I had the pleasure this week of listening to George Colman of Optimal Australia Funds Management present both his view of the markets, and the thoughts behind his fund's investment strategy. For those not aware of George or Optimal, he launched the fund on the same day that Lehman's failed in 2008, and is one of only a handful of managers that have provided their investors with positive returns every year since.

As such it is fair to say that financially George is what one might describe as a "safe pair of hands". However, in spite of not losing money, and since inception having annualised returns of 10.38%, with volatility of just 3.55%, he was less than enthusiastic about his 2013 returns when the fund significantly underperformed the strongly rising market.

Optimal's long/short investment strategy relies on what George describes as deep value investing. Between them, George and his colleague Peter "Fish" Whiting have almost 60 years' experience in the market, and their major concern in 2013 was the excessive valuations put on Australia's banks as bond yields collapsed and they became the most expensive in the world.

Firstly we make the point that we are not suggesting an imminent collapse in bank share prices, nor are we qualified to do so. The point is that at both an individual household, and the overall market level, Australia is heavily exposed to interest rates and the yield play of the banks. However there are some worrying statistics and signs on the horizon.

One came from a recent report from another local fund manager, Paul Moore of PM Capital which included a chart of the percentage of household share portfolios in banks, which having fallen to a recent low of around 30% in 2000 (think tech wreck) has risen to exceed previous highs to be nudging 60%.  One can safely assume this is the retail investor chasing a dividend yield, further bolstered by the effect of franking credits.

That's fine in a low interest rate environment, but as George pointed out, Australia's 10 year  bond rate has risen to 4.10%, becoming one of the highest in the world, well above Mexico (3.76%), Spain (3.4%) and not far off Brazil (4.75%) and Portugal (4.66%). In addition, RBA governor Glenn Stevens warned this week of the risks of further rises to rates, and the dangers that poses to the property market. This is relevant considering although the cost of servicing household debt has decreased as rates have fallen, the overall level of that debt has remained static - and high - at around 150% of household disposable income.

At the risk of embarrassing him, back to George. His current view (or at least one of them) is that while prices rose over the past two years somewhat irrationally from a value perspective, he refrained from joining the crowded trade, but feels value will become front and centre once again as rates rise.

He also was able to explain to me the real meaning of the term a Gordian knot and his feeling that the US QE program and current tapering exercise was a prime example of one. Altogether an illuminating and informative discussion.

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

Cor Capital Fund returned 0.92% and 4.87% (annualised) since inception in August 2012.

The Pengana Asia Special Events (Onshore) Fund 2.00% for January, a very difficult month for Asian equity and 11.76% for the 12 months to end-January.

Intelligent Investor Value Fund managed the poor equity market of January with a good return of 1.05%. For the year the Fund recorded  a very strong 37.69% (Index 10.98%).

The Monash Absolute Investment Fund has a sound February returning 2.60% with the twelve month return 24.51% (ASX 200 Acc 10.56%).

FUND REVIEWS RELEASED THIS WEEK:

Aurora Fortitude Absolute Return Fund is characterised by steady returns and very low risk. Since inception (March 2005) the Fund has returned 8.12% pa.

AFM's updated Fund Review for Insync Global Titans Fund for January 2014 shows the Fund delivering  an annualised return of 10.96% and annualised standard deviation of 8.46% (since inception in October 2009) with sound risk-reward statistics.

Morphic Global Opportunities Fund has returned 34.52% for the previous twelve months with a volatility of 10.04% p.a.

AFM's updated Fund Review for Optimal Australia Absolute Trust has been released. The fund is characterised by very low risk with an annualised standard deviation 3.57% (Index 15.06%)and a Sharpe Ratio since inception of 1.73.

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

Also in Sydney on 27-28 March 2014: Operations Risk Management and Mitigation seminar enables participants to prepare and manage the planning and implementation of operational risk management processes.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different this week, and in particular for Dylan fans (yes RVC, that includes you) here's a clip, that while not very Australian we couldn't help but enjoy.

On that note, I hope you have a happy and safe 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.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

For more information visit www.cpresearch.org.au or contact me by email.

• The Aurora Fortitude Absolute Return Fund  (AFARF) has a 8 year track record investing in ASX listed equities. A Market Neutral overlay is used across a multi strategy approach which allows for flexible asset allocation to maximise returns and minimise risk under a variety of market conditions and cycles.CIO John Corr has over 20 years financial market experience with a strong focus on risk.
• Significant use of low risk "long" derivatives and option overlays has provided positive returns with low volatility during periods of market dislocation. Annualised return since inception is 8.12% with a very low standardised standard deviation of 2.74%. Over 88% of monthly performances have been positive, with no losing months in 2008 with the Fund's largest drawdown -2.09%.
• ASX listed Aurora Funds Limited was established on the merger of three existing fund management businesses, managing approx. $480m on behalf  of more than 2,500 retail and wholesale investors.

