can make a significant change.

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

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

MORPHIC GLOBAL OPPORTUNITIES FUND

ATTACHED FILESMorphic Global Opportunities Fund AFM Review - May 2013 (pdf format)

OPTIMAL AUSTRALIA ABSOLUTE FUND

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

We would like to highlight the following aspects of the Fund:

• Optimal Australia is a specialist Australian equity investment manager established in 2008.
• The Fund's long/short equity strategy portfolio typically has a low but variable net market exposure comprising 40 to 65 stock broadly selected from within the ASX200.
• The investment team comprising George Colman, Peter Whiting and Stephen Nicholls have close to 90 years combined experience in equity markets.
• Consistent out-performance of the market: Approximately 84 % of monthly performances have been positive with a largest drawdown of -1.38%.

Research and Database Manager
Australian Fund Monitors

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

Last week we suggested that given the outlook for the local currency, Australian investors would be well served by including some offshore exposure to their portfolios as protection against further falls in the A$. With various economists now calling the Aussie down to US$0.80 this may well be the way to go.  Certainly there seems to be an exodus of offshore investors from the equity market (where they constitute 47% total value) after the inflows of the past 12 months, which has further undermined the currency and the market.

In any event, local funds which invest offshore benefitted significantly (provided they weren't hedged) from the A$'s fall of over 7% in May, with strong double digit returns from the likes of PM Capital and Magellan amongst others.  On the local front returns have been varied as usual depending on the manager, fund or strategy.  Some of this week's reported highlights are featured below.

Last Monday we wrote an article for Alan Kohler's Eureka Report entitled "In defence of Hedge Funds" to counter some negative comments on the sector in Ian Verrender's article "The thin edge of the hedge wedge". Ian suggested that after fees investors might find it simpler and cheaper to merely purchase an index fund - in other words, just buy the market.

The thrust of our response was that given the diverse range of underlying assets and strategies which combine to make up the "hedge fund" sector, averages can be both dangerous and misleading, as can results of average returns.

But it did cause us to delve into the returns (after fees) of all funds in our database with a five year track record, and compare them against the market (using the ASX200 accumulation index as the benchmark).  For the record, over the five years to the end of May, the market provided investors with an annualised return of 3.07%. Therefore, in one way Ian was correct: 37% of the 145 funds underperformed the market, and 15% underperformed to the extent they provided negative returns.

On the positive side, 63% of funds outperformed the market, and therefore presumably justified their existence up to a point. However given that the markets return of 3.07% is not what we would call acceptable, particularly given the risk and volatility concerned, that might not be saying much.

But 41% of all funds doubled the market's return, and 27 (or 18%) provided their investors with annualised five year returns ranging between 10 and 19%, which by any standard is impressive. The chart showing the spread of returns is below:

It does however emphasise that analysis and understanding of the strategy, manager and fund is essential when discussing hedge funds - as it is when investing in them.

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

BlackRock Global Allocation Fund returned 2.04% in April, in line with its benchmark, and 14.10% over the preceding 12 months. The team continues to believe that equity valuations remain attractive relative to fixed income valuations, though the Manager has become incrementally more cautious over the short-term given increasing stock prices, weaker revenue expectations and uncertainty in Europe.

The Bennelong Long Short Equity Fund had a remarkable May delivering 9.49%, bringing its twelve month performance to 19.89%. The portfolio benefitted from a pleasing month, with both the long and short portfolios contributing positively.

Bennelong Kardinia Absolute Return Fund delivered 0.4% during May.  The twelve month return now stands at 18.46%.  The Fund's net equity market exposure, including derivatives was reduced to 31.3% (47.5% long and 16.2% short).

The K2 Asian Absolute Return Fund returned 2.38% during April to bring twelve month performance to 33.82%.  The Fund's net exposure band has been maintained at 80-100%, ending the month at 96%, marginally lower than April. Increasing volatility in recent weeks, together with seasonal weakness justified a wider trading band of the Fund's net exposure.

And finally, for something completely different, The Swear Jar, probably something every office needs.  Ours certainly does!!

On that note, I hope you have a happy and healthy weekend, or in Australia, a long weekend (all except Western Australia who will be celebrating the Queens birthday in September).

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook