ETF's are only cheap (good value) in a rising market

One of the great financial product success stories of the past few years has been the dramatic increase of flows into ETF's, which not surprisingly, have had a significant effect on the rise and rise of the overall market.

Based on the concept of a rising tide lifts all ships, ETF's have assisted those tidal flows, as investors, no doubt encouraged by the manufacturers and marketers of ETF's, have sought a simple and low-cost approach to gaining equity market exposure. As investors' funds flow in, by definition they find a home across all stocks in the index according to their weight, and which naturally helps support and/or lift the market.

In turn, the rising market helps the marketers sell the benefits of their products to more and more investors, who are encouraged not only by the performance but the low fee structure. And so it goes on.

Or at least it will until there is a market correction, and - however buoyant the market may seem - there will be one eventually.

When this does occur there is a danger that the rising tide effect of ETF's reverses, and becomes a falling tide. As investors, concerned about capital losses, redeem from ETF's, it will in turn create downward selling pressure on the market, which in turn well result in more investors redeeming or withdrawing. And so it will go on.

Hedge Clippings is not against ETF's as such, and many smart investors use them to gain low-cost exposure to equity markets. However, many other investors ignore the fact that a simple index ETF employs no risk process in the event of a falling market, and therefore they offer no downside protection.

This is relevant at the current stage in the cycle, as markets continue to rise (in spite of a minor bump in the past week), so it is worth looking at recent comments in February investor newsletters from some well-respected active equity managers.

For instance, Richard Fish of Bennelong Long Short Equity, (who has returned an average of 16.5% per annum over the past 15 years) noted:

"The US S&P 500 index has rallied almost 15% since Trump's election victory in early November. Accordingly the forward P/E multiple of the S&P 500 is now over 18 times (its highest level since the unwind of the early 2000's tech bubble) and the relative strength index (a momentum indicator) has moved into the mid-70s (historically a sign that the market is overbought). It's as though the issues plaguing markets 12 months ago, such as China's growth challenges, US policy rate normalisation, European fiscal reform, no longer exist. Yet such issues have far from disappeared."

Meanwhile, George Colman from Optimal Australia (one of the most risk averse funds in AFM's database) wrote:

"Our strategy often underperforms a broader market when it rallies strongly, as we favour downside investor protection when we see many stock prices move well above fundamental fair value. We believe we are at such a junction at present and we continue to worry about downside risk."

And as Mike Surridge from KIS Capital (annual returns of 14.67% pa over 7 years and a Sharpe Ratio of 2 since inception) observed this week when discussing the forward P/E multiples of many stocks now over 20 "At these high levels many investors and brokers don't like to memntion these high P/E multiples as it makes the stock look expensive. They're much happier talking about a yield of 5% which given current cash rates, makes them look cheap."

ETF's may be cheap, but the old adage that you only get what you pay for is often worth remembering.

PERFORMANCE NEWS

Affluence Investment Fund increased 1.20% in February, resulting in a +13.41% return for the latest 12 months. Since inception in November 2014, the Fund has an annualised return of 9.98% p.a.

Pengana Absolute Return Asia Pacific Fund returned -0.04% for the month of February 2017, compared to Asia Pacific markets which posted a gain of 2.4%. The Fund has an annualised return since inception of 8.49% p.a.

Collins St Value Fund rose 0.46% for the month of February, taking the latest 12 months return to 23.85%.

Pengana Global Small Companies Fund was up 0.8% for the month of February, compared to a 1.1% return for the MSCI AC World SMID Cap Index. Over the past 12 months, the Fund has returned +16.45%, taking the annualised return since inception to 5.57% p.a.

Bennelong Australian Equities Fund gained 1.58% in February, taking the Fund's one year return to 11.87%. Since inception, the Fund's has an annualised return of 13.27% p.a.

Touchstone Index Unaware Fund returned +3.16% in February, outperforming the ASX 200 Accumulation Index 2.25%, by +0.91. The Fund has gained +7.80% over the latest 6 months.

Pengana PanAgora Absolute Return Global Equities Fund returned +0.87% in February, taking the annualised return since inception to 10.15% p.a.

FUND REVIEWS released this week: Bennelong Twenty20 Australian Equities Fund; Optimal Australia Absolute Trust; APN Asian REIT Fund;

And on that note, have a great weekend. 

Regards,

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.

He may not fit the presidential mould, but the market likes the President

The US market is continuing to be buoyed overall by the "Trump Effect", albeit that certain sectors are benefiting considerably more than others. That's life in general, and it is certainly going to be life under this president. Any sector related to the $1 trillion intended to be spent on new infrastructure projects are looking positive. On the other side of the ledger, Trump's move against Obamacare, renewable energy and others are going to suffer.

As a result of the overall Trump Effect the US market has seen a significant upward trend, with hardly a pause, let alone a pull back, over the past three months. In fact since Trump won the November election, the US market hasn't had a one day fall of 1%. As a result volatility, as measured by the VIX index sits currently at 11.21, although that's fractionally higher than the 10.58 it touched at the end of January. Not even a 0.25% rate rise announced during the week in the US was able to upset Trump's rally, which has also reached across the Atlantic as the British market set a new record high overnight.

Compare the VIX to the PC (Political Correctness) Index which the Tweeting Mr Trump has sent into overdrive! In fact, we wonder if Trump is the beneficiary, or benefactor, of the Twittersphere?

Closer to home local funds managers have been making the headlines over the past couple of weeks. Bronte Capital's John Hempton won both the war of words with and bragging rights over Pershing Square's Bill Ackman based his short in US pharmaceutical company Valeant. Meanwhile, Russel Pillemer's Pengana Capital seems to have pulled off a coup with their bid (in conjunction with WH Soul Pattinson) for listed fund manager Hunter Hall,  winning the backing of Hunter Hall's board.

Most in the industry are still wondering why founder and CIO Peter Hall chose to sell a 19.9% stake in Hunter Hall to Soul Patts back in December for $1 a share, way below the then market price, although he has since agreed to sell them the balance of 24% for a more respectable market price of $2.60 a share. If nothing else he did trigger the bidding war which ensued, will hardly be left penniless, and according to the Financial Review is committed to "making the world a better place", so overall not a bad result for him either. 

From Pengana's perspective, the deal looks like one with excellent synergy. They add an additional $900m in funds under management to their current $2.2b without having to cannibalise their existing suite of managers, with a similar target client base of premium investors, while gaining a foothold in the increasingly interesting ethical investing space. 

We're not sure how ethical investing fits with The Donald's casino empire, but we think investors will like it.

PERFORMANCE NEWS

Bennelong Long Short Equity Fund returned +2.07% in February, to take the annualised return since inception to 16.47% p.a.

Paragon Australian Long Short Fund returned -5.0% for the month of February and +9.96% for the latest 12 months. The Fund has an annualised return since inception of 13.63% p.a.

APN AREIT Fund rose +3.02% in February, to take the latest 12 months return to +8.68%. The S&P/ASX 300 Property Trust Accumulation Index also gained in February, returning +4.13%. Since inception in January 2009, the Fund has an annualised return of 16.71% p.a.

Allard Investment Fund increased 0.75% for the month of February. The Fund has gained +18.54% over the latest 12 months, taking the annualised return since inception to 9.03% p.a.

Bennelong Kardinia Absolute Return Fund returned +0.25% in February, taking the annualised return since inception to 11.07% p.a.

Cyan C3G Fund returned +0.1% in February, taking the Fund's one year return to 22.44%. Since inception, the Fund's has an annualised return of 26.16% p.a.

APN Asian REIT Fund returned -0.19% in February, outperforming the Bloomberg Asia REIT Index which returned -0.81%, by  0.62%. Since inception, the Fund has an annualised return of 13.99% p.a.

Quay Global Real Estate Fund increased +3.1% for the month of February and +4.84% for the prior 12 months. The Fund has an annualised return since inception of 15.35% p.a. Global real estate returned +1.8% for the month in AUD terms, with around 3.2% in underlying stock returns, while the stronger AUD deduced -1.4%.

Totus Alpha Fund fell -0.46% in February, to take the latest 24 months return to +23.02%. Since inception in April 2012, the Fund has an annualised return of 19.63% p.a.

Bennelong Twenty20 Australian Equities Fund increased 2.03% in February and 18.2% over the latest 12 months.

NWQ Fiduciary Fund returned -0.35% in February, to bring the annualised return since inception in May 2013 to +5.87% p.a.

Optimal Australia Absolute Trust returned -0.98% in February, a rare negative month for one of the most consistent performers, to take the annualised return since inception to 8.11% p.a.

FUND REVIEWS released this week: Bennelong Long Short Equity Fund; Bennelong Kardinia Absolute Return Fund;  

And on that note, have a great, and if you're in Sydney, a wet and windy weekend. 

Regards,

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.

Bigger ain't necessarily better...

This week's Hedge Clippings comes to you from New Zealand or Aotearoa - the "land of the long white cloud" - a name which seems ironic as the country is in the grip of a drought, with bushfires in both the North and South Island, and not a drop of rain. Hence the magnificent countryside is more reminiscent of outback Australia than NZ's usual verdant green.

One cannot help but be impressed by New Zealand. Geographically it is stunning. Moving around is easy, (with the exception of peak hour in Auckland) courtesy of a population of less than 5 million people, who, either by nature or lack of pressure, or both, seem universally polite and friendly. The locals seem to have both the time and inclination to make sure visitors are enjoying their country, of which they are justifiably proud. Understandably we don't raise the subject of rugby.

New Zealand, and New Zealanders, punch above their weight in so many respects, and not only on the rugby field. I am not sure if this is their natural instinct, or a necessity in order to make their presence felt on the world stage amongst countries with populations, and resources, many times larger than their own. Whichever, they succeed in so many areas - and have adapted where necessary to do so, swapping sheep farming to dairy production, creating a world-class wine industry producing some wonderful (trust me) vintages of chardonnay and pinot noir.

To its credit NZ can lay claim to a number of firsts: The first country, way back in 1893, to give women the vote, and in 1898 the first country in the British Empire to introduce pensions. Sensibly (Malcolm, you'd love this) NZ has only one house of parliament, with the upper house abolished in 1950. In spite of this, or possibly because of it, New Zealanders can point to a history of one of the most stable governments in the world.

There's a similarity in many ways with the fund management industry, and hedge funds in particular. While size is important, bigger is not necessarily better. Smaller fund managers rely on performance more than FUM, and being smaller are more adaptable to change - either economic or market driven. And while some may grumble about their fees compared with large, index orientated, long-only funds, performance is worth paying for, provided of course that they provide appropriate levels of risk and reward. 

Back to the similarity with NZ, where a good bottle of pinot noir costs as much as a dozen of a lesser variety. Meanwhile our Kiwi friends have made an art form of charging top dollar for top end tourism spots such as Huka Lodge and Cape Kidnappers - the latter coincidentally or otherwise developed and owned by Julian Robertson, founder of the US Tiger hedge fund - and where tourists from the US and Europe are prepared to travel, and pay, for the privilege.

PERFORMANCE NEWS

January represented a mixed performance across the share markets. The local market declined slightly (S&P/ASX 200 Index -0.8%) with most sectors declined over the month. The Asian markets were also a mixed bag with the MSCI Asia ex-Japan Index up +6.2%, while Japan flat (Nikkei Index -0.4%). The S&P 500 Index and the MSCI ACWI were up +1.8% and +2.73% respectively.

Bennelong Long Short Equity Fund returned +4.95% in January, outperforming the S&P/ASX 200 Accumulation Index by 5.74%. The Fund has an annualised return since inception in January 2003 of 16.41% p.a.

Allard Investment Fund returned +0.83% for the month of January 2017. The Fund has returned +14.27% over the past 12 months, taking the annualised return since inception in July 2003 to 9.03% p.a.

Cyan C3G Fund increased 1.90% in January, outperforming the Small Industrials Index that fell 3.8%, by 5.70%. The Fund has returned +17.96% over the latest 12 months, taking the annualised return since inception to 27.09% p.a.

Bennelong Kardinia Absolute Return Fund returned +0.12% in January 2017, taking the latest 12 months return to +1.13%. Since inception in May 2006, the Fund has an annualised return of 11.14% p.a.

Optimal Australia Absolute Trust returned -1.0% in January.  taking the most recent 12 months return to +3.68%. Since inception in September 2008, the Fund has an annualised return of 8.32% p.a.

Paragon Australian Long Short Fund rose 2.30% in January, taking the most return 12 months return to +9.79%. The Fund has an annualised return since inception in February 2013 of 15.44% p.a.

APN Asian REIT Fund returned -0.39% in January, against the Bloomberg Asia REIT Index which returned -1.07%. The Fund has returned +5.96% over the past 12 months, taking the annualised return since inception to 14.26% p.a.

KIS Asia Long Short Fund rose 1.43% in January, taking the return for the most recent 12 months to 15.55%. Since inception in October 2006, the Fund has an annualised return of 14.67% p.a.

Totus Alpha Fund returned -2.0% in January, taking the annualised return since inception to 20.12% p.a.

Bennelong Australian Equities Fund beat the market posting a positive return of 0.79% for the month of January. The Fund has returned +8.10% over the past 12 months, taking the annualised return since inception to 13.19% p.a.

Affluence Investment Fund increased 0.33% in January resulting in a +11.84% return for the latest 12 months, taking the annualised return since inception to 9.78% p.a.

APN AREIT Fund returned -3.81% in January to take the latest 12 months return to 8.80%. Since inception, the Fund has an annualised return of 16.46% p.a.

Pengana Global Small Companies Fund generated 2.60% in December 2016, taking the latest 12 months return to +12.38%. Since inception in April 2015, the Fund has an annualised return of 5.75% p.a.

Insync Global Titans Fund returned +2.76% in December, however, fell -2.24%, taking the annualised return since inception to 8.75% p.a.

FUND REVIEWS released this week: QATO Capital Market Neutral Long/Short Fund; Insync Global Titans Fund; Bennelong Kardinia Absolute Return Fund; Bennelong Long Short Equity Fund;

And on that note, have a great weekend. Now where's that pinot.....?

Regards,

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.

Let the games begin!

There was never going to be any risk that Donald Trump's presidency would be plain sailing, and to be fair he also said that he would not dilly-dally when implementing his policies. And so it seems, with the TPP out the door (at least from the US perspective, but it is hardly going to work without them) and the Mexican wall, irrespective of who will end up paying for it, on the agenda in his first week. He certainly has hit the ground running, irrespective of the direction.

Meanwhile the DJIA has hit the 20,000 level for the first time, albeit that it is not the best or broadest indicator of US stock prices. None the less, the markets, including the US dollar, are certainly positive about Trump's plans to reinvigorate the US economy, and particularly his insistence to put the US first. No one can say he didn't telegraph his punches during the campaign.

Quite how he will end up working with the media and Democrats on the East and West coast remains to be seen. Foreign leaders will have an interesting time, as evidenced by the cancellation of discussions between Trump and the Mexican President overnight. Is this what is meant by a Mexican stand-off?

British PM Theresa May also wasted no time in presenting her credentials and opinions to the new President at the annual Congressional Republican Retreat in Philadelphia overnight, albeit that she still has the challenge of having to guide Article 50 through the British Parliament thanks to a pesky high court. 

Politics in Australia seem positively insignificant by comparison, but maybe that is due to the short term focus on the date on which Australians should be celebrating Australia Day, and what it should be called. Political correctness prevents Hedge Clippings from publishing our real thoughts on this matter, except that without Captain Cook's discovery in 1770, and Captain Phillip sailing through Sydney heads in 1778, there would be nothing for  Australians to celebrate. For those who think the "Great Southern Land" was a blissful Utopia prior to the first fleet's arrival we suggest reading Captain Watkin Tench's first hand account (appropriately titled 1788) of the first four years of the colony.

NEW FUNDS!

We are continually adding new funds to the database, and this week are pleased to include two new early stage managers/funds, the Collins St  Value Fund and the Mhor Australian Small Cap Fund.

Melbourne based Collins St Asset Management is managed by founders Vasilios Piperoglou and Michael Goldberg, whose experience servicing high net worth clients and family offices covers wealth management, portfolio management and private equity. The concentrated portfolio consists of undervalued stocks, and the managers are prepared to hold cash until sufficiently attractive opportunities are available.

The Collins St Value Fund returned +0.89% in December, to take the latest 6 months return to 20.62%. Since inception in February 2016, the Fund has returned 25.14%.

Based in Sydney, Mhor Asset Management was founded by Portfolio Manager Gary Rollo, along with co-founder James Spenceley (who previously founded the ASX listed Vocus Communications). The fund's portfolio typically consists of 25 to 75 small cap stocks listed in Australia or NZ, and may also invest in stocks to be listed in the next 12 months. At the manager's discretion the Fund may hold up to 50% in cash.

In December the MHOR Australian Small Cap Fund rose 5.14%, outperforming the ASX Small Ordinaries Index which returned +3.61%, by 1.53%. Since inception in August 2016, the Fund has returned +5.10%.

Other PERFORMANCE NEWS 

Over the last 12 months, the S&P/ASX 200 Total Return Index returned +11.80%, the MSCI Asia Pacific Ex-Japan Index returned +9.49% and the S&P 500 Total Return Index returned +14.77%.

QATO Capital Market Neutral Long/Short Fund rose 0.70% in December, taking annualised return since inception to 4.93% p.a.

King Tide NZ/Australia Long/Short Equity Fund returned -0.64% in December, the Fund has an annualised return of 11.37% p.a. 

Pengana PanAgora Absolute Return Global Equities Fund returned -1.38% in December. Since inception in December 2015, the Fund has returned -3.24%.

Bennelong Twenty20 Australian Equities Fund gained  +2.62% in December, taking the most recent 12 months return to 7.42%. 

FUND REVIEWS released this week: Bennelong Long Short Equity Fund; Optimal Australia Absolute Trust; Pengana Absolute Return Asia Pacific Fund; 

And on that note, have a great weekend.

Regards,

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.

So long 2016: Welcome 2017 but stay on your toes!

Firstly, Happy New Year from Hedge Clippings. We trust you have had a relaxing and peaceful break and, depending where in the world you are, have survived the extremes of temperature. From our perspective in Sydney it has been hot and humid which, while not unusual for this time of the year, seems to have been more so than usual.

And so goodbye to 2016. Judging by the comments received from many over the past few weeks there aren't too many who were sad to see the back of it. It was certainly a turbulent year from a political point of view, and depending on one's leanings, either very satisfactory or very disappointing. Brexit, the potential for which was only brought to our attention 12 months ago, although done and dusted has a long way to run, longer certainly than most of the proponents originally envisaged.

Meanwhile, tonight sees the inauguration of probably the most unexpected (at least from an outsider's point of view) of US Presidents in memory. Looking back over our commentaries of the past 12 months it would be fair to say we misjudged the mood of middle America, as did most of those on the east and west coast. To what extent President Trump will be able to bring the disbelievers along with him on his journey of 'Making America Great Again' remains to be seen but is certainly going to make for interesting, and turbulent times.

Turbulent probably also describes Australia's equity markets in 2016. It's fair to say that they started the year with a whimper, falling 10% in the first two months, only to end the year with a roar, rising 8% in the last two months, and as pointed out by George Colman of Optimal Australia, rising 13.1% between November 9 and January 9 this year.  Furthermore in the three weeks from December 19 only three stocks in the ASX 100 lost ground.

Going forward it is probably fair to say that, with valuations at current levels and earnings still uncertain, there is plenty of room for volatility. And whilst on the subject of volatility and earnings, woe betide any company missing expectations or disappointing investors.

From a fund manager's perspective, it was also a tough year. With 70% of AFM's database reported, only 11% outperformed the ASX 200 Accumulation Index. Many proven, tried and tested funds found it difficult to negotiate and navigate both political and earnings uncertainties over the year, particularly the strength of the last two months. For many, it will go down as a forgettable year, and probably one in which the marketers will be reminding investors that its a longer term game.

On the other hand, there were some excellent performances particularly from new and smaller managers, and those investing outside the top 100, who benefited from the ability to select outstanding companies, and profit accordingly. We look forward to bringing you information, news and research on these, and others, over the coming 12 months.

PERFORMANCE NEWS 

Over the last 12 months, the S&P/ASX 200 Total Return Index returned +11.80%, the MSCI Asia Pacific Ex-Japan Index returned +9.49% and the S&P 500 Total Return Index returned +14.77%.

Allard Investment Fund rose 0.57% in December (MSCI Asia Pacific ex-Japan A$ +1.28%). The Fund has returned 9.25% over the past 12 months, taking annualised return since inception to 9.02% p.a.

The Paragon Australian Long Short Fund returned +0.80% in December, +6.82% for the latest 12 months and since inception, the fund has an  annualised return of 15.11% p.a. 

Totus Alpha Fund returned +2.74% in December and -14.25% for the latest 12 months. Since inception in April 2012, the Fund has an annualised return of 21.02% p.a.

Bennelong Kardinia Absolute Return Fund gained 1.45% in December, however, fell -2.44% for the most recent 12 months. 2016 marked the first negative year for the Fund since inception in May 2006, taking the annualised return to 11.22% p.a.

Optimal Australia Absolute Trust returned +0.29% in December 2016 and +4.75% for the latest 12-months. The Fund has not recorded a negative year since inception in September 2008 and has an annualised return of 8.54% p.a.

Touchstone Index Unaware Fund generated +4.42% in December, slightly ahead of the market rise of 4.38% (S&P/ASX 200 Accumulation Index). Since inception in April 2016, the Fund has returned +14.24%.

Cyan C3G Fund returned -1% in December, taking the most recent 12 months return to 14.79%. Since inception in August 2014, the Fund has an annualised return of 27.15% p.a.

Affluence Investment Fund increased 1.08% in December resulting in a +10.65% return for the 2016 calendar year, and 10.01% p.a. annualised returns.

APN AREIT Fund increased 6.80% in December, taking the prior 12 months performance to +13.73%. Since inception in February 2009, the annualised return for the Fund is 17.22% p.a.

Pengana Absolute Return Asia Pacific Fund finished up +0.37% for December 2016, marking the first negative year for the Fund, returning -2.10%. Since inception, the Fund has an annualised return of 8.56% p.a.

KIS Asia Long Short Fund returned -0.42% in December, taking the return for the most recent 12 months to +13.46%. The Fund has an annualised return of 14.63% p.a. since inception in October 2009.

Bennelong Long Short Equity Fund returned -3.23% in December taking the latest 12 months to -13.07%, in a rare negative year over 15 years of history. Since inception in February 2002, the annualised return for the Fund is 16.14% p.a.

FUND REVIEWS released this week: Bennelong Kardinia Absolute Return Fund

And on that note, have a great weekend.

Regards,

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.

Hindsight is so easy!

I can't imagine there is anything left to say about Donald Trump's stunning victory last Tuesday that hasn't been said or written elsewhere, but for better or for worse, here's a few more.

It is probably fair to say that the only people who were truly surprised were either those outside the USA, or Democrats within it. And possibly a few Republicans as well, although they might not choose to be reminded of it.

There will no doubt be books written, lectures given, and certainly debates held for a long time to come as to what, depending on one's opinion, went right or wrong. What is most surprising however is the "new" Donald Trump - gracious, polite and reasonable, all characteristics that would have been difficult to ascribe to him based on his electioneering over the past 18 months or so.

Only time will tell whether this is a temporary reprieve, or if Trump in election mode was just a carefully devised plan to gain attention from the so-called "forgotten and downtrodden" and in so doing polarise the electorate. Irrespective of the answer, he is now the President-Elect, and his Party has a seemingly iron grip on government at all levels for the next four years. (Malcolm, how would you like that?)

Over the past few weeks Hedge Clippings has received regular feedback to our Trump/Clinton election comments from a U.S. based subscriber who was adamant that those outside the US, plus those on the West and East coast, simply did not understand reality. Needless to say soon after the result was known we received an email from him titled: Was I Right?

Given that he was 100% spot on, it is worth taking notice of his opinion that "contrary to what the Australian media would like you to believe and have been toting, Donald Trump may make a good President". Assuming he will or can curb the excessive rhetoric, maybe he will.  Our 100% correct subscriber went on to add that it will be interesting to watch Trump and Putin as he feels there will be a big change in the relationship between Russia and the USA.

Certainly equity markets, which had previously been nervously awaiting the outcome, seem to think the outcome is positive, even if it just serves to remove the uncertainty of the unknown. Trump's massive infrastructure spending promise ($1,000 billion over 10 years) could well kick the economy along, and provide some much needed inflation to boot. If only it were all so simple.

Locally there's market uncertainty however, as Trump will govern for America first, and the rest of the World, and Australia second. The potential for trade, or currency wars, would seem to heightened.

PERFORMANCE NEWS 

Bennelong Long Short Equity Fund returned -1.76% in October. The Fund is up 33.63% for the latest 24-months.

Optimal Australia Absolute Trust rose 0.35% in October 2016, outperforming the ASX 200 Total Return Index, which returned -2.15%, by 2.50%.

Pengana Global Small Companies Fund returned -1.20% in October 2016, outperforming the MSCI AC World SMID Cap Index which returned -2.4%, by 1.2%.

Bennelong Kardinia Absolute Return Fund returned -1.85% in October to take the annualised return since inception to 11.29% p.a.

Finally, news has just arrived that one of our favourites from "and now for something completely different", Leonard Cohen has died aged 82. Hedge Clippings is old enough to remember seeing him at the Isle of Wight in 1969. Here's a link to a live version (and explanation) of his great hit Chelsea Hotel.

And on that sad note, have a great weekend.

Regards,

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.

Inertia and indecision to decide the outcome.

The spectre of President Trump is looming larger than ever with investors certainly taking risk off the table - or at least holding fire until the outcome of Tuesday's vote is known, next Wednesday (AEST).

What seemed unthinkable until recently to those outside the Trump camp is now a distinct possibility, but this is going to be difficult to predict and according to the polls, will go down to the wire. There is no doubt that like the recent Brexit vote, it will be the voters who DON'T vote who will decide the outcome of who sits in the White House for the next four years.

As bizarre as this might seem in a country with compulsory voting such as Australia, there is no doubt that Americans, and probably the British, who think a system whereby an upper house candidate can do secret deals and thus, in spite of only achieving a minute vote in percentage terms, hold sway over the government of the day, is equally crazy. Or that the State with the smallest population has the same representation in the Senate as the largest.

And while on politics and Brexit, an interesting dilemma has emerged for British MP's, with the High Court ruling overnight that any decision to invoke Article 50 to leave the EU must be made in Parliament. Should each MP follow the outcome of a national referendum, where less than 40% of the eligible population voted to leave? Or should they abide by the wishes of the voters of their own constituency, who elected them in the first place, the majority of whom may have voted to stay? 

Meanwhile to markets: Trump as Commander-in-Chief would undoubtedly un-nerve markets if for no other reason than it will invoke change, uncertainty, and a fear of the unknown. A second President Clinton (back) in the Oval Office will unnerve investors based on higher taxes, and a Democrat who according to many, (including the Russians who have reportedly been behind her hacked email account) has a dubious past.

Hence risk off.

Meanwhile October fund performances have yet to emerge, but with the ASX falling 2.15% over the month for a 12 month return of 6.1% there is likely to be the usual range. 

FUND REVIEWS released this week: Insync Global Titans Fund

And on that note, have a great weekend.

Regards,

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.

Could we be misjudging the US election outcome?

We are less than two weeks away from the US election which will provide both a media frenzy, and likely decide all our futures. Sitting in Australia the feeling is that no one in their right mind would vote for a President Trump, but sitting in Australia we are not voting.

However, what happens if Trump wins? And could Trump be Hilary Clinton's greatest electoral asset, who based on Wikileaks reports might not be a perfect candidate anyway?

Is there the possibility that like Brexit, a combination of non-compulsory voting, voter apathy with conventional politics, and not being close enough to the detail, means that we are not in a good place to judge the outcome? Today's media seems to indicate that the unthinkable might actually happen.

Either way, Hilary Clinton has promised to raise taxes and spend $500 billion on infrastructure. Trump has promised to reduce taxes and spend double that on infrastructure. That will surely change the supply/demand ratio in the bond market, and send interest rates upwards.

In that environment what will happen to equities? The optimists are hoping that increased economic activity will generate sufficient growth to offset the increase in interest rates, while the doomsday merchants believe it's all going to come down to a case of tears before bedtime.

Remembering what happened when interest rates rose unexpectedly in 1987 - before the stock market crashed - even without the buildup of debt we have seen over the past 7 years, suggests caution will be the investor's best friend.

PERFORMANCE NEWS 

Pengana PanAgora Absolute Return Global Equities Fund rose 1.77% in September. The Fund continues to have a low systematic risk (beta) to the ASX200 and the MSCI World Indices of 0.08 and 0.09 respectively.

APN AREIT Fund returned -3.21% in September. The long term performance since inception remains strong with annual returns of 17.90% p.a.

Totus Alpha Fund returned -5.31% in September. Since inception, the Fund has an annualised return of 24.74% p.a.

Insync Global Titans Fund returned -1.75% in September, compared to the MSCI All Country World ex-Australia Net Total Return Index in $A, which returned -1.20%.

King Tide NZ/Australian Long/Short Equity Fund rose 1.83% in September and +23.77% over the latest 24-months.

FUND REVIEWS released this week: Qato Capital Market Neutral Long/Short Fund; Bennelong Twenty20 Australian Equities Fund;

And on that note, have a great weekend.

Regards,

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.

History might not always repeat itself, but it frequently rhymes

This week saw the 29^th anniversary of the 1987 stock market crash. For those that can't remember, (or choose not to) or weren't around to experience it, on "Black Tuesday" October 20^th the Australian market fell by 25%, following the DJIA's fall of 22% in the US the previous night ("Black Monday"). By the end of October '87 the local market had fallen by over 40%, and at its lows had recorded an overall drawdown of 50% (exciting the followers of Fibonacci along the way) from the highs it had reached in August of that year.

The actual catalyst for the crash can be traced back to a number of individual and varied events, including a storm in the UK the previous Friday which closed the London exchange and increasing tensions in the Middle East between the USA and Iran. However, the underlying causes were a combination of over-inflated valuations, excessive leverage, and debt, exaggerated by program trading during the crash itself.

Of course human traits such as fear and greed also exaggerated the problem, as they have in every boom and bust before and since, and no doubt will do so again in the future.

The problem in Australia was further exaggerated by the likes of Bond Corporation, Quintex, and Rothwells, where greed was alive and well, along with a complete lack of fear (at least when it came to playing with other people's money).

The same happened in 2008 and will happen again next time. In 2008 the local market fell over 45% between September and March 2009, and one could argue that the QE and easy credit response of central banks we have seen since could well be setting the scene for the bursting of the resultant asset bubbles.

Interestingly, or importantly, in 2008 almost one in four Australian hedge funds produced a positive annual result, with the average of all funds falling by less than half of the ASX 200.

The reality is that when asset prices become unreasonably inflated, for whatever reason, a series of potentially unrelated events can act as a catalyst for the end of the game. Whether the asset bubble is in equities, or real estate, or caused by corporate actions or central bank policy, the bigger the bubble, the louder the bang.

PERFORMANCE NEWS 

Bennelong Twenty20 Australian Equities Fund returned 0.07% in September to take latest 6-months return to 9.06%. 

APN Asian REIT Fund returned -0.70% in September, outperforming the Bloomberg Asia REIT Index which returned -1.53%, by 0.83%.

QATO Capital Market Neutral Long/Short Fund returned +1.23% for September, outperforming the ASX-100 by +1.21%, which returned +0.02%.

NWQ Fiduciary Fund returned +0.16% in September and +13.69% over the latest 24-months. 

Touchstone Index Unaware Fund rose 0.47% in September to take latest 6-months return to 8.26%.

Affluence Investment Fund rose 0.59% in September to take the annualised performance since inception to 10.95% p.a.

KIS Asia Long Short Fund rose 1.45% in September taking the return for the most recent 12 months to 16.55%. 

FUND REVIEWS released this week: Optimal Australia Absolute Trust; Bennelong Kardinia Absolute Return Fund; Pengana Absolute Return Asia Pacific Fund;  

And on that note, have a great weekend.

Regards,

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.

US Federal Reserve chickens out

As expected the US Federal Reserve didn't have the nerve to increase rates when they met earlier this week, once again scared that any shift, however long it has been expected, will either damage a fragile economy, equity markets where valuations have been bloated by QE, or their own reputations. It seems unlikely that they will make the move in November either, given the looming presidential election and not wanting to be seen to be political.

Meanwhile, the Bank of Japan confirmed their negative interest rate stance of -0.1%, while back in Australia the market's expectation seems to be that rates may have fallen as far as they can go. What is certainly true is that with rates where they are the RBA's firepower seems limited.

Strange times indeed. Equally as pointed out by Hugh Dive from Aurora Funds Management, over the past week in the financial press there have been articles advocating a zero weighting to banks, and another one has taken the opposite view and saying that Australian bank shares are historically cheap, and investors should be buying with their ears pinned back. With 25% of the ASX 200 represented by six high-yielding bank stocks and investors' relentless search for yield, there is likely to be ongoing support. It will be a brave (and unlikely) retail investor that exits the sector entirely.

However as and when interest rates do start to rise, it is likely that the shift will start to occur. While the market has taken the gloss off bank shares this year, alternative income streams, or concerns about the bank's level of exposure to an overpriced property market, is likely to cause a serious rethink in valuations.

Back to politics for a second - next week sees the great US Presidential debate theatre in action. The big question seems to be whether Donald Trump will try to outdo even himself with further wild rhetoric, or pull his head in. Seeing as he has got this far with the former it seems unlikely he will change his tune, but it will certainly make for an entertaining, if somewhat alarming, TV fodder.

PERFORMANCE NEWS

Pengana Absolute Return Asia Pacific Fund returned 1.63% in August, compared to MSCI ACWI Asia Pacific markets which returned +0.91%.

APN AREIT Fund returned -3.29% in August. The long term performance since inception remains strong with annual returns of 18.62% p.a.

NWQ Fiduciary Fund fell 1.54% in August and has returned +12.72% over the last 24-months.

Affluence Investment Fund rose 1.06% in August, outperforming the ASX 200 Accumulation Index which returned -1.55%, by 2.61%.

King Tide NZ/Australian Long/Short Equity Fund returned -2.10% in August. Over the latest 24-months, the Fund has risen 20.31%. 

FUND REVIEWS released this week: Optimal Australia Absolute Trust; Bennelong Kardinia Absolute Return Fund; APN Asian REIT Fund; Bennelong Twenty20 Australian Equities Fund;

And on that note, have a great weekend.

Regards,

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.