QE's has to end sooner or later.

Nothing lasts forever (except true love, so they say) and QE3 will be no different. The question of course is whether Dr Bernanke, or his successor, can manage the taper from the US $85 billion a month of QE life support through to a reasonably healthy and self supporting economy without investors pulling the rug out from underneath the market?

Based on last night's performance from New York and Europe, it seems not, but surely any reasonably sensible market participant would be able to work out that sooner or later the QE theme tune has to end as the US economy recovers.  However, investors being what they are, history shows that nearly everyone hangs around thinking they'll be able to exit painlessly.  Memories of '87, the "tech wreck" of 2000, and even the great credit bubble leading up to 2008 don't seem to last too long.

China seems to be following the same way, and although the staunch believers are committed to the "stronger for longer" theme, it's worth reminding them again that nothing lasts forever, at least not without some imbalances being created along the way.

Japan, the world's third largest economy, is learning the hard lessons of trying to kick start a moribund economy to life. For a start Japan's demographics will create significant difficulties, with its workforce forecast to fall to just half the population by 2050, down from 70% in 1990.  Japan's experiment is just starting, and it may well work, but the risks along the way are significant.

And finally on the "nothing lasts forever" theme the Aussie dollar's flirt with parity against the US$ seems to have come to an end, in spite of some still believing the current fall is just a temporary blip. Falling interest rates at home, rising one's in the US, a slowdown in resources (price and volume) and repatriation of capital from the carry trade of the past few years make any meaningful rally unlikely.

Volatility is back, and as we suggested back on February 22 when we warned of the historically low levels of the VIX, that's often an indication of the lull before the storm.

Performance and News Updates on www.fundmonitors.com this week:

Aurora Fortitude Absolute Return Fund returned 0.78% during May and 5.79% over the last 12 months. The Fund is characterised by it's very low volatility at 2.84% pa (since inception) as compared to the S&P/ASX 200AI volatility of 14.58%.

The Pengana Australian Equities Fund recorded -1.3% during May and 25.66% for the last twelve months. As at 31st May, cash (including notes and preference shares) represented 31% of the Fund. The top five holdings by value were: DUET Group, Caltex, ANZ Bank, Telstra and Resmed.

Pengana Asia Special Events Fund recorded 1.63% during May and has a twelve month performance record of 11.79%.

The Monash Absolute Investment Fund returned -1.1% during May and 13.87% for the last six months. Despite a difficult month for stocks in Australia the portfolio fell only 1.1% in May and is up 17.3% for the financial year.

And finally there is no "for something completely different" this week as we mentioned above, nothing lasts forever (except as we noted true love, so they say).

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESFund Review: Aurora Fortitude Absolute Return Fund (pdf format)

Last week's "Hedge Clippings" included some comments defending hedge and absolute return funds against some of the broader criticism they receive, particularly when the market is rising strongly. Our logic was twofold:

Firstly the sector, often included as part of the "alternative" asset bucket, is made up of such a diverse range of strategies that comparison (apart from bottom line performance) is nigh on impossible. It's also worth noting that many equity long short strategies should, in our opinion, not be categorised as alternative at all, but rather should be termed active equities.

Secondly the diversity of performances are equally large, even between funds with similar strategies or geographic mandates. Taking May's single funds' performance numbers to date (based on 45% of those received so far) they range from -12.44% through to +15%, with an average of +0.92%, against the ASX200 Accumulation index which fell -4.50%.

Over 12 months the range becomes even greater: -62% through to +75% with an average of +14.22% against the cumulative return of the ASX200 of +26.41%.

As we've noted many times before, with diversity such as that, it's easy to prove your hedge fund point of view, positive or negative.

Taking a look at May performance numbers also proves the point that while volatility normally leads to negative market returns, it provides the opportunity for hedge funds (or at least the best of them) to show their defensive characteristics in falling markets. While there is a way to go yet, the ASX200 accumulation index is down a further 4.67% in June, taking it almost 10% off the high reached just a month ago.  Year to date (January) the Index is up only 2.92% while hedge funds, which had been lagging, are up 6.85%.

Having said that of course, we're falling into our own problem of calculating averages from a significantly diverse set of numbers.

Moving on, we were pleased to be able to host Opalesque's founder and CEO, Matthias Knab, along with a selected group of local fund managers to the 2013 Opalesque Australian Round Table to discuss issues affecting the local industry. The full transcript is available here.

Performance and News Updates on www.fundmonitors.com this week:

Optimal Australia Absolute Trust achieved 1.22% during May with a since inception (September '08) return of 11.48% pa.  Major contributors to the Trust's return for the month were driven by a return from both long investments (+0.22% attribution) and shorts (+1.25% attribution).

The Allard Investment Fund returned 6.30% during May with its twelve month return standing at 14.59%.  At the end of May the Fund was 67.3% invested and in terms of country exposures the largest was HK/China 31.4%, followed by Singapore at 13.0% and Korea at 10.3%.

Morphic Global Opportunities Fund recorded 6.77% for May bringing its since inception (Aug 2012) return to 28.70%.  Taken as a whole, global stocks in local currency terms were volatile, but largely unchanged by month end.

The Insync Global Titans Fund delivered 4.8% during May bringing it's since inception (October 2009) return to 9.5% pa.  However, the main driver of the Fund's return in May came from the 7.7% depreciation of the Australian dollar against the US dollar.

And finally, for something completely different, how the power of words can make a significant change.

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

MORPHIC GLOBAL OPPORTUNITIES FUND

ATTACHED FILESMorphic Global Opportunities Fund AFM Review - May 2013 (pdf format)

OPTIMAL AUSTRALIA ABSOLUTE FUND

Attached is our most recently updated Fund Review on the Optimal Australia Absolute Fund.  

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

• Optimal Australia is a specialist Australian equity investment manager established in 2008.
• The Fund's long/short equity strategy portfolio typically has a low but variable net market exposure comprising 40 to 65 stock broadly selected from within the ASX200.
• The investment team comprising George Colman, Peter Whiting and Stephen Nicholls have close to 90 years combined experience in equity markets.
• Consistent out-performance of the market: Approximately 84 % of monthly performances have been positive with a largest drawdown of -1.38%.

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESOptimal Australia Absolute Trust AFM Review - May 2013 (pdf format)

Last week we suggested that given the outlook for the local currency, Australian investors would be well served by including some offshore exposure to their portfolios as protection against further falls in the A$. With various economists now calling the Aussie down to US$0.80 this may well be the way to go.  Certainly there seems to be an exodus of offshore investors from the equity market (where they constitute 47% total value) after the inflows of the past 12 months, which has further undermined the currency and the market.

In any event, local funds which invest offshore benefitted significantly (provided they weren't hedged) from the A$'s fall of over 7% in May, with strong double digit returns from the likes of PM Capital and Magellan amongst others.  On the local front returns have been varied as usual depending on the manager, fund or strategy.  Some of this week's reported highlights are featured below.

Last Monday we wrote an article for Alan Kohler's Eureka Report entitled "In defence of Hedge Funds" to counter some negative comments on the sector in Ian Verrender's article "The thin edge of the hedge wedge". Ian suggested that after fees investors might find it simpler and cheaper to merely purchase an index fund - in other words, just buy the market.

The thrust of our response was that given the diverse range of underlying assets and strategies which combine to make up the "hedge fund" sector, averages can be both dangerous and misleading, as can results of average returns.

But it did cause us to delve into the returns (after fees) of all funds in our database with a five year track record, and compare them against the market (using the ASX200 accumulation index as the benchmark).  For the record, over the five years to the end of May, the market provided investors with an annualised return of 3.07%. Therefore, in one way Ian was correct: 37% of the 145 funds underperformed the market, and 15% underperformed to the extent they provided negative returns.

On the positive side, 63% of funds outperformed the market, and therefore presumably justified their existence up to a point. However given that the markets return of 3.07% is not what we would call acceptable, particularly given the risk and volatility concerned, that might not be saying much.

But 41% of all funds doubled the market's return, and 27 (or 18%) provided their investors with annualised five year returns ranging between 10 and 19%, which by any standard is impressive. The chart showing the spread of returns is below:

It does however emphasise that analysis and understanding of the strategy, manager and fund is essential when discussing hedge funds - as it is when investing in them.

Performance and News Updates on www.fundmonitors.com this week:

BlackRock Global Allocation Fund returned 2.04% in April, in line with its benchmark, and 14.10% over the preceding 12 months. The team continues to believe that equity valuations remain attractive relative to fixed income valuations, though the Manager has become incrementally more cautious over the short-term given increasing stock prices, weaker revenue expectations and uncertainty in Europe.

The Bennelong Long Short Equity Fund had a remarkable May delivering 9.49%, bringing its twelve month performance to 19.89%. The portfolio benefitted from a pleasing month, with both the long and short portfolios contributing positively.

Bennelong Kardinia Absolute Return Fund delivered 0.4% during May.  The twelve month return now stands at 18.46%.  The Fund's net equity market exposure, including derivatives was reduced to 31.3% (47.5% long and 16.2% short).

The K2 Asian Absolute Return Fund returned 2.38% during April to bring twelve month performance to 33.82%.  The Fund's net exposure band has been maintained at 80-100%, ending the month at 96%, marginally lower than April. Increasing volatility in recent weeks, together with seasonal weakness justified a wider trading band of the Fund's net exposure.

And finally, for something completely different, The Swear Jar, probably something every office needs.  Ours certainly does!!

