Chinese authorities treading a dangerous path

The news that the China Securities Regulatory Commission was prohibiting investors who own more than 5% of a publicly traded company from selling shares for six months is likely to do more to damage their market than save it. The ban will include foreign investors who hold shares that trade on the Shanghai and Shenzhen exchanges, and comes after Chinese equities lost more than 25% of their value since mid-June.

If anyone can pull off what the Chinese authorities are trying to do, they can, but we doubt they'll succeed. They might be able to control their own citizens from selling shares in smaller caps, or freezing parcels of 5% or more of a publicly listed companies for six months, but the longer term damage to their reputation, and the confidence of traders, investors, and market participants at home and abroad, will be difficult to overcome.

What the Chinese authorities are doing is freezing liquidity, and in this regard it seems they haven't learned from the lessons of 2008 when central banks, governments, and regulators around the world tried to ban short selling, close markets, and in a word, panic. And if governments and the authorities panic, that's exactly what investors are likely to do as well.

Rudyard Kipling put it quite clearly: "If you can keep your head when all around you are losing theirs and blaming it on you" but it seems the Chinese authorities didn't listen, or haven't read Kipling.

By stopping investors selling smaller stocks, they're going to be forced to sell larger ones, and possibly the better ones, to cover their liquidity requirements, margin calls, their need for cash, or just to stuff under the mattress. While western authorities have probably learned from their mistakes of 2008 and might not make the same ones again in a panic, they also succeeded in restricting longer term liquidity through regulations on banks and other market participants in an effort to avoid another too big to fail scenario.

China threatens to make the Greek tragedy just a pimple by comparison. Whatever eventuates in Greece has largely been anticipated by most savvy investors over the past few years, and if a three year moratorium is agreed to it will probably only extend the agony further. There seems no way that the Greek economy, about the same size as that of the State of New South Wales, is ever going to be able to repay the levels of debt.

And so on to fund performance in June.

It was obviously a rocky ride on global markets in June, initially in response to Greece, but more recently as a result of China's problems. The ASX 200 Accumulation Index fell by 5.3%, and July has seen a continuation of the volatility since. Over the 12 months to the end of June the ASX200 rose only 1.17%, or 5.68% on an accumulation basis. By comparison and based on the 25% of fund returns received to date, equity-based hedge funds fell by only 1.41% in June, an outperformance of almost 4%, with 87% of those outperforming the ASX 200 Accumulation Index. Over the past 12 months equity-based funds have returned 11.57%, double the return of the accumulation index.

In addition to the performance updates below, results of note include Kentgrove Capital, (+4.1%) Totus Alpha Fund, (+6.3% (e)) QATO (+1.89%) Bennelong Long Short (+4.86%). 

Specific results received this week include the following PERFORMANCE UPDATES:

Monash Absolute Investment Fund fell 1.9% in June in a weak Australian equity market, but still taking the Fund's annualised return since inception to 14.11% p.a. 

FUND REVIEWS released this week: Totus Alpha Fund; Insync Global Titans Fund; Supervised High Yield Fund

UPCOMING EVENTS:

20 - 21 August 2015 -The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 -The 15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300to all investors and advisors using coupon codepromoFMon registration.

15 September 2015 -The AIMA Australia Hedge Fund Forum 2015 is the annual non-profit hedge fund conference organised by the industry for the industry.

And finally best wishes for a happy and healthy week-end ahead,

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.

INSYNC GLOBAL TITANS FUND

ATTACHED FILESInsync Global Titans Fund AFM Fund Review May 2015 (pdf format)

• 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 14 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 23.31% since inception in March 2012 as compared to 14.43% for the ASX 200 Accumulation Index. The standard deviation has been higher than the Index at 13.39% as compared to 11.05% and the Sharpe ratio is 1.44.  

ATTACHED FILESTotus Alpha Fund AFM Fund Review May 2015 (pdf format)

Grexit Reality - But maybe we need a reality check ourselves?

Actually Greece isn't out of the EU just yet, but the default is a reality, and unless someone blinks, either as a result of Sunday's referendum, or the reality of the consequences of exiting both the political and currency union, the rest as they say, will be history. The problem is no-one can actually say in advance what that history might look like, apart from the certainty that it is going to get messy.

