BENNELONG TWENTY20 AUSTRALIAN EQUITIES FUND

Attached is our most recently updated Fund Review on the Bennelong Twenty20 Australian Equities Fund.

• The Bennelong Twenty20 Australian Equities Fund invests in ASX listed stocks, combining an indexed position in the Top 20 stocks with an actively managed portfolio of stocks outside the Top 20. Construction of the ex-top 20 portfolio is fundamental, bottom-up, core investment style, biased to quality stocks, with a structured risk management approach.

• Mark East, the Fund's Chief Investment Officer, and Keith Kwang, Director of Quantitative Research have over 50 years combined market experience. Bennelong Funds Management (BFM) provides the investment manager, Bennelong Australian Equity Partners (BAEP) with infrastructure, operational, compliance and distribution services.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - July 2018 (pdf format)

Where's the leadership we deserve?

At a time when the government needed leadership, unity and stability, the combination of personal ambition and the desire for revenge delivered exactly the opposite. Irrespective of who one believed should be in the top job, the country deserved better, and only time will tell if it gets it.

Personalities, and personal ambition, and in our view a misreading of the mood of the majority of people in the street, has resulted in the running of the country put to one side, while a bunch of self-centered politicians have indulged themselves, in just the same way as their predecessors did.

The real tragedy is that the economy, while not booming, is sound and growing, employment is growing, inflation and interest rates are low (probably too low) and taxation, except for the "big" end of town, is coming down. The federal budget is forecast to make it back to a surplus way ahead of forecast, and given the potential change of government at the next election, that's probably now in doubt.

If there's one good (?) thing to come out of the debacle in Canberra it's probably that the chief destabiliser and those pulling the strings didn't win, although they'll no doubt be happy enough they've dispatched the one person - now the previous PM - they didn't want to win. The question is will they now be satisfied and pull their heads in, or will they work to destabilise another moderate?

If there's one good (?) thing to come out of the week's media focus it is that the Hayne Royal Commission wasn't on the front pages.

Meanwhile AMP's appointment gets out thumbs up - experience and ability, and hopefully prepared to make the changes necessary - or enforced by the HRC and future legislation. Hedge Clippings has previously been critical of both AMP and David Murray, but this is a good and smart move. However, there's still a long, long way to go.

The current investment landscape reminds me a lot of the Kilauea volcano - eruptions and disruptions always on the horizon. Translate that volatile geography across to the world of finance and all too often we see the potential for the financial lava that flows from these macro events consuming traditional investment strategies. 

National Geographic reports that Kilauea has been erupting almost constantly for the past 35 years ... and, in the process, has been changing the physical shape of Hawaii. We now live and work in the era of the 'new normal' with its volcanic volatility changing the shape of investment practice. Add to this some more climate change factors - think Trump, think trade wars, think Brexit or, for that matter, any macro geo-political or economic event you care to choose from the smorgasbord that besets our planet.

With this changed investment climate upon us - and I think most pundits believe that the 'new normal' is most certainly the ongoing investment environment - then how do we optimise investment outcomes? Ahh, diversification I hear you say. Absolutely, but in my view, we need to re-cast the parameters of diversification in the pursuit of optimal outcomes.

In doing so, it is always prudent to take lessons from the smartest people in the business and, in this case, I am talking about the organisations that manage their funds in a fiduciary-centric way to be 'all weather.'

They embrace strategies which are true diversifiers and which complement their overall investment approach. So, let's interrogate this through the prism of two world class portfolios - our own Future Fund here in Australia and the Harvard University endowment fund in the United States.

Guidance from the $140 billion Future Fund is that for the 12 months to the end of March 2018 their return was 8.6%, which is in line with its yearly average for the past decade.

The Harvard fund (AUD 50 billion) returned 8.1% on investment in the year ended June 2017 - a year they lamented as sub-par, as the fund has generated an average of better than 10.0% per year for the past two decades.

Noting that "the successful investments of the last five decade won't necessarily be the successful investments of the next five decades," Raphael Arndt, the Future Fund's Chief Investment Officer, is focused on the role the "new generation of hedge funds (will) play in delivering uncorrelated returns and reducing risk."

The Harvard Management Company, which operates the university's endowment, is, like Dr Arndt, also wary of the past ... and is currently reconstructing its investment foundations from traditional "asset allocation" towards a "risk allocation strategy." The objective is better management of risk across the fund, rather than individual asset classes.

Harvard allocates around 15% of its funds to Absolute Return, which is the same amount the Future Fund allocates to Alternative Assets - but in handing over his money Dr Arndt measures performance against the objectives of diversification, downside protection and alpha generation.

He's hit the nail right on the head. But what sort of diversification optimises alpha generation and downside protection? To my mind, diversification these days requires a lot more than a spread of asset classes and geography.

True diversification is often difficult to achieve in high volatility markets, as traditionally uncorrelated assets become highly correlated - failing the investor when most needed. Arndt says "the inclusion of uncorrelated sources of return in our portfolio allows us to invest into risk assets elsewhere in the fund."

Which brings me to the nub of my argument: the two true diversifiers in approach to investment that Australian investors need to fully embrace are equity market neutral and managed futures. Integrated into a portfolio, they enhance the high probability of returns at a targeted rate year after year and have a "smoothing" effect.  This is the peace of mind all investors desire.

At NWQ we have been researching uncorrelated returns for several years, piloting a global markets fund as a next-step to our highly successful equity market neutral fund.

It is incontrovertible: managed futures work. Ineichen, a leading asset allocation researcher, concluded a well managed portfolio of managed funds "delivered a positive return in 18 out of 20 systemic events in the equity market from 1980 to 2012." Ineichen added that "in the field of investment management, there is simply nothing that comes anywhere close to this."

But, in the times which have proved that even Nobel Prize winner Harry Markowitz's Modern Portfolio Theory wasn't quite there (as we found out, all asset classes are affected by systemic shock such as the GFC), my conclusion is that to optimise managed futures it is necessary to have the right, diverse mix of largely uncorrelated global managers on your platform.

And that's the key to my hypothesis of an expanded definition of diversification.

ATTACHED FILESRe-casting Diversification - the True Diversifiers (pdf format)