There is now sufficient July performance data in from fund managers to be able to make some meaningful comments regarding performance not only for July but also year-to-date and over the past 12 months.

The ASX 200 Accumulation Index rose 4.4% in July to take YTD performance to 7.57%, more than the first six months of the year put together. Against that, with 74% of results in to date, equity base funds rose 2.14% in July to take year-to-date returns to 4.44% which in the current environment is a reasonably significant underperformance.

Over 12 months the performance differential is not so stark, with equity based funds returning 13.82% against the ASX 200 Accumulation Index which has risen 16.54%. Before the disbelievers jump on these numbers as proof that absolute return and active managers fail to justify their fees, it's worth looking at the distribution of returns both within individual funds and between various strategies.

Taking individual funds first, in July the best performing fund across all strategies (Paragon) rose 12.5%, while the worst fell 8.8%. Year-to-date the best performing fund has returned 37%, and the worst -34%. Over 12 months the best performing fund has returned 101%, and the worst -24%.

While only 10% of funds in the AFM database outperformed the ASX 200 in July, that figure rises to 16% year-to-date and just over 30% over the past 12 months.

Returns by strategy are less diverse, with funds within the Equity 130/30 group averaging 3.57% in July, 10.22% year-to-date and 26.64% over the past 12 months to be the top performing strategy overall three periods. On the negative side Global Macro funds which have been struggling for some time on the back of government intervention fell 1.13% in July, while managed futures trailed the pack at -2.27% year-to-date, and currency funds the worst of the 12 months at -2.07%.

While Equity 130/30 has certainly been the standout there remains a significant spread of distribution between the underlying funds within the strategy, indicated by 12 month performances with the best up 50%, while even the poorest managed a pretty impressive 23%.

All this goes to prove what a diverse group of underlying assets, managers, funds, strategies and skills go to make up what some still choose to lump into an overall category of "alternatives".

Obviously research is an essential key to the puzzle, although as I heard at a presentation from a fund manager this week "you can't buy last years returns". However as we've seen in the media even the best research can come unstuck as shown by the problems with Van Eyk's Blueprint Funds, four of which have had redemptions frozen.

Hedge Clippings has to admit to not being across the details, why's and wherefores in this case, but they will  no doubt emerge over time. However it does indicate that conflicts of interest in the financial services sector, whether tested or not, are not restricted to the well published retail advisory space. Rightly, or or probably wrongly, the whole sector suffers from potential conflicts at every turn,, and it will be interesting to see if the final report of David Murray's Financial System Inquiry will come up with a any solutions to the problem.

Personally we doubt it. The system is too entrenched, leaving it to a combination of regulation, and personal ethics to resolve the problem.

Specific results received this week include the following PERFORMANCE UPDATES:

The Forager Australian Shares Fund recorded an out-performance of the Index 2.30% (Fund 6.70%) during July and 13.73% for the previous 12 months.

Totus Alpha Fund returned 3.55% during July with an annual return of 37.86% and a volatility of 15.62%.

With a standard deviation of 8.64%, the Morphic Global Opportunities Fund returned 11.34% over the prior 12 months.

The Alpha Beta Asian Fund returned 1.02% during July and 10.61% for the previous 12 months with a volatility of 4.18%.

AFM are now accredited by the Financial Planning Association of Australia to issue CPD points for FUND REVIEWS.
This week's updated reviews include:

Microequities Deep Value Microcap Fund, Bennelong Kardinia Absolute Return Fund, Optimal Australia Absolute Trust and also Insync Global Titans Fund

Read the most recent Fund Review for any of our research clients, and then answer 5 straightforward questions, these are presented in multiple choice format. An 80% or more success score will provide 0.5 CPD points, with a certificate provided as proof of completion. There is no charge for this service.

UPCOMING EVENTS:

Tuesday 26 August in Melbourne and also Tuesday 9 September in Brisbane , from 12pm to 4.30pm - ARRIA is hosting a further round table discussion, providing a valuable opportunity to meet with like-minded advisers. Free to Financial Advisors.

Wednesday 27 - Friday 29 August Money Management's Platforms and Wraps conference in the beautiful Hunter Valley, NSW. Covers the latest industry trends and innovation, while also exploring technology iniatives, client segmentation, data ownership, analytics, marketing and distribution, regulatory reform and consolidation. Pre-conference golf and wine tour of Hope Estate included. Special rate for fundmonitors.com members.

Tuesday 16 September in Sydney AIMA Australia's Hedge Fund Forum - and event by the Industry for the industry featuring quality Australian and international speakers.

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

This week's Now For Something Completely Different is a gentle reminder that today is Daffodil Day. Every dollar raised goes into cancer research, something that touches us all.

Best wishes for a happy and healthy weekend,

On that note, have a good 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.

We are pleased to announce the release of our latest products, Prism Select and OLIVIA123.

Australian Fund Monitors launches Prism Select and OLIVIA123 as an alternative to ASX'S mFUND SERVICE.

Australian Fund Monitors Pty Limited (AFM), a specialist provider of research on actively managed, absolute return and hedge funds, has thrown down the gauntlet to the Australian Securities Exchange's new mFund service.

AFM has launched the new Prism Select portal for self-directed investors or their advisors to enable them to research and apply for unlisted managed funds, and providing a superior research service to the ASX.

Prism Select has launched with comprehensive information and performance on a range of 14 boutique funds, enabling investors to compare and research each one.

AFM believes Prism Select's research offering is superior to mFund's, as it includes a number of wholesale funds not available through the mFunds service, contains a significantly greater depth of information and detail on each fund, and finally provides the ability to apply and deal directly with their chosen fund without having to contact a stockbroker.

AFM was established in Sydney in 2006 and is a specialist provider of research and information on actively managed funds, including hedge and absolute return funds, maintaining a database (www.fundmonitors.com) that contains over 300 funds either managed from or available in Australia.

Going forward it is expected many of these funds will sign up to Prism Select, and AFM's new online application process, OLIVIA123, which cuts down the time taken and mistakes made when applying for managed funds.

AFM believes that mFund is a welcome industry advance, but is mainly directed at retail investors, with only basic information provided on each fund. The investor is then referred to a limited group of five stockbrokers, with which they have to establish an account, before placing their order. While it has the convenience of the ASX settlement service, the range of funds remains limited to 12 Managers and 44 funds at this stage, while the information on each fund, and its strategy and performance metrics is minimal.

Like mFund, Prism Select does not provide financial advice, but it does provide investors with comprehensive, verifiable and in-depth information, along with up to date performance and risk data on each fund, assisting investors and their advisors to make informed and well-considered investment decisions.

All funds available on Prism Select are contained in their own "kiosk" each containing a wide range of factual and qualitative information, including the fund manager's details, the fund's investment strategy, its performance history, advanced analytics, and investment terms and fees, all in one place.

Users of Prism Select can also download and view copies of the managers' recent performance reports and offer documents, which coupled with AFM's own Fund Reviews provide investors with a powerful research and information tool.

OLIVIA123 - on line applications as easy as one, two, three.

Prism Select also provides access to each fund's offer documents and application forms through OLIVIA123, an online application service developed by AFM which provides a customised and interactive application form for each fund, reducing the time and frustration often experienced by investors when completing paper based application forms, and cutting the errors and omissions which often delay the processing of their applications.

OLIVIA123 consists of three modules - Data Collection, Identity Verification (AML&KYC), and Online Execution - assisting fund managers and their administrators by reducing the time and costs of processing paper based applications, including compliance with new anti-money laundering legislation.

OLIVIA123's online, interactive system is estimated to cut the time taken to complete and process a paper based application by up to 70 per cent.

Both Prism Select and OLIVIA123 will be rolled out progressively as additional funds are added to the portal, which will also provide "white labeling" and licensing functions for advisors, fund managers and fund administrators.

There is no cost to the user for access to Prism Select. Each Fund Manager pays a monthly fee covering a range of hosting services and research, and contributes a fixed portion of their management fee for transactions processed through OLIVIA123.

For further information visit www.prismselect.com or email [email protected].

Chris Gosselin
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

This week Hedge Clippings attended the ARRIA Round Table in Sydney. ARRIA, for those not aware of the organisation, stands for the Association of Real Return Investment Advisors and acts as a resource for independent financial advisors looking for ways to improve returns and diversify risk for their clients.

It was the third such ARRIA Round Table event we have attended, and it was pleasing to note the expanding numbers of attendees, and as a result the level and depth of discussion and debate that ensued.