The fact is that the Greek problems were a classic example of the boiling frog syndrome, in that they developed, or simmered for a long time with nobody prepared to fix the problem until it was too late. The release this week of The Grattan Institute's working paper, entitled "Fiscal challenges for Australia", made us wonder if we aren't heading for our own equivalent of the Greek tragedy, even though to many it might seem we're a long way off at present.

At first glance we're sitting, if not pretty, but at the top of the tree when it comes to net levels of Commonwealth government debt to GDP, which is projected to peak at 18% in 2017. This excludes state government debt, and for good measure treats the value of the Future Fund as an asset. However, the Grattan report notes that when it comes to forecasting, the Federal government's forecasts consistently contains highly optimistic assumptions about revenue growth and spending restraint.

For the last six years budget outcomes have been worse than projections, and both the previous and current Governments have been unwilling to address deep seated issues, instead relying either on the mining boom (gone!) and personal income tax bracket creep to raise additional revenue, while refusing to curb excessive spending. In other words we haven't been the only ones not prepared to accept the austerity measures (increase taxes, reduce spending) needed.

In its place we have increased taxes by stealth, otherwise known as bracket creep. According to a recent article in the Financial Review, the government's reliance on bracket creep will push the average full time worker in Australia on $78,000 a year into the second highest tax bracket this financial year, with any earnings above $80,000 subject to a tax rate of 39% including the Medicare levy. This will earn the government, and cost the average income earner, an additional $1,200 per year over the next decade, and take their average tax rate from 21.7% to 27.4% over the next decade.

The current Federal Government has refused to address major issues such as changes to the taxation of superannuation, changes to the GST (as did the previous Labour government), or curbs on negative gearing, thereby excluding three major reforms which would get them out of the fiscal hole that has been deepening for some time. Relying on personal income tax bracket creep seems to be their only solution, with the creep the equivalent of the above mentioned frog in his slowly warming pot.

As the Grattan Institute correctly points out, hoping for the best is not a budget management strategy: It simply justifies putting off hard decisions, and shifts the costs and risks of budget repair onto future generations, with their research showing that each $40 billion dollar deficit increases the lifetime tax burden for households headed by a person aged 25 to 34 by $10,000.

Your Clippings correspondent can rest easy - it won't be his problem. He's waaay older than that, and will be part of the other side (expenditure) of the problem once he starts to draw a pension!

Specific results received this week include the following PERFORMANCE UPDATES:

The Insync Global Titans Fund increased by 3.0% in May, bringing the Fund's prior 12 month performance to 20.79%.

Totus Alpha Fund was down 1.80% in May, compared to the ASX200 Accumulation Index's 0.40%. However the Fund's annual performance of 23.31% p.a has been strong (Index 14.43% p.a.).

The Signature Quantitative Fund returned -1.20% for May, to bring the annual performance since inception to 11.34%.

Supervised High Yield Fund rose 1.04% during May to bring the Fund's annual return since inception to 10.22%. In the same time frame the RBA Cash Rate returned 3.45%.

FUND REVIEWS released this week:Aurora Fortitude Absolute Return Fund; Pengana Absolute Return Asia Pacific Fund

UPCOMING EVENTS:

20 - 21 August 2015 -The 2nd Superannuation Fund Investment Operations Forum 2015 is a two day forum providing invaluable technological, regulatory compliant and best practice insights into improving back and middle office efficiency to drive member loyalty, bottom line profitability and a competitive edge

26 - 28 August 2015 -The15th Annual Wraps, Platforms & Masterfunds Conference will provide solutions for succeeding in a distribution world of endless possibilities, showcasing strategies to help business achieve the biggest bite of market share, use innovation to overcome problems and support opportunities. Australian Fund Monitors is pleased to offer a discount of $300 to all investors and advisors using coupon code promoFM on registration.

15 September 2015 -The AIMA Australia Hedge Fund Forum 2015 is the annual non-profit hedge fund conference organised by the industry for the industry.

And now for something completely different. An article in today's Guardian Australia suggesting that in the mid eighties, with the Hong Kong handover looming, and the Troubles in Northern Ireland in full swing, UK officials considered relocating 5.5 million Hong Kong citizens to Ulster, but were concerned about how they'd adapt to the weather. Had it been April 1st you might understand it, but really?

And finally best wishes for a happy and healthy week-end ahead,

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.