On that note, I hope you have a happy and healthy weekend, or in Australia, a long weekend (all except Western Australia who will be celebrating the Queens birthday in September).

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

BENNELONG LONG SHORT EQUITY FUND

Attached is our most recently updated Fund Review on the Bennelong Long Short Equity Fund.  

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

• Research driven, market and sector neutral, "pairs" trading strategy investing primarily in large cap stocks from the ASX/S&P100 Index, with a ten year track record and annualised net returns of over 20% .
• Portfolio Manager Richard Fish has over 25 years market experience, while Bennelong Funds Management, who have over $3 billion in FUM across various funds, provide infrastructure, operational and compliance functions.
• The Fund's Investment history commenced in January 2002 and has positive annual returns each year, including an 11.95% return in 2008 and 20.6% in 2011, both of which were negative years for the ASX200.
• Consistent returns across the investment history indicates the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market.

Sean Webster

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESFund Review: Bennelong Long Short Equity Fund (pdf format)

Sell in May and go away? That all depends where you're going.

With just one trading day to go, May has been an interesting month. The sharp contrast between the fall in the ASX200 of -4.33%, and the S&P500's gain of 4.08% is a significant differential of 8.41%.

Although the overall fall on the ASX200 has been significant (although smaller than May 2012 when it fell over 7%) the variance between sectors will also make a big difference to this month's fund and strategy performances.

The contrast will be even more glaring when comparing returns between funds investing in Australia, and those with offshore or global mandates.  Partly or un-hedged international funds will benefit from the decline in the A$ of 6.7% during May from US$1.036 to US$0.967 which pushes the return on the S&P500 in $A terms to 11.15%. This brings the potential difference in returns between local and un-hedged US equities to 15.48%.

This raises two points of interest. Firstly the volatility of monthly returns recorded by the ASX over the past 12 months, with moves ranging between +5.37% and -4.43%. 

Secondly and looking forward, is the outlook of the ASX and the A$ given the deterioration in sentiment.  Most Australian  investors, both individual and institutional, have a strong bias to domestic  rather than global equities which has worked well until 2008.

However with local interest rates forecast to fall further, the A$ is expected to have further to fall, and the earnings outlook for the domestic market is deteriorating on the back of contraction in the mining sector. Meanwhile the medium outlook for consumer related companies has deteriorated, even if the yield argument may keep the (expensive) banks, Telco's and REITS supported.

While offshore markets in each geography have their own problems they may be further into a recovery at a time that Australia is moving into a slower growth situation. In this environment, investors may need to consider their asset and strategy allocation as the long only and index funds which have performed so well over the past year make way for more risk averse investments, or include the option of funds with offshore exposure.

Performance and News Updates on www.fundmonitors.com this week:

The BlackRock Multi Opportunity Fund had a sound April, returning 1.69% and 10.86% over the last 12 months.  Their latest Fund Review is available here.

SGH Ice Fund, a small cap manager, delivered 2.57% during April and 28.53% over the preceding 12 months. 

Mathews Capital Velocity Fund redemptions have been frozen for 12 months. Perpetual Trust Services, the responsible entity of the Velocity Fund has advised investors that the fund has become "non- liquid" and that redemptions will be suspended for up to nine months.

And finally, for something completely different, a funny look at insurance company decision making policy.

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Skating on thin ice:

My old friend Patto was the master of market sayings which became known to those who followed him as "Pattoisms". One of his favourites was "when skating on thin ice, the speed at which one has to skate is directly proportional to the thickness of the ice."

Markets have seemed a bit like that this week. In the US the ice appears to be very thin every time Ben Bernanke goes off cue and suggests that QE might end at some stage. The ice in China appears thin whenever the numbers indicate growth might slow below 7%. And in Australia it seems that without the mining and resources sector, we are skating on thin ice as significant parts of the rest of the economy (manufacturing, retail) are struggling.

Over the past couple of weeks the ice actually cracked under those companies whose earnings are reliant on the mining sector.  In the last couple of days it seems that even the yield driven rotation into the banks might also be on thin ice.

April Fund Performance:

Close to 90% of single funds have now reported April results as follows:

From a Strategy perspective the best performances are:

Performance and News Updates on www.fundmonitors.com this week:

The BlackRock Australian Equity Market Neutral Fund had a sound April returning 2.18%, bringing its 12 month return to 8.71%. The portfolio benefitted from the resource under performance due to a tilt toward producers versus explorers, with significant contribution coming from short positions in Kingsgate Consolidated, Newcrest Mining and Oz Minerals, amongst others. The yield theme also proved profitable via our exposure to property trusts and telecoms.  

Pengana Australian Equities Market Neutral Fund delivered -0.9% for April and has an annualised return of 8.82% since inception in September 2008. Two of the largest long positions in April were BC Iron and Skilled Group, while two of the largest short positions were Macquarie Atlas Roads Group and AWE.