The points we tried to make at the meeting were twofold:

Firstly, what's in a name? It doesn't really matter what they're called - real return, absolute return, alternatives, or hedge funds - the end objective of each is to provide an attractive risk adjusted return, and appropriate diversification to underlying markets or asset classes.

The second point was that there's no silver bullet when choosing the ideal asset class, strategy or product as the universe is infinitely variable, and certainly not homogenous, as are the end investors' needs and objectives. Having said that we do believe that research, research and more research is the key to understanding any investment product's strategy and performance, rather than some simplistic rating or label applied to a product for marketing and distribution purposes.

Inevitably the subject of fees raised its head, as it so often does, with the usual opinions and concerns. Tim Farrelly, probably quite correctly, claimed that over the past half century or so the wealth management industry (and specifically hedge funds) had done more to improve the wealth of those in the industry than the wealth of the investors for whom they were investing.

In our opinion that misses the point about research and manager selection. There are undoubtedly fund managers that don't deliver value, just as there are some who deliver excellent value. Bundling them into one basket and avoiding them all risks reverting to index or ETF type products that provide long term market returns, complete with the market's volatility, albeit at very low fees. The solution comes from doing the research, both quantitatively on performance and risk, and qualitatively on the product, manager, strategy and processes.

Following on from last week's Hedge Clippings, we referred to fund manager Jonathan Rochford's article "The Great Fee Debate - Resetting Manager and Investor Expectations". What did occur to us in this debate is the structure and alignment of interest that fees can create - or for that matter obscure - depending on the strategy, structure and size of the fund involved.

There is a strong argument that funds with assets under management (AUM) well into the multi billions do not require management fees of over 1% in addition to a performance fee of 10% or 20%. Without necessarily singling them out, in Magellan's results announced today, they indicated that the total capacity of their combined funds was potentially $50 billion. Whilst Magellan's average management fee might well be lower than their stated 1.35%, this plays into Tim Farrelly's argument pretty easily.

It is encouraging to note that some smaller managers, such as Monash Investors, are proposing to lower their management fee as AUM increases, and will achieve their alignment of interest with investors through co-investment and performance incentives.

There's a myriad of why's and where fore's in the great fee debate, including the fees on LIC's, structure and others, not forgetting of course that if the manager is performing to expectations, why shouldn't they benefit from the successful business they've built? There are few complaints about the profits made in other industries, with the exception perhaps of banking, but let's not go there.

Specific results received this week include the following PERFORMANCE UPDATES:

Bennelong Kardinia Absolute Return Fund returned 1.07% during July bringing annual performance to 7.02% with a volatility of 4.29%.

Returning a performance result of 12.50% in July (Index 4.40%), the Paragon Fund brings annual returns to 43.65% (Index 16.54%).

The Optimal Australia Absolute Trust returned 1.03% during July and 6.37% for the previous twelve months with a standard deviation of 1.69%.

AFM are now accredited by the Financial Planning Association of Australia to issue CPD points for FUND REVIEWS.
This week's updated reviews include:

Supervised High Yield Fund, Alpha Beta Asian Fund and also Monash Absolute Investment Fund

Read the most recent Fund Review for any of our research clients, and then answer 5 straightforward questions, these are presented in multiple choice format. An 80% or more success score will provide 0.5 CPD points, with a certificate provided as proof of completion. There is no charge for this service.

UPCOMING EVENTS:

Wednesday 27 - Friday 29 August Money Management's Platforms and Wraps conference in the beautiful Hunter Valley, NSW. Covers the latest industry trends and innovation, while also exploring technology iniatives, client segmentation, data ownership, analytics, marketing and distribution, regulatory reform and consolidation. Pre-conference golf and wine tour of Hope Estate included. Special rate for fundmonitors.com members.

Tuesday 26 August in Melbourne and also Tuesday 9 September in Brisbane , from 12pm to 4.30pm - ARRIA is hosting a further round table discussion, providing a valuable opportunity to meet with like-minded advisers. Free to Financial Advisors.

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

This week's Now For Something Completely Different we say a sad farewell to Robin Williams, who made us laugh, he made us cry and bought so much joy to the world. Now go out and make your life spectacular, like he did.

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.

This week's Clippings is going to attempt to multi-task, (not your scribe's strongest point) or at least cover a number of different topics. Feedback (positive or negative) is welcome.

