NEWS
4 Jul 2014 - Hedge Clippings
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.
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
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4 Jul 2014 - Microequities Deep Value Microcap Fund
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| Fund Overview | The objective of the Fund is to identify undervalued Microcap companies, invest in them and, through a medium to long term commitment, attempt to deliver superior investment returns. The Fund invests primarily in ASX listed Microcap companies, which at the time of initial investment are generally below a market capitalisation of A$250 million. The Fund may also invest in companies with a higher market capitalisation, but these will be limited to no more than 20% of the assets of the Fund. At times the Fund may invest in pre-IPO securities that are due to be listed on the ASX within 3-6 months, and have lodged a prospectus with ASIC. These investments will also be limited to no more than 10% of the assets of the Fund. The Fund will be limited to investing no more than 20% of the Fund's assets in any one security or company. The Fund will make investments with a medium to long term time horizon of between 3-5+ years. The Fund will not speculate in derivatives. It will be permitted to hold other securities that are directly associated with a particular investment such as options granted with a specific company issue etc. The Fund will not engage in short selling or stock lending. The Fund will not hold financial debt of any kind. |
| Manager Comments | Since inception in March 2009 the Fund has returned 29.63%, double the ASX 200 return of 14.32% with a slightly higher volatility of 14.97% as compared to the Index volatility of 12.59%. Investors have been rewarded for the higher volatility with a Sharpe ratio of 1.59 and a Sortino ratio of 3.69. Index comparatives statistics are 0.84 and 1.27. Domestically the month has seen a stabilisation in consumer confidence following a post-budget fall. Despite the negative bent in media reporting, the Australian consumer has plenty of good reasons to open their wallets. The labor market is relatively stable, interest rates are near all time lows, property and equity markets have risen, increasing household wealth. On the liabilities side, the GFC saw households take a defensive mindset and reduce their gearing levels. There exists significant pent up demand within Australian households. |
| More Information | » View detailed profile of this fund |
3 Jul 2014 - Fund Review: Bennelong Long Short Fund AFM Fund Review May 2014
BENNELONG LONG SHORT EQUITY FUND
Attached is our most recently updated Fund Review on the Bennelong Long Short Equity Fund.
- The Fund is a research driven, market and sector neutral, "pairs" trading strategy investing primarily in large cap stocks from the ASX/S&P100 Index, with a twelve year track record and annualised net returns of 18.26% pa.
- Since inception in January 2003 the Fund has had 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.
- The Fund's risk statistics are also sound with maximum drawdown of 12.22% and 68% positive months. Both the Sharpe Ratio at 1.09 and the Sortino ratio at 1.84, indicate a high reward-to-risk ratio.
- The 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.
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Fund performance was muted for the month as the market drifted without any strong thematic and investors were subject to merger andacquisition activity/speculation, yield/defensive buying and stock specific issues. Our assessment is that the April factors thatnegatively impacted fund returns, which were of a more global nature, were persisting early in the period but since have abated. Fund activitywas limited in May as our view of market fundamentals have not really changed.
Research and Database Manager
Australian Fund Monitors
2 Jul 2014 - Fund Review: Optimal Australia Absolute Trust May 2014
Attached is our most recently updated Fund Review on the Optimal Australia Absolute Trust.
We would like to highlight the following:
- Optimal Australia is a specialist Australian equity investment manager and the Fund has a long/short equity strategy typically with a low but variable net market exposure comprising 40 to 65 stocks broadly selected from within the ASX200.
- The Fund returned 1.40% in May with an annual return of 4.81% and a very low standard deviation of 1.70% (ASX 200 Acc 8.87%).
- The Fund has recorded out-performance of the market since inception in September 2008 with approximately 84% of monthly performances having positive returns and the largest drawdown was -1.38% (Index -33.11%).
- The Fund has sound Sharpe and Sortino ratios at 1.78 and 5.22 since inception, as compared to the Index ratios of 0.21 and 0.18 respectively.
- The investment team comprising George Colman, Peter Whiting supported by Stephen Nicholls and Justin Hay have over 100 years combined experience in equity markets.
For further details on the Fund, please do not hesitate to contact us.
