SUPERVISED HIGH YIELD FUND

Attached is AFM's updated Fund Review on the Supervised High Yield Fund.

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

• The Supervised High Yield Fund (SHYF) has a 6 year track record investing in fixed interest investments. The Investment strategy aims to deliver returns with zero correlation to equity markets by investing in debt securities with minimal default probability and offering a premium return above the risk free rate.
• The Fund is managed by Philip Carden whose experience in debt and capital markets spans over 33 years, including time with JB Were's Capel Court Securities and Macquarie Bank, where he was the Executive Director responsible for the Debt Markets Division.
• SHYF is an Alternative Income fund which invests in Global and Australian debt markets, with all foreign currency receivables hedged back to Australian dollars.
• The Fund utilises a top down analysis of the economic environment and market to screen and identify debt market opportunities which it believes offer low risk with high yield. The next stage is the development of a risk matrix and investment strategy, following which detailed research is undertaken on specific investment opportunities which meet the pre-defined criteria established in the investment strategy.
• Prior to approving an investment for the Fund each potential investment is subject to two stress tests. The first of these is for credit and default risk, in which the investment is stress-tested to ensure that in a worst case economic environment it can repay 100% of its principal and interest obligations case scenario for the asset by examining the highest margin over the risk rate that the investment has previously experienced in a crisis situation. Any decline in value under the stress test that exceeds 10% of the Fund's value is avoided The second test examines market risk.  In this case Carden looks at the worst case scenario for the asset by examining the highest margin over the risk rate that the investment has previously experienced in a crisis situation.  Any decline in value under the stress test that exceeds 10% of the Fund's value is avoided.

Australian Fund Monitors

ATTACHED FILESSupervised High Yield Fund AFM Review January 2016 (pdf format)

We're searching for a confident economist, but can't find one!

This week Hedge Clippings seemed to be in the company of economists and other experts more than normal. It's not that we have a habit of avoiding them, even if we wanted to, it was just the way the week unfolded. And having paid attention to what they were variously either saying and putting up on the screen, you'd have to say it was a pretty sobering experience, particularly in a week when the once big Australian, BHP, cut their dividend by 75%.

Now trying to distil close to four hours of economic opinion and expertise into a few paragraphs is not the easiest thing to do - so much so that I'm just going to jot a few dot points down and hope they're the right ones. Here goes, and no doubt I will be reminded either that I got it wrong, or missed other more pertinent points:

• Demographics across the globe are changing, and causing some major issues. More people are earning, but not much, and therefore not spending or paying much tax, and more people are getting older and relying on welfare of one sort or another.
• China is in serious transition from their infrastructure boom of the past decade or so, to a consumer and consumption and service based economy. Transitional economies (Australia's included) are always difficult.
• Interest rates are at all time lows, and either negligible or negative. This leaves central banks with no room to move, and no levers left to pull.
• Over supply and inflation. As one who grew up, or at least experienced the '70's, '80's and '90's, it is almost unthinkable that rates would be close to zero, and deflation is the problem, rather than inflation.
• Profit share has overcome labour - and there's signs of political pushback as evidenced by Donald Trump's appeal in the US.

Amongst all this returns of double digits from traditional portfolios are going to be hard to find. Mid-single figures possibly, but that's not attractive if it comes with anything like equity volatility. Choosing the correct, and diversification of, asset class is going to be vital.

And in case you think we're not grateful for their views, we were, and are. Thanks to Charlie Jamieson of JCB Bonds, Saul Eslake, Mark Burgess (ex Future Fund), Daniel Blake of Morgan Stanley, Ben Silluzio of QATO Capital, and Deloitte for their hospitality.

Performance updates and reviews received this over the past couple of weeks included the following PERFORMANCE UPDATES:

For January, the Alexander Credit Opportunities Fund rose 0.43%, to bring 12 month performance to +7.08%.

The QATO Capital Market Neutral Long/Short Fund returned a solid +4.90% versus the S&P/ASX-100's fall of -5.48%; an outperformance of +10.38%.

Pengana Absolute Return Asia Pacific Fund finished -2.0% for the month, compared to the HFR Event Driven Index which closed -3.8%. Asia Pacific markets sold off sharply -8.0%, with volatility measured by VIX hitting a high of 30.

Totus Alpha Fund rose 0.67% for the month of January, compared to the ASX 200 Accumulation Index that fell 5.48%, an outperformance of 6.15%.

The NWQ Fiduciary Fund returned -1.62% for the month of January and has returned +14.06% over the last 12 months.