Firstly AFM's Research Manager, Sean Webster has taken a look below the surface of yesterday's poor employment numbers (6.4% against the market expectation of 6.1%) which helped trigger a fall of almost 1c in the Aussie dollar, and led to further expectations of the RBA easing official rates by Christmas. RBA Governor Glen Stevens came out today and tried to pour cold water on that view, but it would certainly seem that any rate rise might be further off than previously expected.

Sean's piece, 'Lies, damn lies and statistics' is not suggesting there was any fiddling of the books, just that the ABS has made some significant changes to its data collection and survey methodology, and yesterday's numbers are the first example of the resultant numbers. For those wondering why the numbers were such a surprise it makes excellent reading.

What might also have impacted the unemployment rate was the never ending budget saga, which three months after budget night is still being debated in the media at least, as debate in parliament has been interrupted by Federal MP's winter overseas holidays (apologies, "fact finding tours"). Business hates uncertainty, almost as much as a bad budget. With the final budget outcome yet to be determined by negotiation with the minor parties in the Senate, including the uncertain Clive Palmer, business confidence and patience might be running as low as Treasurer Joe Hockey's.

Elsewhere Sean also unearthed this excellent article entitled The Great Fee Debate - Resetting Manager and Investor Expectations. If there's one subject guaranteed to generate ill feelings, let alone a debate, it is the quantum and structure of fund manager's fees. We have raised this issue before, and it was front and centre in David Murray's interim FSI report a few weeks ago, but Jonathan Rochford of Narrow Road Capital has some excellent points to make - most of all his number one factor when choosing a manager: Integrity. At AFM we often ask ourselves a rhetorical question when speaking with managers: Do they see managing other people's money as an opportunity, or a responsibility? Only after that can one analyse the value for money the Manager is providing.

Finally ASIC has today released its clarification on how it will apply the wholesale investor test to self-managed superannuation funds (SMSF's).  As ASIC says: "This has long been an area of ongoing legal uncertainty" (and therefore probably quite a lucrative area of advice for the legal fraternity) where SMSF's were not necessarily judged to be wholesale investors even though their trustees were.

ASIC's revised approach can be viewed here, and as the previous approach (QFS 150) was issued ten years ago, and the SMSF sector has since grown dramatically to number over 500,000 funds, representing over one third of Australia's retirement pool by value, the clarity will be welcomed. As we read it, ASIC's new approach means that it is the Trustee's status as a wholesale investor which determines the wholesale status of their super fund. Maybe we should get a legal opinion on that. Or two just to be sure.

Specific results received this week include the following PERFORMANCE UPDATES:

Microequities Deep Value Microcap Fund recorded a return of 5.94% during July and 34.46% for the previous twelve months.

Returning a performance result of 3.20% in July, the Monash Absolute Investment Fund is now at 20.24% over the prior year with a volatility of 8.62% in line with the Index.

AFM are now accredited by the Financial Planning Association of Australia to issue CPD points for FUND REVIEWS.
This week's new reviews include:

Optimal Australia Absolute Trust, Aurora Fortitude Absolute Return Fund and also Insync Global Titans Fund

Read the most recent Fund Review for any of our research clients, and then answer 5 straightforward questions, these are presented in multiple choice format. An 80% or more success score will provide 0.5 CPD points, with a certificate provided as proof of completion. There is no charge for this service.

UPCOMING EVENTS:

Tuesday 12th August 2014, from 12pm to 4.30pm - ARRIA is hosting a round table discussion in Sydney, providing a valuable opportunity to meet with like-minded advisers. No cost to participants. Also in Melbourne on Tuesday 26 August and Brisbane on Tuesday 9 September.

Wednesday 13 August 2014 - Perth and Thursday 14 August - Melbourne: Financial System Inquiry - Public Forums to raise issues and discuss the inquiry. Brisbane and Sydney next week. Click here to see dates in your capital city and register.

Thursday 14th August in Sydney: AIMA Australia Education Forum. The forum will discuss regulatory, tax and other issues, as well as current observations and insights associated with a range of hedge fund investment products, including Australian unit trusts, Cayman funds, UCITS and listed investment companies. It is a "must attend" event for hedge fund managers reviewing their current products or considering development of new products.

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.