Research and Database Manager
Australian Fund Monitors
2 Jul 2014 - Fund Review: Insync Global Titans Fund May 2014
INSYNC GLOBAL TITANS FUND
Attached is our most recently updated Fund Review on the Insync Global Titans Fund.
We would like to highlight the following:
- The Global Titans Fund invests in a concentrated portfolio of 15-30 stocks, targeting exceptional, large cap global companies with a strong focus on dividend growth and downside protection.
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The Funds unit price increased by 1.7% in May. Key positive contributors for the month came from our holdings in Reckitt Benckiser, Zimmer, Directv, Express Scripts and Discover. The main negative contributors were Coach, Safran and Wyndham. The Fund continues to have no foreign currency hedging in place as Insync consider the main risks to the Australian dollar to be on the downside.
- Portfolio selection is driven by a core strategy of investing in companies with sustainable growth in dividends, high returns on capital, positive free cash flows and strong balance sheets.
- Emphasis on limiting downside risk is through extensive company research, the ability to hold cash and long protective index put options.
For further details on the Fund, please do not hesitate to contact us.
Sean Webster
Research Manager
Insync Global Titans Fund AFM Review - May 2014 (pdf format)
2 Jul 2014 - Fund Review: Supervised High Yield Fund May 2014
We would like to highlight the following aspects of the Fund;
- The Supervised High Yield Fund (SHYF) has a 5 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 32 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.
- Annualised return since inception is 11.01% with a very low standardised standard deviation of 2.20%. Other risk statistics are impressive and show the Fund's risk philosophy; over 98% of monthly performances have been positive, the Fund's largest drawdown is -0.12% and has a Sharpe ratio of 3.18.
Sean Webster
Research and Database Manager
Supervised High Yield Fund AFM Review May 2014 (pdf format)
1 Jul 2014 - Fund Review: Morphic Global Opportunities Fund May 2014
MORPHIC GLOBAL OPPORTUNITIES FUND
AFM has updated the Fund Review on the Morphic Global Opportunities Fund.
Key points include:
- The Fund is a global equity long/short manager with a long bias and a macro-economic overlay. The mandate allows the Fund to short sell, use derivatives and invest in assets such as commodities & currencies.
- Portfolio construction is stock selection agnostic with a bias to value based and momentum strategies. Risk management is a primary consideration in portfolio construction and the strong emphasis on risk is evidenced by the Fund's since inception annualised standard deviation of 9.37% (9.71% ASX 200 Accum Index), maximum drawdown of 4.93% (6.72% Index) and downside deviation of 2.97 (5.11 Index).
- The Fund had a net exposure of 101% and a gross exposure of 165% at May month-end with a VAR of 1.06%.
- Morphic's philosophy is that only funds with flexible investment and hedging strategies will be able to deliver acceptable, steady, real, absolute returns over the investment cycle.
- The Fund is an early stage, boutique, Sydney-based fund established in 2012 with experienced CIO's, and an investment team of 6 including a risk manager.
- The Board has a majority of independent members with significant risk and investment experience.
For further details on the Fund, please do not hesitate to contact us.
Sean Webster
Research Manager
1 Jul 2014 - Fund Review: Monash Absolute Investment Fund May 2014
30 Jun 2014 - Fund Review: Microequities Deep Value Microcap Fund May 2014
- The Microequities Deep Value Fund has a 5 year track record investing in ASX listed equities. The Fund is a fundamental, research-driven Fund investing in equities with a market cap below $250m. The Fund uses a value philosophy based on the view that microcaps are often under-researched and under-valued.CIO Carlos Gil has over 15 years financial market experience across a broad range of equities.
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The Fund has delivered very strong performance since inception with a 29.82% annualised return compared to the ASX 200 IndexAccum return of 14.89%. Volatility has been somewhat higher than the Index at 15.09% (ASX 200 Accum 12.63%) however theSharpe ratio at 1.58 (0.88) reflects the very high incremental returns for taking on the extra volatility/risk.
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The Fund does not short, use derivatives or borrow i.e., it is long only and is concentrated; usually with 15 to 20 companies acrossindustrial sectors. Resource stocks are avoided.
Sean Webster
Research and Database Manager