The 8IP Asia Pacific Partners Fund delivered -1.17% during April bringing its six month performance to 21.57%.  After five months of strong gains, a number of stocks in the Fund ran into profit taking. Largest sector exposures were financials, real estate and consumer discretionary.

Allard Investment Fund recorded 0.80% over April with it's since inception (July 2003) performance at 8.49% pa. At end-April the asset breakdown was 68.6% equities and 31.4% cash and fixed income. The geographic breakdown was HK/China 32.1%, Sing 12.4% and Korea 9.3% with other countries at lower percentages.

The Pengana Asia Special Events (Onshore) Fund returned 1.31% during April and had a twelve month return of 8.23%. The Fund maintained an average net and gross exposure of 16% and 164% respectively. Largest month end net exposures were China, Japan and Indonesia and biggest gross exposure by strategy was Merger and Acquisitions. April was very eventful led by a significant pick up in M&A activity and the earnings seasons in some markets. Japan was the most active M&A market in Asia, accounting for 6 of the 14 new deals during the month.

And finally, for something completely different, the latest Evian commerical, also featured on Alan Kohler's Eureka report (if you are not a subscriber, I recommend it) last week.

On that note, I hope you have a happy and healthy weekend!

Budget week finally confirmed what most already knew: Australia was not going to be in, or return to, surplus any time soon, irrespective of any change in government in September. Treasury's earlier revenue estimates were far too optimistic, and some (in particular from the mining and carbon tax) have simply not materialised as anticipated by the government.

Coincidentally or not with the confirmation of the federal deficit, the A$ came under pressure as the combined effects of lower rates (down 25 bps to 2.75%), a reduced outlook for resources, and the reality of a mid to long term budget deficit added to the effects of a strengthening US currency.

The current government delivered a strategic budget which promised large social programs such as the disability pension scheme and education reform, cleverly boxing in the opposition and making it difficult for them to abandon them if, or when they assume power.

As previously telegraphed the budget included the gradual increase of the superannuation guarantee levy from the current 9 to 12%, which the opposition promptly announced would be delayed or deferred on their watch. One interesting twist in the ongoing progress or otherwise of reform of the superannuation system was the opposition's successful amendment this week requiring at least one third of industry superannuation fund trustees to be independent.

The current equal representation model requires industry super funds to appoint half their trustees from union representatives and the other half from employer representatives.  Although the Cooper Review recommended that a lack of independent trustees was no longer appropriate, the government chose not to include the changes in the legislation.

The twist came not so much that the amendment was proposed, and passed 72 to 68, but in the fact that the independent MP's voted against a proposal favoring independence, and that it appears four government MP's, including two ministers and a government whip, either abstained, or were absent.

Given the importance and value of the superannuation system it seems incongruous that industry super funds are not subject to the same or similar governance and transparency regime as corporate Australia.

The Bloomberg saga:

While on the subject of governance and transparency, Bloomberg the global leader in financial information with over 300,000 terminals installed, was (or should be) severely embarrassed.  It was revealed this week that Bloomberg has been engaging in a case of "big brother" by enabling their journalists to be able to track who, what and where the terminals were being used, and what was being viewed.

While we haven't yet read of actual cases where the information gleaned has been misused, the potential for misuse (given that each terminal is usually registered to an individual user) is massive, and Bloomberg will no doubt be scrambling to protect their reputation in dealing rooms around the globe, just as users will be demanding changes to the terms of their agreements.  

Performance and News Updates on www.fundmonitors.com this week:

The Monash Absolute Investment Fund returned 1.13% during April, a month of extreme moves on the ASX with Small Cap Resources falling 19% and the top industrials rising 4.7%. At month-end Fund net exposure was 67%.  

Insync Global Titans Fund returned 1.63% for April with the biggest positive contributors coming from a range of stocks including Sanofi, Coach, Roche and Walt Disney.  Average mkt cap of stocks in the portfolio is $A 99.1bn with a weighted average forecast dividend yield of 2.90%. The fund is currently un-hedged. We also released the latest Fund Insync Review for April 2013, which you may read here.

The Pengana Australian Equities Fund had a strong April returning 3.51% bringing its 12 month return to 25.91%. Cash exposure at end April was 29%.

Morphic Global Opportunities Fund had a sound April returning 2.80% with top stock contributors coming mostly from Japan. Performance since inception in August 2012 is now 20.53%. The Fund is fully un-hedged, you can read the most recent Morphic Fund Review here.

The Auscap Long Short Australian Equities Fund had a very strong month, recording 9.83% during April. A major contributor to performance was shorting gold stocks which provided the Fund with a 2.8% return.

And finally, for something completely different, a funny clip on how frustrating it could be to teach a child how to tell the time, almost as frustrating as teaching my wife how to fix her computer.

On that note, I hope you have a happy and healthy weekend!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook