Just because a problem is obvious it doesn't mean it's going to be solved. 
 
Hedge Clippings would love to claim the above adage as our own and would also be more than happy to credit the author if only we could recall in which of the thousands of emails we receive each week we found it. In any event it struck a chord based on the chorus of negative possibilities and opinions that are currently doing the rounds.
 
It is worth noting that based on what we are seeing, reading and hearing we are more in the glass "half empty" than "half full" camp, and in one conversation with a "half full" (metaphorically speaking) investor over the past week we pondered which, if any, of the following scenarios might be more positive in 6 or 12 months' time than they are now.
 
Australian Property/Equities:
 
Problem: Negative influences coming from oversupply (units) and reduced demand (particularly from Chinese buyers), potential reductions in immigration, tightening credit from banks following the Hayne Royal Commission, low wages growth, higher mortgage costs as fixed deals turn to variable, higher US interest rates impacting bank's cost of funds, and reduction in negative gearing if there's a (likely) change in government next year.
 
Solution/Outlook: Glass half full, and a reminder not to listen to property experts who as recently as April this year couldn't, or wouldn't, see the writing on the wall.
 
Australian Economy:
 
Problem: The Australian economy is the envy of the world - growth forecast around 3%, low interest rates, low unemployment, but also a hostage to global, and particularly China's, fortunes. See above - if the property market weakens further it will impact significantly on consumer sentiment, spending, and thus unemployment. Any slowdown and the RBA has nowhere to move. 
 
Solution/Outlook: Glass half full. And then there's the federal election.
 
US Economy/Equities:
 
Problem: Rising interest rates, stretched valuations, The Donald, and after the recent mid-term elections no longer fully in control, potential expiry of tax and infrastructure short term "sugar pill", trade policy, Chinese tariff war.
 
Solution/Outlook:  Glass half full. Anyone able to predict "double down" Donald please let us know.
 
US/China Tariff War:
 
Problem: As above - who's going to blink first, Donald or Xi? There's a good chance that if it gets worse before it's resolved, Donald might have scored an own goal.
 
Solution/Outlook:  Could go either way. If solved expect a bounce, but could get worse before it gets better.
 
Chinese Economy:
 
Problem:  As above - the tariff war is likely to hurt China more than the US, it's slowing, although still a significant force. There's more than just the tariff issue at play, including mountains of debt.
 
Solution/Outlook: The government is doing everything it can - and they can do more than most to solve problems as they don't have to face elections - but they can't control everything. 
 
Brexit/Europe: 
 
Problem: The UK's previously dominant position as a (the) global financial centre is irreversibly damaged, and with it a significant section of the economy is relocating to the EU.
 
Solution/Outlook: Whatever the outcome, no one's going to be happy! Definitely half full, and a reminder that David Cameron must have had a brain snap when he announced the Brexit referendum!
 
In Summary:
 
In case you're wondering if we're alone in these thoughts, last night we listened to Dr John Hewson give his economic outlook at EY's Annual Hedge Fund Symposium. Being a self-confessed economist, he was able to quote reams of facts and figures which yours truly couldn't memorise at the time, or if he could, couldn't a couple of glasses of chardonnay later. However, it's fair to say he was definitely in the glass half empty camp.
 
For what it's worth, while happy to identify the problems, the good Doctor wasn't forthcoming on how to solve any of them either. How times have changed since he left politics!

INSYNC GLOBAL CAPITAL AWARE FUND

Attached is our most recently updated Fund Review on the Insync Global Capital Aware Fund.

We would like to highlight the following:

• The Global Capital Aware 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.

• 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.

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - October 2018 (pdf format)

BENNELONG TWENTY20 AUSTRALIAN EQUITIES FUND

Attached is our most recently updated Fund Review on the Bennelong Twenty20 Australian Equities Fund.

• The Bennelong Twenty20 Australian Equities Fund invests in ASX listed stocks, combining an indexed position in the Top 20 stocks with an actively managed portfolio of stocks outside the Top 20. Construction of the ex-top 20 portfolio is fundamental, bottom-up, core investment style, biased to quality stocks, with a structured risk management approach.

• Mark East, the Fund's Chief Investment Officer, and Keith Kwang, Director of Quantitative Research have over 50 years combined market experience. Bennelong Funds Management (BFM) provides the investment manager, Bennelong Australian Equity Partners (BAEP) with infrastructure, operational, compliance and distribution services.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - October 2018 (pdf format)

BENNELONG KARDINIA ABSOLUTE RETURN FUND

Attached is our most recently updated Fund Review. You are also able to view the Fund's Profile.

• The Fund is long biased, research driven, active equity long/short strategy investing in listed ASX companies with over ten-year track record. 

• The Fund has significantly outperformed the ASX200 Accumulation Index since its inception in May 2006 and also has significantly lower risk KPIs. The Fund has an annualised return of 9.57% p.a. with a volatility of 7.11%, compared to the ASX200 Accumulation's return of 5.37% p.a. with a volatility of 13.38%.

• The Fund also has a strong focus on capital protection in negative markets. Portfolio Managers Mark Burgess and Kristiaan Rehder have significant market experience, while Bennelong Funds Management provide infrastructure, operational, compliance and distribution capabilities.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - October 2018 (pdf format)

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-caps from the ASX/S&P100 Index, with over 15-years' track record and an annualised returns of over 15.8%.

• The consistent returns across the investment history indicate the Fund's ability to provide positive returns in volatile and negative markets and significantly outperform the broader market. The Fund's Sharpe Ratio and Sortino Ratio are 0.94 and 1.54 respectively.

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

Australian Fund Monitors

ATTACHED FILESAFM Fund Review - October 2018 (pdf format)

Times are tough!

Markets remain tough. China is slowing ahead of the tariffs kicking in at 25% in January, the UK is anything but a United Kingdom, valuations (particularly tech and growth) are stretched, banks are tightening credit whilst the property market is awash with unsold units and an upcoming election next year could, and probably will, significantly change negative gearing, imputation credits and the labour market, the ASX is back to levels of 12 months ago, and volatility has spiked.

What makes a good fund manager in tough times?

It would be trite to reply to this question with the obvious answer "one who doesn't lose my capital", but in reality that's about it. However, the "why" and "how" behind the answer is less obvious. Given that markets are undoubtedly in the midst of tough times at the moment it is worth taking a deeper dive into a fund's quantitative performance and risk analytics to look behind the numbers.

This week we hosted a joint presentation from two different fund managers, Dean Fergie from Cyan, and Rodney Brott from DS Capital. Both are "boutiques", running concentrated portfolios and managing relatively small amounts of capital on behalf of both themselves and their investors. That gives a clue to one answer - invest with managers who have a significant amount of the own capital at risk alongside their investors and don't run other PA positions outside the fund. Both Dean and Rodney started their funds primarily to manage their own capital the way they'd like to, and so are literally putting their money where their mouths are.

Both funds have relatively small amounts of FUM by industry standards and as a result can not only be more nimble but can invest in smaller cap stocks without taking huge liquidity risks. Moving outside the ASX200 not only avoids the large cap stocks which are fully covered by brokers' and institutional research, and therefore are more efficiently priced, but also avoids the rising (and falling) tide effect of index and passive investing. It also increases choice, which of course can be a double-edged sword as it requires significant research to find the hidden gems amongst the dirt.  

Both have the flexibility to move out of the market to cash when deemed appropriate, although in practical terms this means generally in the range of 20 to 40%. "Appropriate" means not only when the market as a whole is risky, but also when they can't find quality companies in which to invest at attractive valuations.

Quality companies and attractive valuations means having a deep understanding of the sector, the company, and its competitors, and involves multiple company visits and "eyeballing" management as well as analysing their financials from which to finally invest in as few as 30 to 40 positions. Understanding was a recurring theme, not only understanding why to invest and what price represents value, but also understanding changes to their original investment thesis, or valuation metrics, and therefore when it is time to reduce or exit a position.

Speaking to one of the investors present at the lunch afterwards, the ability to sell a stock is where he felt the best managers have a real edge over the individual investor. Good managers don't use hope as a strategy, and when circumstances, news or valuations change, they're prepared to cut the position accordingly.

Finally, with approximately 58% of all equity funds having reported their October results, 54% of those have outperformed the ASX200 Accumulation Index's October return of -6.05%, whilst only 2% have managed to achieve positive returns. Of the funds that outperformed the market in October, the average return was -1.39%, with returns ranging from -5.94% up to +7.81%.