Last week we concluded our weekly commentary with the line that (as at the end of May) "by itself, a fall on the ASX of only 12% YTD, given the "R" word... is extraordinary." As at the time of putting Hedge Clippings together only a week later and the ASX is in almost exactly the same position, but having both risen and then fallen 400 points over the week.

As anticipated by a few old hands, the steam seems to have well and truly gone out of the post-COVID rally, with volatility and risk well and truly back on the table. Whether that's a reflection of too fast, too hard, the realisation of the economic damage facing the global economy, or a reaction to recent civil unrest, is hard to tell. Maybe a combination of all three, plus others. However, it is a reminder that diversification, particularly into assets and funds with a low correlation to the market and each other, is a cornerstone of risk mitigation.

The other re-appearance over the past week has been some good old political opportunism with oppositions of all persuasions grasping for (or should that be gasping?) airtime in the COVID saturated media. As we've mentioned before, given there was no playbook for the crisis that's unfolded over the past four months, we think that both the Federal and State governments have steered through the potential social, health and economic carnage pretty well. By global standards, both Australia and New Zealand have shown the world (with the exception of Taiwan) how to handle, or not handle as the case may be, a crisis.

Now as we exit lockdown, those same governments have possibly come to the difficult part of the exercise, with a combination of community impatience and frustration building up. Taking away the handouts that so many people have received (including some who saw it as a free bonus given they didn't need it in the first place) is the difficult part of any welfare process.

Hereafter, and for years or decades to come, Australians will be footing the bill for the essential life support the economy has been put on. That will take some real management, and we hope the government (or governments) will take the opportunity to reform certain key areas. One amongst them that Hedge Clippings has long banged on about is the current superannuation regime.

Where do we start given limited time and space available?

Well for a start, make it simpler! What should be straightforward has been overcomplicated by rules and regulations to the extent most of the population can't fathom out the detail and just leave it for others.

Secondly, what's the point of forcing the workforce to save for 40 years or more by (they or their employers) contributing almost 10% (yes, we do think it should be higher!) of their salary, only to allow them to take a lump sum at retirement or aged 65, and be able to potentially blow the lot rather than earning a pension, even though they have another 20 years or so to go before "moving on"?

And finally, and probably most importantly, given the economic need to kick start the economy with long term infrastructure projects, why not force - or incentivise - all superannuation funds to invest a percentage of their assets in approved infrastructure "bonds". As of the most recent APRA data, there's now $2.7 trillion in superannuation, almost 35% of which is in a combination of fixed income or cash. That's almost a trillion dollars earning not very much (over 13% is in cash, so not very much is actually almost nothing) and which is there for the long-term (up to 45 years).

Meanwhile, infrastructure, and the country, has the need for funding, has a similar investment term, and can provide steady returns (certainly more than cash in the bank).

And finally, that $2.7 trillion is forecast to grow to over $7 trillion before yours truly (if he's lucky) is currently scheduled by the actuaries to shuffle off to another place. So that is around $2 trillion in cash and fixed income which could, with the benefit of some governmental initiative and taxation reform, be helping to build the nation, and helping to stabilise the returns of all superannuation fund members.

OK, off the soapbox! Australian Fund Monitors is delighted to announce the addition of Damen Purcell to the position of COO. Damen has over 20 years of experience in the financial services sector and will bring added depth to the management, marketing and operations of AFM. Yours truly might even be able to hand over the reins of Hedge Clippings in the not too distant future, and return to his prior habit of enjoying lunch each Friday. (Question mark deliberately excluded!)

Now there's an idea worth chasing!

Recession confirmed. Surprise, Surprise!

Hedge Clippings understands that for politicians the "R" word is a double-edged sword. Oppositions love to taunt governments, and governments love to remind the opposition of their own "R" record when in power, while pointing to their own prowess in avoiding them.

Of course, the fact that Australia hasn't experienced a recession in close to 30 years makes the Treasurer's acceptance/admission that we're now in one - while we're still in the June quarter, let alone before we have the numbers that won't be released until September - all the more a confirmation that we're living in extraordinary times.

However, this week's premature acceptance, or capitulation, or however one wants to describe it, was probably a first. Hardly the "recession we had to have" under former Treasurer Keating (self-described as the "world's best" at the time), more one that no government could have avoided under the circumstances, in spite of the efforts they're making, and the billions they're spending, to mitigate its effects.

