In this week's Clippings: FoFA, the Senate circus, and budget deficits as far as the eye can see.

Irrespective of the rights or wrongs of either side's opinions and arguments over the Government's Future of Financial Advice (FoFA) reforms, this week's about-face in the Senate seems to confirm a number of thoughts:

Firstly that the government has done a pretty average job of selling their proposed changes to the original legislation. Secondly, the Senate, which had seemed to be much like a circus looking for some new clowns, appeared to have found them; and thirdly that the level of uncertainty created as a result is simply unacceptable.

As far as the government's sales job goes this is hardly surprising given the success of their other PR and communication efforts over the past six months. What is surprising is that many commentators still seem to think that commissions for dodgy financial advice were still on the table. As far as we could see the new legislation made it absolutely clear that this was not the case.

That's not to say that everything in the government's changes were perfect, but it was pretty plain that financial advisers had to act in their client's best interests, and that conflicted remuneration had been banned. However given the various misdemeanours in the financial services industry, large and small, over the past few years most minds had a really been made up, irrespective of the facts.

As for the Senate, it is somewhat ironic that Clive Palmer, who has been known to do the odd ungainly reverse somersault in the past, found himself subject to some of his own behaviour.

What will be interesting will be to see what compromises are made between now and June next year, because undoubtedly compromise will be required. But the really important part is the confusion created both within the industry, and presumably in the minds of the average investor, the very people who the legislation is designed to protect. Uncertainty benefits nobody.

Changing subjects, Hedge Clippings attended the Ernst & Young (EY) Global Hedge Fund Symposium this week for a presentation on the findings of their 2014 Hedge Fund and Investor Survey. Apart from a presentation on the results of the survey, which were of significant interest to the industry, there was an excellent keynote speech made by John Daley, the CEO of the Grattan Institute.

This was fascinating stuff, and entertainingly presented, even if the overall impression was that State and Federal budget deficits are likely to remain a serious problem for the foreseeable future irrespective of which political party is in power, and in spite of their rhetoric about fixing the problem.

The bottom line seem to be that in order to fix the problem issues such as the taxation of superannuation, GST, and negative gearing all need to be raised as potential solutions. With all of these there is likely to be significant pain not only for the current beneficiaries, but also for the politicians who try to implement them.

Specific results received this week include the following PERFORMANCE UPDATES:

The Paragon Fund returned -2.50% (ASX 200 Accum 4.43%) during October with annual returns at 23.80% (Index 6.39%) with a volatility 14.39% (Index 10.33%).

Totus Alpha Fund returned 0.87% during October and 15.65% over the prior 12 months with a volatility 8.94%.

The Avenir Value Fund returned -1.92% during October with annual performance of 18.68% and volatility of 9.00%.

Bennelong Kardinia Absolute Return Fund returned 1.22% during October and 4.31% over the previous 12 months with a volatility of 4.02%.

The Laminar Credit Opportunities Fund returned 0.51% in October with the 12 month return coming in at 9.28% with a volatility of 0.62%.

FUND REVIEWS released this week, all with the potential for earning CPD points:

Morphic Global Opportunities Fund; Monash Absolute Investment Fund; Bennelong Alpha 200 Fund

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.

MONASH ABSOLUTE INVESTMENT FUND

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

• The Fund is a research driven, active equity long/short strategy investing in listed ASX companies.
• The Fund seeks to identify opportunities in the share market to make positive returns (long and short) irrespective of market conditions. It is style agnostic, as compelling investment opportunities exist across all investment styles from time to time. The Fund places a high priority on capital preservation, and has an absolute return focus in accepting market risk.

ATTACHED FILESMonash Absolute Investment Fund AFM Fund Review Oct 2014 (pdf format)

MORPHIC GLOBAL OPPORTUNITIES FUND

ATTACHED FILESMorphic Global Opportunities AFM Monthly Review October 2014 (pdf format)

In this week's clippings: Not the G20, ASX top 20 concentration, Bank Valuations, the Property Market, and a new Fund in Focus video interview.

We'll leave any comment on the G20 well alone this week (apart from mentioning that we won't go there, either physically or metaphorically) firstly because it hasn't happened yet, and secondly because it has little to do with absolute return. Unless we could find an analogy with Tony "Shirt Front" Abbott's comments on Vladimir Putin and things making an absolute return bite you.

But we will spare you that.

Instead we'll draw on more words of wisdom from Optimal Australia's CEO George Colman who noted in his October performance report that the ASX top 20 index now represents 68% of the ASX200, compared the with 55% just prior to the 2007 market peak. Within that banks are now 31% of the ASX 200 index and the financial sector overall represent 47% - an all-time high.

Optimal's view is that investors in the Australian stock-market are assuming concentration risk of unprecedented levels, and that this skew in index concentration typically occurs at market extremes. However his view also is that he should save his breath, as YAAP, or yield at any price, continues to push these stocks up irrespective of the risk.

Other factors also highlight that bank prices possibly represent an "as good as it gets" scenario at current levels irrespective of the attractiveness of their yields. What was interesting in the recent round of bank results was that two thirds of their growth in earnings came from reductions in bad and doubtful debts, to record low levels of just 0.15% of gross loans.

As we said, it might look as if bank prices are as good as they get, so maybe Gail Kelly's departure from the top job at Westpac is smart indeed.

Bank prices are obviously closely tied into the current property market, and we took the opportunity of bouncing this off a well respected and trusted developer who knows much more about these things than we do. His view was that whilst the market is undoubtedly buoyant he thinks Armageddon is unlikely, rather that there are more likely to be long periods of low growth than the doomsday outlook of a property crash.

His logic was that affordability significantly drives property prices, and this in turn is driven by two key factors, namely unemployment and interest rates. Provided the former remains at reasonable levels, homeowners and borrowers will go to extraordinary lengths to maintain ownership of their home.

It's not only the banks that are enjoying the current property boom, with real estate agents, whose commission rates don't seem to have been trimmed in spite of the significant increase in prices, also enjoying the flow. State and local governments must be loving it too, with our favoured developer estimating that on a 20 unit block of two-bedroom apartments in Brisbane he is paying a total of well over $1 million in stamp duty, fees and taxes, and net GST to governments of various hues, on top of which the buyers also have to pay stamp duty.

Elsewhere this week we interviewed Jack Lowenstein from the Morphic Global Opportunities Fund, who gave an interesting overview of the fund's performance in October's global markets, which he described as the most difficult environment he had experienced since launching the fund two and a half years ago. You can view the video by selecting the image below, or the Fund's profile and the AFM Fund Review are here.

UPCOMING EVENTS:

25-27 March 2015 Digital Marketing for Banking and Financial Services Summit.

Specific results received this last fortnight include the following PERFORMANCE UPDATES:

Morphic Global Opportunities Fund returned 1.12% during October bringing the annual return to 15.62% with a volatility of 8.62%.

The Bennelong Alpha 200 Fund returned -2.49% during October with a net exposure of 1.2%.

Optimal Australia Absolute Trust returned -0.71% in October with annual returns at 5.42%, with a volatility of 2.08%.

The Cor Capital Fund returned -0.13% during October bringing the annual return to 1.72% with a volatility of 3.43%.

Best wishes for a happy and healthy weekend,

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.

Jack Lowenstein, the Joint CIO of the Morphic Global Opportunities Fund talks about how the
Fund performed in October 2014 and was positioned at the end of the month.

Watch AFM's other videos.