Signature Quantitative Fund returned -0.6% for the month of January, compared to the S&P/ASX 200 Accumulation Index's return of -5.5%, an outperformance of 6.08%.

APN AREIT Fund rose 0.55% for the month of January to bring annualised return since inception to 17.60% p.a.

Supervised High Yield Fund decreased by 0.51% for the month of January, to bring annualised performance since inception to 9.47% p.a.

FUND REVIEWS released this week: Meme Australian Share Fund; APN Asian REIT Fund; Morphic Global Opportunities Fund; Bennelong Kardinia Absolute Return Fund; Optimal Australia Absolute Trust; QATO Capital Market Neutral Long/Short Fund; Pengana Absolute Return Asia Pacific Fund; Totus Alpha Fund 

And on that sobering note, have a great week-end.

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

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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.

TOTUS ALPHA FUND

Attached is our most recently updated Fund Review on the Totus Alpha Fund.

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

• Totus Capital is a Sydney based long short fund manager established in 2012 by Ben McGarry which aims to place equal emphasis on performance and capital preservation.  The Fund invests mainly in Australia, but also in other developed economies, with a primary exposure to equity markets.
• The Totus Alpha Fund's investment strategy is to identify structural themes, and then seek to drive performance by investing in securities that have concentrated exposure to those themes.  Single stock short positions are used to generate alpha, frequently in under researched parts of the market such as the small and mid-cap space. Index derivatives are used to hedge the portfolio's market risk.
• McGarry qualified as a Chartered Accountant with PWC in 1999 and has 15 years market experience, commencing his career covering European building materials and construction sectors at Morgan Stanley in London. Previous experience included analytical roles at Ausbil, a Sydney based $10bn+ long-only manager, and sell side emerging companies experience at UBS. McGarry's emerging company research with UBS included exposure to a range of sectors including energy, materials, industrials, tech, financials, retail and telecommunications.
• The Fund has delivered an annalised return of 32.05% since inception in March 2012 as compared to 8.44% for the ASX 200 Accumulation Index. The standard deviation has been higher than the Index at 13.88% as compared to 12.39% and the Sharpe ratio is 1.90.  

Australian Fund Monitors

ATTACHED FILESTotus Alpha Fund AFM Fund Review January 2016 (pdf format)

PENGANA ABSOLUTE RETURN ASIA PACIFIC FUND

Attached is our most recently updated Fund Review on the Pengana Absolute Return Asia Pacific Fund.

• The Pengana Absolute Return Asia Pacific Fund ("PARAP") was established in 2008 by portfolio managers Antonio Meroni and Vikas Kumra. The Fund is a feeder fund into a Cayman Islands AUD share class fund.
• The Fund invests both long and short in Asia Pacific equities, including in Australian and New Zealand, after a stock specific "event" has either occurred or been announced and the portfolio aims to be uncorrelated to the underlying equity markets. A combination of the Manager's experience, thorough research and continuous back- testing identify the most attractive of these events.
• Risk controls include limits on individual positions as well as gross and net exposure. Limits are in place for option exposure and cash borrowing, with stop loss limits on individual positions. Overall the manager is looking to derive returns from the event strategies as opposed to any currency or market exposures.
• Since inception, the Fund has an annualised return of 9.69% p.a., compared to the AFM's Asia Pacific Index of 4.95%. The Fund has achieved this with lower volatility of 6.18% (Index 11.96%).

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

Australian Fund Monitors

ATTACHED FILESPengana Absolute Return Asia Pacific Fund - AFM Fund Review January 2016 (pdf format)

QATO Capital Market Neutral Long/Short Fund

Attached is our most recently updated Fund Review on the QATO Capital Market Neutral Long/Short Fund.

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

• Qato Capital is a Melbourne-based boutique fund manager backed by single family office, Larkfield Funds Management.
• Qato has a systematic, market-neutral strategy which invests exclusively in S&P/ASX 100 stocks.
• The QATO Capital's Q-score process captures and quantifies six broad fundamental factors, which assess multiple underlying sub-categories. Those companies with the top score (quality companies) are included in the "long" portfolio, those with the lowest score are sold short.
• The Fund seeks to preserve capital and maximise absolute returns through active and constant risk management, targeting monthly a net market exposure of 0% to hedge broader market risks through 30 S&P/ASX-100 positions (15 long & 15 short equally-weighted positions).
• Qato Capital's process is entirely systematic - stock selection and risk management are employed in a rules based approach. The Fund employs no financial leverage/gearing to purchase securities, no derivatives and no financial products to imitate leverage.

Australian Fund Monitors

ATTACHED FILESQato Capital AFM Fund Review January 2016 (pdf format)