What is surprising is how long it has taken to accept the inevitability of the "R" fact (or perhaps how long it has taken a journalist to ask the question), given that you don't need to be a student of the science of economics, or the dark art of political speak, to have known the answer.

The real question, which no one knows, is how long the recession is going to last, how deep it will be, how large the deficit will become, and how long - or should that be, how many generations - before the "S" word (surplus) is considered remotely possible. There are millions of Australians who only know of recessions via the classroom or through the media. Going forward, there are millions more who sadly won't live to see another surplus.

None of this should be taken as criticism of the measures that the Federal government, and the State governments of all persuasions, have taken to protect Australians against both the physical and economic effects of the global COVID-19 pandemic. Inevitably there are sections of the community and workforce which have been affected - or benefitted - more or less than others.

That happens. However, taken as a whole, it is difficult not to be thankful (if we weren't already) that we live in Australia, rather than in the US, Europe, or in fact anywhere else in the world. That would include NZ, but understand there may be more than one opinion on that depending on which side of the Tasman one is on.

More importantly, as we're only three months into this disaster (probably more correctly described as a debacle in the US or UK), how we come out of it and how the government manages to wean the country off COVID Welfare, bring us out of the recession, and put us back onto the path to growth, will be key to our collective future prosperity. And don't fall into the trap of thinking that a quarterly bounce in GDP in Q2 or Q4 means we're out of the woods. Getting back to where we were is not going to be an easy task.

Which brings us to the markets and the performance of managed funds. To the end of May, the ASX200 Accumulation Index rose 4.36%, still down -12.7% from December 31, and -6.7% over 12 months. Early days yet, but based on 20% of performances received to date, Australia/NZ managed funds rose by 9.55% in May for an outperformance over the month of +5.19%, and are down just -2% YTD. Over 12 months they are up +4.33%, outperforming the Index by over 10% both YTD and over 12 months.

By itself, a fall on the ASX of only 12% YTD, given the "R" word that is now part of the vocabulary of 30 and 40-year-olds for the first time in their lives, is extraordinary.

Pity the poor private investor

Coronavirus driven capital raising on the ASX has been a boon for listed companies (wanting to shore up their balance sheet), a treat for investment banks and brokers (lucrative fees), and a boon for institutional shareholders (new shares at a substantial discount to market) who've made a quick and easy return of 10% or more.

Not so fortunate are the legion of individual shareholders - be they mums and dads, retirees, or SMSF members - who didn't get the offer of a quick return to make up, even in part, for the shellacking they've received as a result of the coronavirus in the first place. Not only this, but in many cases they've had, or will have, their dividends slashed or cut completely, seen interest on any cash in the bank go down to virtually nothing, and for those whose jobs have been impacted, seen their wages and salaries reduced - or disappear completely.

And finally, to add insult to injury (maybe that term's a little harsh) their equity has been diluted along the way, and therefore in due course so will their future dividends. And it's not as if there's no spare capital around, SMSF's are currently holding almost record levels of liquidity.

However, it's not fair! Although as Bill Gates once remarked when returning to give advice to students at his old university: "Life's not fair. Get used to it!".

The other side of the argument, of course, is that the institutions and managed funds who have been on the receiving end of the bonus quick returns are actually investing on behalf retail investors. As such, it could be argued it all works out in the wash, even if that's not really the point. However it does provide another reason to leave investing to the experts (the fund managers) provided, as we are always at pains to point out, you do your homework (research) and don't put all your eggs in one basket (diversify across managers, funds and strategies).

Talking of funds and performances, the statistics and returns continue to show that when times are tough for the market, actively managed funds, absolute return and alternative strategies provide downside protection - which is of course when it's required.

For the 12 months to the end of April, the ASX200 absolute return index was down -9.06% (and as of today's date is not much better). On a strategy or sector basis, managed futures rose +4.59%, equity long/short fell -2.13%, market neutral -2.90%, and equity long-only -4.78%. Across all strategies, the 12-month return was -3.12%, and -2.67% for all absolute return funds. With the usual caveat on averages, the range has been extreme: -75% through to +30%, with 75% outperforming the ASX200.

When looking back at the market's gyrations over the past 3 months there would appear to have been three clear stages: Falling for a month from the highs reached in the middle of February, bouncing back for a month from the lows of 23 March, and since then some semblance of stability as the market moves in a broadly sideways direction (albeit with considerable underlying volatility).

In hindsight, probably the most surprising factor was that it took until mid-February for investors and some fund managers to recognise the potential damage caused by the global pandemic. Not all investors or funds of course, as some were clearly ahead of the curve, but plenty were not.

As investors are now painfully aware, the ASX200 fell almost 21% in March, and that figure would have been closer to -27% had the last week of the month not included the start of the recovery.

April's market recovery of almost 9% still saw the ASX 200 down 16% since the start of the year, and over 9% lower than 12 month ago. By comparison, absolute return funds listed on www.fundmonitors.com have fallen just over 8% year-to-date on average, and slightly under 3% over 12 months.

As we always point out, the term "average" is dangerous: YTD individual performances range from -80% to +25%, while over 12 months the figures are not that much different: -78% through to +30%. Drilling down into the details always reveals reality. Many of the funds that would have appeared in "Top 10" tables to 31 December last year are at the other (wrong) end of the scale by the end of April this year.

Equally, what the volatility has shown clearly is that diversification across funds and strategies is vital when looking to avoid downside risk and loss of capital. And not just diversification of names or managers - selecting funds with low correlation is vital, particularly in negative or volatile markets. So too is including funds which offer real downside protection - either through manager skill, or diversification of strategy.

During the bull market of the past few years some defensive funds and strategies have struggled to attract the attention of investors and the obsession for high headline returns. Finally, funds such as Gyrostat (12 months: +15%), ARK Global (12 months: +25%), and Levitas (12 months: +16%), to name just a few, are being recognised as true diversifiers in a well-balanced, low correlation portfolio of actively managed funds.

So where to from here?

While some managers consider the worst is over, many others, possibly along with the mood of many investors, are more cautious, concerned about a second leg down in the market, an extended recession, and/or a second wave of infections. Hedge Clippings remains in this camp, but either way, up or down, diversification across funds with low correlations to each other would seem appropriate in these uncertain times.

It seems as if, in Australia and New Zealand particularly, there are increasing expectations around the lifting of social distancing and lockdown restrictions. Whether it be the re-opening of schools or the resumption of limited sporting competitions, or it's simply the number of people with whom we can meet and greet - albeit at arm's length or more.

However, we have been incredibly lucky in Australia to have avoided the worst of COVID-19 - at least from a medical perspective. Oversees the infection rates and death tolls have been truly devastating, initially in Italy and Spain, and subsequently in the UK and the USA. With this in mind we spoke with two of our "regulars" this week, namely Monik Kotecha from Insync Fund Managers and Chris Watling from Longview Economics, to get their take on how companies, markets and economies might emerge once the lockdown is over.

Unfortunately, the quality of Zoom videos for both interviews wasn't what we would like it to have been so we will produce full transcripts of each interview and publish them as "Insights" articles early next week.

However, what was interesting was their different take on what lies ahead. Monik was looking at it through the prism of secular trends and the global "mega" companies in which Insync invest, while Chris Watling from Longview was naturally considering the global implications and the effects on consumers and small companies, or those with high levels of debt which might be more severely damaged by the pandemic.

Insync are optimistic that the pricing of companies in which they invest is not unreasonable. Longview are questioning the extraordinary bounce in global markets since the March lows, and what lies beyond Q3 when life might have returned to a near-normal state.

As Hedge Clippings views the future, while we can see the lockdown being eased both here and overseas, we can't see a return to normal until a cure or, failing that, an effective vaccination is found and deployed around the globe. There is also the significant risk of a second, and possibly third, wave of infections. It also seems that there is a huge amount that is not known about the disease, and unless and until the Chinese government agrees to release information about its source, this is likely to remain the case.

Come to think of it, the Chinese government's intransigence and reluctance to have any kind of open dialogue on the matter seems inevitable. While that is the case, the possibility of a further outbreak or other outbreaks of as yet unknown diseases remains high.

So, maybe for the foreseeable future at least, we live with the threat.

Active Beta vs Active Alpha: "Oils ain't Oils"

This is part of a larger insights article due to be published next week containing additional tables of top performing funds over the past 12 months.

An article published in the UK's FT last week highlights an ongoing issue in the debate between Active and Passive investing. When it comes to analysing managed fund, and active funds in particular, it is worth remembering the old Castrol advertising line: "Oils ain't Oils".

Put simply what is often misunderstood about so-called Active Managers is that some are what we could term "Active Beta" while others - what we'd describe as truly active - are "Active Alpha".

Before the emergence of "absolute return" hedge funds utilising long/short or market neutral strategies, and in fact before the rise of Passive investing, most managed funds were "Active Beta". In other words, they tried to provide broad equity market exposure, but by adjusting the weighting of individual stocks in the index, or by being over or underweight a particular sector, they sought to outperform the market.

Frequently the objective was to be in the top or second quartile of their peers, and thus qualify for a chance at approval from asset consultants, and thus receive large institutional mandates. Making it to the top quartile in their peer group didn't mean they needed to outperform the market by much, or at all. They just needed to be better than the rest.

A problem with Active Beta, either by design or otherwise, is that marginally adjusting the weighting of, say, the top 100 stocks in the ASX100 still leaves the portfolio heavily reliant on the direction or performance of the overall market.

For instance, in the banking sector an Active Beta manager might still hold all four banks, but be over or underweight in one or more of them. Alternatively, they may be overweight the banking sector but still retain significant exposure, because not to do so would create the risk that they could underperform the market, or more importantly, their peers.

Ironically, by not wanting to take that risk they created the overall risk of moving broadly in line with - give or take 2-3 percent over the long term - the overall market's performance. In other words, they weren't paid to take risk, but paradoxically were doing just that because the market itself, as we know, is a volatile beast.

There are literally thousands of Active Beta funds both in Australia and overseas, as shown by Morningstar's extensive list.  Most of them, on average as per the FT's article, fail to outperform the market - and therefore passive funds - over time.

So, what about Active Alpha funds?  

As we define it, Active funds are those which aren't index constrained, and therefore don't allocate to stocks based on being over or underweight their index weighting. They might, for instance, have only 20 or 25 stocks in the entire portfolio out of over 2,000 in the ASX All Ordinaries. They might be able to adjust their cash weighting to 40, 50 or even 100% - and therefore their exposure to the market as a whole - given their view of the market's risk.

They might avoid sectors as a whole, or only invest outside the top 200 stocks. And of course, some - the hedge funds - are able to short stocks or the market as a whole, use derivatives or borrow to add leverage, either to avoid risk or to improve returns.

Others are "true" alternatives, managing futures, commodities or volatility.

Overall the prime objective of Active Alpha funds is to provide an "absolute return" - in other words, positive performance in both rising and falling markets over time - and generally with the a focus on protecting capital, or being less correlated to the market when it falls.

Of course, not all Active funds achieve their objective. Some do, some don't. As the Castrol add says, "Oils ain't Oils". But on average, unlike Active Beta funds, they do outperform the underlying market, and some will provide that elusive ability to provide positive performance across various market conditions.

The performance of these "Active Alpha" funds varies widely - as does their investment mandate - not only between the good and the bad ones, but from year to year. Hence the necessity of research and careful analysis.

For the record, AFM avoids including Active Beta funds on the fundmonitors.com database, because frequently they're all much the same. AFM only includes Active Alpha, some good, some not so good. We provide the facts, and let you be the judge.

See below for the best performers on our database sorted by 12-month return after fees:

Top 10 - All Funds

Geographic mandate: All
Strategy: All

Top 10 - All Australian Equities Funds

Geographic mandate: Australia, Australia/NZ, Australia/Global
Strategy: All equity-based strategies

To view any of these funds' profiles, you can do so by searching for them via the Fund Selector on the fundmonitors.com homepage.

Past performance is no guarantee...

So the disclaimer goes on virtually any Product Disclosure Statement or financial services product's marketing material, as required by ASIC. This is understandable, but equally interesting considering past performance is one of the most important pre-requisites for most, if not all, investors when considering a managed fund.

Casting one's eye over the performance of funds as a whole, and the various strategies employed by the 430+ funds listed on www.fundmonitors.com, provides a pretty good reason for ASIC and the lawyers to insist on the "Past Performance" caveat.

Individual fund returns over previous periods range as follows:

So while past performance has obviously NOT been a good indicator in some circumstances, in many others it has been no surprise. And for clarification, we're not just talking about the outlying numbers - good and bad. Hidden in the averages are some real disappointments.

Given the extraordinary circumstances in which markets - and every country in the world for that matter thanks to COVID-19 - find themselves, it is no wonder that only 20% of funds YTD have provided positive returns. However, closer analysis shows that 76% outperformed the ASX200 in March, 77% YTD, and 99% did so over 12 months.

On the negative side (say -40% or more in March) there were combinations of "truly disappointing" through to "not surprising". On the positive, none were particularly surprising as their strategy (long/short, long vol, option protection, or managed futures for instance) suggested that would be, or should have been, the expected outcome.

Most heartening for many investors has been the fact that many absolute return funds have protected them from much, and in some cases ALL, of the falls in March, YTD and over the past 12 months.

Having said that, picking the winners from the losers requires more than just a cursory glance at past performance. Drilling down into advanced analytics, down-capture ratios and other downside indicators are essential, although even these may not be foolproof.

Understanding their strategy, risk limits and compliance helps, as does an understanding of the people behind the performance. The manager's track record covers more than just the numbers.

And on that note, we wish everyone a safe ANZAC Day, as we pause to spare a thought for those who faced real risks to keep us safe - and those on the front line such as health workers and others who, in the current crisis, continue to do so.

ANZAC Day won't be quite the same without a chilly start at the War Memorial, or at the dawn service overlooking Bondi Beach. However, hopefully everyone will extract themselves at 6 AM tomorrow morning to stand on their balcony or driveway to remind ourselves how lucky we are to only be figuratively "locked down".

Like most of those we speak with, Hedge Clippings has moved to the home office environment in response to the COVID-19 pandemic, and we have been pleasantly surprised at how seamlessly we have adjusted to the new regime. A significant part of the ease with which we seem to have adjusted lies in the fact that as a business which provides online information and services, there has been little change to the technology we use on a day to day basis.

Others are obviously not so lucky, and are either unable to work, have seen their employers close their doors, or find operating "normally" a thing of the past. We should therefore keep them in mind while counting our own blessings.

In fact, if anything, the enforced change has merely served to emphasise, or indeed accelerate, our reliance on good IT and communications to keep the wheels in motion. Zoom, which has become a household name over the past month or so, had been part of our daily office routine for some time. Equally, most fund managers, advisors and investors, whilst significantly affected by the market's volatility, have been able to continue despite having had to adapt to the new communication rules.

Probably the most significant change at Fund Monitors, and for asset managers, has been the increased importance of IT systems and information in general, and in particular the move to - or acceptance of - video communications. Whilst this has been a trend for some time, necessity has made it commonplace, such that even post-pandemic and lockdown we suspect it will become the new normal.

In line with that trend, this week we spoke with two fund managers, Alex Pollak from Loftus Peak and Robert Swift from Delft Partners, to discuss how they see the world - and particularly the investment world - going forward. With apologies for the less than perfect production quality courtesy of the work-from-home restrictions, the result was an excellent insight into the investment thinking of two managers whose investment strategies have resulted in not having to be overly focussed on the short-term market volatility. You can watch the twenty minute interview here.

We also caught up with Dean Fergie from Cyan Investment Management whose CG3 Fund has a more active style, investing in the Australian small-cap sector, and requiring a more nimble approach to adjust for the headwinds affecting the travel, tourism and leisure sectors in particular. Dean's interview lasts around seven minutes and can be seen here.

More broadly, fund returns for March have been as mixed and varied as the markets. Most finds have performed in line with expectations - both positive and negative - although there have of course been more of the latter given the markets. Certainly, there have been a few significant disappointments from managers not prepared to change and/or able to adapt quickly enough.

On the plus side, one quarter of all funds that have reported their March results so far have been positive YTD, with that number increasing to 90% over 12 months, and with over 99% outperforming the ASX200 Accumulation Index over the past year.

Inevitably the best performing strategies have been the true "alternatives" - managed futures, currency/FX and Global Macro amongst them. Having rallied sharply from the lows of March 23, there are those who believe the worst is behind us, and others who are more cautious.

Time will tell, but caution when managing other people's money would seem a sound approach to us.