Australian Fund Monitors

ATTACHED FILESAurora Fortitude Absolute Return Fund AFM Fund Review January 2014 (pdf format)

INSYNC GLOBAL TITANS FUND

ATTACHED FILESInsync Global Titans Fund AFM Review - January 2014 (pdf format)

MORPHIC GLOBAL OPPORTUNITIES FUND

ATTACHED FILESFund Review: Morphic Global Opportunities Fund (pdf format)

OPTIMAL AUSTRALIA ABSOLUTE TRUST

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 has recorded out-performance of the market since inception in September 2008 with approximately 83% 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 1.73 and 5.05 since inception, as compared to the Index numbers of 0.13 and 0.08.
• The investment team comprising George Colman, Peter Whiting and Stephen Nicholls have close to 90 years combined experience in equity markets.

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

Sean Webster

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESFund Review: Optimal Australia Absolute Trust (pdf format)

Size matters, sometimes?

A recent (January 2014) research paper published by The University of Chicago entitled "Scale and Skill in Active Management" analysed the nature of returns vs scale in active mutual fund managers. Whilst the study focused on US mutual funds the findings were seemingly both worrying and logical, particularly from an investor's point of view.

The study found strong evidence of decreasing returns at the industry level - in other words as the size of the mutual fund industry increases, a fund's ability to outperform a passive benchmark declines. At the same time the skill (and we would assume advances in technology) levels have improved, but this has coincided with the industry growth, thereby cancelling out the benefits of the improved skills from boosting fund performance. The study also found that performance deteriorates over a fund's lifetime, which could also be explained by the decreased ability to outperform by the industry as a whole.

The full report, which covers 51 pages, can be found here, focusses on the mutual fund industry - in other words long only funds trying to achieve relative outperformance of the underlying benchmark, rather than an absolute return. In essence it seems to be saying that as the industry gets so large, and information, technology and skill become so readily available, the opportunity to outperform diminishes. In simpler terms the whole market is in danger of becoming a huge "crowded" trade.

In the absolute return space there have been a variety of studies over the years that indicate early stage managers outperform, as do those with limited funds under management. However in an Australian context this has not always been the case, partly because there aren't many Australian funds which are genuinely large by global standards. In addition the Australian absolute return sector is not homogenous, as shown by the wide ranging returns from both early stage and developed managers, small and large and across and within strategies.

There's no doubt that being in the correct asset class, or having the right strategy to suit the prevailing market significantly affects performance, but the one factor which dominates performance over time is skill. In absolute return investing skill can be found in managers with both and small large FUM, even if the opportunity set decreases as FUM increases.

Over the last 12 months 90% of Australian funds provided positive returns, with an average return of 12.19%, outperforming the ASX200 at 10.98%. But those averages mean little when the range of individual fund performances are considered - the best returning 73%, and the worst -54%. Even those statistics mean little given the volatility of some fund's returns, with less than 20 with at least a six year track record providing positive returns every year.

Size doesn't matter. Skill does

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

Pengana Australian Equities Fund recorded -2.00% during January but still a positive 10.45% for the previous 12 month period.

The Auscap Long Short Australian Equities Fund recorded 1.32% during January, a weak month for domestic equity (-3.03% ASX 200 Acc) and 52.73% during the previous twelve months.

Totus Alpha Fund returned -0.59% during January, and 57.2% for the previous twelve months with a volatility of 16.9% and Sharpe ratio of 2.65.

The Allard Investment Fund returned -1.1% during January, a good outcome in difficult Asian markets which fell 3.3% (MSCI Pacific ex Japan A$).

FUND REVIEWS RELEASED THIS WEEK:

Optimal Australia Absolute Trust The Fund has a track record of just over 5 years which incorporating the market conditions that have been both varied and challenging. To date the Fund has significantly outperformed the underlying market since inception, particularly given the high market volatility in 2008 & 2011.

FUTURE EVENTS

27-29 March 2014: Superannuation Fund Back Office: 2014 Forum in Sydney convenes those responsible for superannuation member administration and investment operation services. It has been designed to explore emerging efficiencies and best practice in a number of key areas.

If you know of any upcoming hedge fund industry Events, or would like your Event listed in our calendar, please contact us.

And now for something completely different, an irreverent look at Quantitative Easing.

On that note, I hope you have a happy and safe 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.  

Cerebral palsy is the most common physical disability in childhood. But despite the incidence of CP, on average only $1 million is invested into CP research each year. To put that into perspective, Australia spent over $10 million on New Year's Eve fireworks last year. We're not suggesting that fireworks money should be spent on CP research, but it just goes to show how drastically underfunded research into cerebral palsy is.

For more information visit www.cpresearch.org.au or contact me by email.