The Royal Commission and the Boiling Frog

Hedge Clippings is reminded of the old adage of the boiling frog - which for those not familiar with it went as follows: If you put a frog into a pot of cold water and put it over a low flame for a long time, the frog would eventually end up "poached". However, if the frog was dropped into a pot of already boiling water it would instantly react by jumping out, and be saved.

In financial services parlance the industry has been on a long slow journey towards being poached, although maybe the Hayne Royal Commission has arrived just in time to create a "boiling frog" moment which will result in it being saved - although not without a severe scorching, and only if the powers that be, and those in charge at the big end of town, take the opportunity to change.

The (long overdue) Hayne Royal Commission has shone - or is shining - a welcome (depending on where one stands) torch on every aspect of the financial services sector. This has now been followed by the Productivity Commission's 500+ page report into Superannuation, particularly focusing on fees and poor performance, and with suggestions of a Top Ten "Best in Show" default system. Now, not surprisingly, ASIC is going to give added focus on the sector, whilst Treasury has also weighed into the debate.

Why has this been able to occur?

Simply because the majority of consumers are not financially literate, and of those that are many have the knowledge to be "self-directed". Meanwhile, most (although not all) of those heading up the industry are very financially literate, and stand, or stood, to make a motza out of the system, the lack of real scrutiny, and a lack of ethics.

Whilst easy to point the finger at the financial advisor actually providing advice to the consumer, the reality is that the real cause is the problem is the systematic and conflicted structure of the industry - be it banking, superannuation, mortgage broking or financial advice. The vast majority of advisors would prefer to give their clients independent financial advice - as evidenced by the significant numbers choosing to do so by moving to an independent AFS licensee. 

Back to the Royal Commission. Round 5 is due to start on 6th August, focusing on superannuation, and will run for 2 weeks.

Round 6, slated for 10 September, will cast its eye on Insurance, while Round 7 on the 19th November will focus on policy questions arising from rounds 1-6.  In between time the CEO's from the big end of town will get their time in the witness box, and anecdotal evidence suggests their minions are putting in long hours beavering away to make sure it won't be too uncomfortable for them.

Some hope.

Talking of hope, Hayne's preliminary report is/was due no later than 30 September, and the final report due by 1 February (2019).  Happy Christmas holidays to Mr Hayne and his team trying to meet that deadline.

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 - June 2018 (pdf format)

It seems fund rankings are in the news in the past couple of days, whether it be super funds, or managed funds available outside super.

Taking super funds first, there seem to be two schools of thought, each not surprisingly probably dependent where the self-interest of the thinker lies.

Super Ratings tables clearly show that industry super funds have outperformed the bank and for-profit sector funds, and while they will understandably promote their performance and claim that it is due to lower fees, they will also rightly claim that asset allocation plays a significant part in their success.

On the other hand Colonial has argued that it is not a simple comparison and the options available, along with the demographics of the fund members, are significant. What is relevant is that the massive number of options and alternatives available make it incredibly difficult not only to compare funds and the returns, but also for the investor to choose the appropriate option.

Whatever the arguments the logic and argument from the Productivity Commission that across the board fees be reduced to match those available in comparable products and jurisdictions overseas, but that there should be a simple default option of the top 10 performing funds.

The complexity of the current array of choices simply makes it impossible for the average person to make an informed choice.

Moving on to managed funds outside superannuation, the tables in today's Financial Review, supplied by Mercer, make interesting reading and will equally no doubt be promoted by each of the relevant funds.

What is interesting is that when Australian Fund Monitors analyses results to the end of June (bearing in mind not all funds have reported as yet) for the past one, three and five years, there are some significantly interesting trends:
 

• Firstly when it comes to 12 month performance Australian equity funds (whether long only or long short), four out of the top five were early stage managers who do not yet have a three or five year track record.

• The emerging or micro-cap sector dominates, having been particularly strong over the past 12 to 24 months, particularly with the Banks and Telstra taking a battering.

• All are concentrated - it is simply impossible to provide these kind of returns when the ASX accumulation index returned 13% without significant stock picking skills (as opposed to Super, where asset allocation is a primary driver of performance).

Finally, in a rising market, with the exception of Newgate and Smallco, Long Only funds dominated.

Taking the top five performing funds over three years, the table looks like this:

Then taking the best performers over five years, the results are as follows:

Before we receive a raft of complaints from those managers with better returns in a specific year than those listed, we applied a consistency filter, which with the exception of the earlier stage funds in the one and three year tables, took out any fund with a performance of less than 15% over either one, three or five years. Equally, the above tables only include equity based funds with a geographic mandate of Australia and New Zealand, so Asian and Global funds were excluded.

Methodology is always important when ranking and filtering funds, and purely selecting the top performing funds based on returns is always risky, simply because looking at returns, without looking at risk factors such as volatility , Sharpe ratios, draw downs and up and down capture ratios, doesn't tell the whole picture.

And of course the overall disclaimer that "past performance is no guarantee of future returns" applies - although we consider it to be highly relevant.

BENNELONG KARDINIA ABSOLUTE RETURN FUND

Attached is our most recently updated Fund Review. You are also able to view the Fund's Profile.

• The Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with over ten-year track record. 

• The Fund has significantly outperformed the ASX200 Accumulation Index since its inception in May 2006 and also has significantly lower risk KPIs. The Fund has an annualised return of 10.52% p.a. with a volatility of 6.90%, compared to the ASX200 Accumulation's return of 5.93% p.a. with a volatility of 13.41%.

• The Fund also has a strong focus on capital protection in negative markets. Portfolio Managers Mark Burgess and Kristiaan Rehder have significant market experience, while Bennelong Funds Management provide infrastructure, operational, compliance and distribution capabilities.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - June 2018 (pdf format)