Wednesday 27 - Friday 29 August Money Management's Platforms and Wraps conference in the beautiful Hunter Valley, NSW. Covers the latest industry trends and innovation, while also exploring technology iniatives, client segmentation, data ownership, analytics, marketing and distribution, regulatory reform and consolidation. Pre-conference golf and wine tour of Hope Estate included. Special rate for fundmonitors.com members.

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

This week's Now For Something Completely Different should either put to rest the argument that children are not influenced by what they see on TV, or that cats are more intelligent than dogs. Enjoy, and wishing you a safe and happy week-end.

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.

Recently the news has been dominated by horrors and disasters in the Ukraine and Gaza, and an emerging global health threat from the Ebola virus in West Africa, none of which are necessarily relevant to Financial Markets or "Hedge Clippings", except we have been surprised at the lack of market volatility resulting from them. Maybe the markets have become hardened or become immune to the daily dose of visual horror we are presented with, or maybe they just won't affect the bottom line enough to matter.

Earnings are a different matter, particularly when the majority of experts have been talking of an over-priced market for some months, with investors also seemingly immune from the warnings. At first call that would seem to have changed overnight with the start of reporting season, as we suspected it might, with significant falls all round, with the exception of Abu Dhabi (+0.99%) and Dubai (+1.99%).

As a the time of writing the Australian market, although generally judged to not be as overvalued as the US, is down around 1.5%, having just completed its second best month for the past year. Timing is everything, and most fund managers will have closed July's books thankful to have booked a positive return, and at least happy they have another 30 days of the month to manage August's performance.

You will note we're not falling into the trap of predicting if this is an overdue correction, and therefore a buying opportunity, or the start of a more serious sell off as Tapering finishes tapering, and rates begin to rise. Ask me in a month or two's time and I should be able to give you a better idea!

On other fronts it's been thankfully quiet in Canberra, while David Murray's Financial System Inquiry has announced a series of upcoming public forums in four capital cities (not quite sure why Adelaide and Hobart missed out, Canberra I do understand) open for anyone to attend, to hear about the Inquiry, ask questions of the Committee, and raise issues for examination by the Inquiry. Those interested can register online or download two summaries of the FSI Interim Report from our library, one from Deloitte, and one from Ernst & Young.

Final round submissions to the Inquiry close on 26^th August.

Prism Select and OLIVIA123

Closer to home, this week Australian Fund Monitors released two exiting new products, Prism Select and OLIVIA123.

Prism Select is an information only site which provides details on a small group of funds from our database, with significantly greater depth of information than available on AFM. However, using OLIVIA the significant factor is that investors have the ability to apply for each fund online, which makes completing lengthy and confusing paper based forms a thing of the past.

OLIVIA stand for "On Line Investor Verification & Interactive Applications". That's a mouthful, so OLIVIA seemed much easier.  In fact we believe OLIVIA makes applying for a managed fund as easy as One, Two, Three.

There's no cost to investors, but they'll save time and effort, and OLIVIA includes an online AML and KYC module to confirm their identity in real time. We can't be sure, but we believe OLIVIA is not only a first of its kind in Australia, but also the world.

Should you have any questions please visit the site, or contact us for further details.

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

The Cor Capital Fund returned 7.82% for the 12 months to 30 June 2014 with a volatility of 5.85% and the one month return is 0.76%.

Laminar Credit Opportunities Fund returned 1.09% during June and 12.20% over the previous 12 months as compared to the RBA cash rate over that time of 2.54%.

Performance for the KIS Asia Long Short Fund was 0.95% during June and 11.89% for the previous 12 months with a low volatility of 2.69%.

The Forager Australian Shares Fund returned -0.15% during June and 17.72% over the year-ended June 2014 with a volatility of 11.48%..

Pengana Absolute Return Asia Pacific Australian Fund returned 1.04% during June and 7.93% for the  prior 12 months with a low volatility of 2.86%.

FUND REVIEWS released this week include:

Morphic Global Opportunities Fund and also Microequities Deep Value Microcap Fund

FUTURE EVENTS:

Tuesday 12th August 2014, from 12pm to 4.30pm - ARRIA is hosting a round table discussion in Sydney, providing a valuable opportunity to meet with like-minded advisers.

Wednesday 13 - Wednesday 20 August: Financial System Inquiry - Public Forums to be held in Perth, Melbourne, Brisbane and Sydney. Click here to see dates in your capital city.

Thursday 14th August in Sydney: AIMA Australia Education Forum. The forum will discuss regulatory, tax and other issues, as well as current observations and insights associated with a range of hedge fund investment products, including Australian unit trusts, Cayman funds, UCITS and listed investment companies. It is a "must attend" event for hedge fund managers reviewing their current products or considering development of new products.

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.

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.

This week's release of the interim report of David Murray's Financial System Inquiry (FSI) was a mixture - part interim report, and part seeking further feedback and comment from interested parties. At 460 pages it has, or will, take some time to go through the complete document, but our initial impression is that the final report will be a major influence on the direction of the financial system, including superannuation for some time to come.

Courtesy of modern technology and the Internet (which the report itself focused on) the presentation and ease of understanding the report was a breath of fresh air. While not everyone might agree with all the directions it is going in, one has to be impressed by the quality of its scope, coverage, and production.

Distilling all 460 pages (even if I had read them all) is not the purpose of Hedge Clippings, so we will just focus on some specific areas of interest. The main one to us is Australia's superannuation system, currently around $1.8 trillion and forecast to grow to 7 or $8 trillion by 2030 according to a recent report from Deloitte. The FSI interim report inevitably spent some considerable effort on superannuation, partly in the area of fees, and also flagging that the final report will have a fair amount to say about superannuation's retirement phase, as opposed to the accumulation phase which seems to be the focus of so much attention.

Firstly the fees. The FSI points out that while the total superannuation pool has grown dramatically over the past 20 years, partly as a result of time, and partly as a result of the SGL levy rising from 3% to 9%, fees as a percentage of total funds has hardly budged. The interim report estimates that whilst one of the largest superannuation systems in the world, it is also one of the most expensive by a factor of two or three times, and that a reduction of around 0.4% in fees would save superannuation members a total of $7 billion a year at current levels.

Given Deloitte's forecast, a simple calculation suggests that figure will be closer to $30 billion a year by 2030 unless competitive pressures (or legislation?) come to bear.

As we are normally at pains to point out, fees are one thing, but net performance drives the bottom line return. Whether net performance, or choice and a preference for being in control of one's own retirement destiny is the cause for SMSF's to be 35% of the total superannuation pool is debatable, but self-managed super funds, while not impervious to fees, would from our experience seem to be far less fee focused than their institutional counterparts.

The FSI also put considerable focus on potential changes or implications to the retirement phase of superannuation. At the current time, and in fact since inception, the pointy end of superannuation has been contributions, returns, and fees in the accumulation phase covering the time up until retirement. David Murray's interim report suggests, correctly in our view, that as the objective of superannuation is to provide for the retirement phase, there should be a greater focus on how the retiree's final superannuation balance is handled.

Given increasing longevity and an ageing population it would seem illogical to force people to save for 40 or 45 years of their working lives, only to allow them to take a lump sum in the hope of carrying them through the next 20 or so years of retirement. We are obviously not aware of how the final report will come down on this, but it would seem that the recommendation might fall somewhere between incentive (the carrot) and legislation (the stick) to increase the focus on annuity style incomes over the longer term.

While they're at it they may want to consider either a carrot or stick approach to encouraging an increased allocation of the superannuation pool to infrastructure assets. Both have a long term timespan of 30 to 40 years, and infrastructure should be able to provide the necessary steady returns without the volatility of equities and other financial markets.

Our focus on the superannuation aspects of the FSI are not meant to diminish the importance of other areas the report, including the quality of financial advice, and Australia's dependence on overseas capital. We'll leave that to others, or another day.

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

The Nanuk Global Alpha Fund returned 1.16% during June, with 12 month performance coming in at 14.83%.

Pengana Australian Equities Market Neutral Fund returned 1.8% during June.

Performance for the Aurora Fortitude Absolute Return Fund was -0.31% during June, its first negative month since January 2013.

Avenir Value Fund returned 0.22% during June, a month in which the Global Equity Index fell -0.76%. The Fund's financial year performance was 30.04% (Index 17.87%)..

Performance for the Insync Global Titans Fund over the 2014 financial year closed at 10.70%.

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 so to something completely different: on what would have been his birthday today here are 7 things we can learn from Nelson Mandela's life. Seven pretty important principles but in my world there's one that rises above them all: Happy Wife, Happy Life!

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.

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.