The Government kicked off an overhaul of Australia's financial system this week by announcing the appointment of David Murray, the former CEO of the Commonwealth Bank and inaugural Chairman of the Future Fund to lead the inquiry promised during the election. It has been 16 years since the last major inquiry into Australia's financial system, and with this one due to report to the Treasurer by November 2014 it will be 17 years, and it will then no doubt take some time to implement - assuming the recommendations are accepted.

Given the changes in technology and financial markets since the Wallis inquiry of 1997, on top of the GFC and the ongoing changes to the world order, the report will be interesting. One hopes that the terms of reference are sufficiently broad, and the findings accepted (unlike the previous Government's Henry tax review). Submissions for the draft terms of reference are being accepted by the Government up until Thursday 5th of December 2013.  If you want to have your say, click here.

Meanwhile Business Insider is reporting on a speech by Larry Summers, who until he withdrew from the race was a strong chance to be the next Chairman of the US Federal Reserve. In the speech, Summers raised the issue that in the past the Federal reserve cut short-term interest rates during recessions to spur economic growth, but this time around the Fed has cut rates to zero, but there is still only a slow recovery.

The problem, argues Summers is that "the natural interest rate - were investment and savings bring about full employment - is now negative. However the Fed cannot cut the nominal rate below zero because people will choose to hoard money instead of putting it in the bank." The risk therefore being how would the Fed combat further weakness when rates are already at zero?

There is no doubt that the US recovery is going to take longer than anyone hoped or expected. Meanwhile Bloomberg are reporting that the ECB is considering charging banks 0.10% on their overnight cash deposits, in an effort to encourage them to lend the money instead. If the US recovery has a way to go one gets the feeling that Europe will be some way behind. And if this seems unlikely consider how long it has taken Japan to overcome their financial crisis over 20 years ago.

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

The Pengana Australian Equities Market Neutral Fund delivered 1.0% for October and 8.5% for the last 12 months with a beta of -0.03 with the equity market.  Over the last 60 months the Fund has delivered an annual return of 9.23% as compared to the ASX 200 Accumulation Index return of 11.08%. However the Fund's low risk is indicated by a volatility of 8.03% (13.57% Index), maximum draw-down of 13.47% (15.13% Index) and downside deviation of 5.00 (8.95 Index). 

The Fund's fundamental Earnings Revisions factor rebounded during October as a raft of profit warnings including AMP and Qantas hit the market. Quality was once again favoured as risk appetite remained flat over the month. Against this the Value factor sold off slightly as investors headed back towards stronger balance sheets and more certain cash flows with dividend yield once again being sought out by the market.

Intelligent Investor Value Fund returned 2.5% during October bringing the 12 month return to 50.89% with a volatility of 9.93% p.a. The Fund has a four year track record returning 15.47% p.a. (Index 8.64% pa) since inception in October 2009 with a volatility of 13.86% p.a. (Index 12.38% p.a.) and a Sharpe Ratio of 0.83 (Index 0.42).

The Manager comments 'Buoyed by investor optimism, the market has gained 24.7% over the past 12 months (including dividends). It was significant helpings of luck and, we hope, some skill that allowed the Value Fund to return 50.9% over the same period. It's been a good year, but please don't get accustomed to these returns because they won't be repeated regularly, if ever again".

FUND REVIEWS updated this week include:

The Bennelong Long Short Equity 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 ten year track record and annualised net returns of over 20%. Since inception in January 2002 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 71% positive months. Both the Sharpe Ratio at 1.27 and the Sortino ratio at 2.23, 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.

The Morphic Global Opportunities 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 annualised standard deviation of 8.71% (10.01% ASX 200 Accum Index), maximum drawdown of 1.57% (6.72% Index) and downside deviation of 1.74 (5.30 Index). 

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 

EVENTS

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

This week, now for something completely different wishes Jamie Curtis a happy birthday. Here she is in our favourite A Fish Called Wanda clip with another great actor, John Cleese.

On that note, enjoy the week-end!

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.  

• 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 ten year track record and annualised net returns of over 20%.
• Since inception in January 2002 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 71% positive months. Both the Sharpe Ratio at 1.27 and the Sortino ratio at 2.23, 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.

Sean Webster

Research and Database Manager
Australian Fund Monitors

ATTACHED FILESBennelong Long Short Equity Fund (pdf format)

MORPHIC GLOBAL OPPORTUNITIES FUND

ATTACHED FILESMorphic Global Opportunities Fund (pdf format)

It seems as if Janet Yellen's approach to keeping the US market's momentum intact is somewhat similar to Mario Draghi's approach to saving the Euro. Namely "whatever it takes".

There's no doubt ongoing QE is great for equity markets, and probably consumer confidence. In due course it may even fix the employment issue as it is designed to do. In the meantime it is a little surreal, and we wonder if QE will ever end? After all in the short term it is not costing the Fed anything other than paper and ink to keep the printing presses turning. There's no actual hard cost - that will presumably come later, but who knows when?

So US equities look cheap on a relative basis while interest rates remain close to zero. Company profitability is underpinned to a degree, even if forward earnings estimates are reducing. Just when or how the market is going to wean itself off QE is an issue that will need to addressed eventually. And in the meantime, as equities continue to rise so does risk.

Australia's equity market has broadly kept pace over the past 12 months with the ASX200 rising 25.4% on a total return basis. There's no surprise that taken as a whole the absolute return sector has lagged over the past 12 months. Overall 28% of funds in the database have outperformed the ASX, with equity based funds providing 21.65% on average, and equity long, and equity 130/30 well ahead of the pack, and equity long short not far behind.

On another tack John Daley, Chief Executive of the Grattan Institute wrote an interesting article in the October issue of the institute's magazine, linking the futures of the superannuation industry and the Australian economy. Follow this link to read his view on the challenges of the federal budget, an ageing population and increased costs of healthcare and the aged pension.

This week, now for something completely different takes a more humorous look at the challenges facing the rest of the community as a result of the ageing population.

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

The Allard Investment Fund recorded 0.3% for October. Since inception (July 2003) the Fund has returned 8.74% with a low volatility of 8.00% pa as compared to 13.8% for the MSCI Asia Pacific ex Japan (A$) Index and a maximum draw-down of 18.29%. 

At month-end the Fund was 70.7% invested in equities with the remaining 29.3% in cash and fixed income. In terms of portfolio concentration the Top 5 holdings were 41.2% and the next 5 at 16.9% with remainder totaling 12.6%. Industry break-down in terms the largest exposures are Financial Services 15.4%, Conglomerates 12.3% and Telco's at 8.6%. 

Bennelong Kardinia's Absolute Return Fund  recorded a sound performance of 2.17% during October with a net exposure of 71%. Twelve month performance was 15.37% with a volatility of 2.68%. The Fund's longer term record demonstrates the low risk investment approach with the five year performance record showing an annualised standard deviation of 7.15%, 52% of the ASX 200 Accum Index, and a return of 12.84% pa (11.08% Index). 

The domestic market was focussed on the AGM season with trading updates and commentary generally cautious. Banks performed strongly with ANZ and NAB reporting solid results and increased dividends.

The Insync Global Titans Fund  returned 1.47% over October and 20.7% over the previous twelve months with a very low volatility of 6.12%. The Fund continues to show lower risk characteristics with a since inception (October 2009) volatility of 8.26% p.a., maximum draw-down of 4.39% and downside capture of - 0.42. Comparative ASX 200 Accum Index stats are a volatility 12.33% p.a. and maximum draw-down 15.13%. Notably the Fund has moved its holding of cash and puts to 9.9% from 2.2% the previous month. 

Signs of modest economic recovery continue and the US earnings season has been broadly supportive. Although revenue growth is still hard to come by earnings have more often than not surprised on the upside, particularly in the more cyclical sectors such as Consumer Discretionary. Forward guidance by companies is still generally conservative and share prices have risen faster than earnings, making markets look fully priced. 

The Fund's unit price increased by 1.47% in October, with the largest positive contributions coming from our holdings in CR Bard, Reckitt Benckiser, Wyndham Hotels, British Sky Broadcasting and Sanofi. The main detractors for the month included Coach and Dr Pepper Snapple. 

Pengana Australian Equities Fund  returned 2.29% during October with a cash weighting of 22% at month-end. Over the last 12 months the Fund has returned 23.93% (25.48% Index) with a volatility of two-thirds of the ASX 200 Accum Index. The top five holdings by value were: DUET Group, ANZ Bank, Telstra, Resmed and NAB. 

The Fund increased its existing holdings in Resmed (post the sharp reaction to its lower than expected turnover growth by the US market), McMillan Shakespeare, Summerset, Mermaid Marine and David Jones. In addition the Fund acquired a new holding in new listing Australian Industrial REIT (a well-managed high quality industrial property group on an attractive yield). The Fund's exposure to non Australian dollar earnings streams (inclusive of companies with global earnings profiles such as Resmed and Fox Group, NZ based companies and US dollar exposure) stood at 22%. 

The Optimal Australia Absolute Trust returned 0.32% for October 2013 bringing its five year performance to 10.84% p.a. (11.08% pa ASX 200 Acc Index) with a volatility of only 3.66% (13.57% Index). Notably the Fund's maximum draw-down since inception in September 2008 is 1.38% as compared to the Index maximum draw-down of 33.11%, indicating the Manager's strong aversion to capital losses. 

The Manager comments "In our view, a lot of the easy money in equities has been made. Those investors who backed central banks to either print money forever, or to eventually create decent economic growth, have done very well, and continued to do well in October. From here, however, it gets harder. Financial repression has driven equity valuations to levels that require a sharp acceleration in growth for stock prices to hold, and there are still many questions over the degree and sustainability of that acceleration. We believe that we are reaching a point at which the market has to make up its mind as to whether or not QE policies may finally work. While resources stocks have finally stopped falling, the compound under-performance of this group over three years certainly suggests that investors remain sceptical on growth."

FUND REVIEWS updated this week include:

The Morphic Global Opportunities 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. 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.

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 annualised standard deviation of 8.71% (10.01% ASX 200 Accum Index) and maximum drawdown of -1.57% (6.72% Index) and downside deviation of 1.74 (5.30 Index).

EVENTS

Limited places are still available for IPARM Australia 2013 in Sydney next week on 18-19 November. The conference will cover Investment Performance Measurement Attribution and Risk. Speakers include Dr Thomas Gillespie from Aurora Funds Management.

Also on 19 November, at the Renaissance Hotel in Hong Kong - the Art of Asset Management - free for senior asset management professionals from both global and local asset management firms. View the agenda here.

On that note, enjoy the week-end!

Regards,

Chris
CEO, AUSTRALIAN FUND MONITORS

Connect with me on LinkedIn Twitter Facebook

Investment Performance Measurement, Attribution & Risk Management 2013 Forum

18-20 November - 2013, Grace Hotel, Sydney

ATTACHED FILESiPARM Australia 2013 (pdf format)