From an initial universe of 13 Market Neutral products, six funds were rated “Highly Recommended” and one fund was rated “Approved”.  The seven funds that were rated are shown below with their respective ratings.

• Aurora Fortitude Absolute Return Fund – Highly Recommended
• Bennelong Long Short Equity Fund – Highly Recommended
• Blackrock 32 Capital Master (USD) – Highly Recommended
• BlackRock Australian Equity Absolute Return Fund – Highly Recommended
• BlackRock Australian Equity Market Neutral Fund – Highly Recommended
• Pengana Australian Market Neutral Fund – Approved
• Regal Tasman Market Neutral Fund – Highly Recommended

The above funds all demonstrate strong risk adjusted returns. The Zenith Investment Grade Market Neutral Funds 2013, as a group, returned a cumulative return of 246.94% in the 10 years to October 2012 (net of fees). Over the same time the broad Australian market has return 128.17%.

Daniel Liptak, Head of Alternatives at Zenith Investment Partners, explains why he considers there to be such outperformance potential from Market Neutral investing: “Short selling Australian equities is relatively unutilised in Australia relative to other regions where hedge fund activity is a larger part of the market. Short interest as a percentage of shares of issue is around half that of in the US. In our view, fewer hedge funds operating in Australia (as Australian equities specialists) creates an opportunity for short sellers here as there are fewer participants scouring the market.”

“While less competition is one thing, the ability to exploit this is another. In our view, while the hedge fund industry is less developed than in the US and Europe, there are nonetheless some excellent managers. We believe there is a rich talent pool sourced from a range of areas:

• Some funds are led by highly regarded ex-investment bank proprietary traders.
• Some individuals are returning Australians who after very senior roles in global hedge funds are now running similar strategies in the home market.
• Global investment banks proprietary trading desks are in retreat, due to increased regulation globally, and this has allowed local hedge funds to pick up strong talent. The retreat of proprietary trading desks has also reduced hedge funds’ natural competitors and thus increasing opportunities for managers.”

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The Fund has four investment options with the Pooled Mortgages Option (PMO) being the subject of Zenith’s Product Assessment Report. The PMO’s objective is to deliver consistent monthly income returns to investors with capital stability and is suited to investors with medium to long-term investment horizons (3-4 years).

The Fund is managed by the La Trobe Group which is a fund manager which specialises in credit, targeting the niche segment of low-doc lending. La Trobe Financial was founded in 1952 and currently has total funds under management of $1.66 billion.

Zenith’s View

Zenith classifies the Fund as a High Yield mortgage fund, owing to its predominant focus on more aggressive lending than the average conservative mortgage fund with in excess of 72.5% of the loan book made up of low-doc loans.

While operating primarily on low-doc lending, the Manager applies a full-doc type approach to credit assessment as well as maintaining strict risk measures that prevent the Fund taking on unwarranted risk. We see the lending processes as being conservative in comparison to other high yield mortgage funds operating in the market and risks are well controlled via stringent lending criteria, and maintaining proactive and robust arrears management.

Zenith regards the PMO as being most suited to those seeking capital stability and an income return which should solidly exceed the cash rate through investment cycles. This means however that investors should only consider this fund if they have a higher risk tolerance.

La Trobe Financial have carved out an impressive track record in this sector driven by their deep lending and continued effort in refining their low-doc lending process.

Key structural advantages have assisted the PMO in being able to sidestep most of the issues which have plagued the sector since 2008 which have resulted in frozen redemptions, constricted distributions and impaired operations for the many of the Fund’s peers.

Overall, Zenith regards the PMO as an attractive offering in what has historically been a difficult asset class.

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The Lonsec Multi-Asset Class Sector Review 2012, released today, found the last few years have seen a dramatic transformation in the multi-asset landscape. Once regarded as the ‘set and forget’ asset class, fund managers and investors alike are putting multi-asset funds under the spotlight.

“There is little doubt that traditional Multi-Asset Class funds disappointed during the global financial crisis. Multi-Asset Class funds proved to be anything but ‘diversified’, holding far too much equity market risk at exactly the wrong time, regardless of risk profile. Questions that went unasked during the equity bull markets of the early to mid-2000s are now being asked,” said Stewart Gault, Senior Analyst, Lonsec Research.

“The realisation that you can’t live off negative peer relative performance has hit home. While investors in the early to mid-accumulation stage of their investment cycle can typically recover from a significant drawdown over a long enough investment period, the same cannot be said for investors at or nearing retirement. Large drawdowns at this time can be devastating to retirement savings and income, forcing investors to delay retirement or re-enter the workforce.

“Investors in this stage of the investment life cycle want some capital growth to at least meet inflation plus some longer term spending goals. But more importantly, they want lower volatility and far better protection on the downside than what has been afforded under the more traditional multi-asset class model. They certainly don’t want their retirement savings dictated to by the performance of equity markets,” Mr Gault said.

The Lonsec review found investors like these are beginning to look for outcomes based, or real return solutions, rather than peer relative performance. This, combined with the recognition that there exists a sizeable gap in terms of available product for those wanting to transition smoothly to retirement, has seen the rapid development of multi-asset real return (MARR) style products over the last 12 to 18 months.

“The MARR sub-sector has grown from five to seven funds since Lonsec’s last review. While intuitively appealing to many, flows into this space have not been particularly overwhelming, with further education in how to use these funds required. Furthermore, with regards to implementing this type of strategy, current financial planning software has some limitations which will need to be overcome,” Mr Gault said.

More broadly, over the past few years Lonsec has noticed an important mind shift occurring within the multi-asset class sector. Fund managers have generally become less concerned about ‘peer risk’ (underperforming peers), and have instead become more focused on delivering outcomes that are more aligned with client expectations.

Just a fad or the future of multi-asset class investing?

With the increased interest in MARR funds in recent times, it remains to be seen if we are witnessing the future of multi-asset class investing or just another product trend that will likely lose its appeal when markets normalise. While only time will tell, Lonsec is of the view that both traditional models and MARR funds can co-exist.

“Lonsec recognises that no one investment style will outperform in all market conditions. MARR funds are likely to underperform their more traditional counterparts in strong bull equity markets, but as a trade-off, will potentially provide a much smoother ride for investors,” Mr Gault concluded.

Lonsec’s Multi-Asset Class Sector Review 2012 provides subscribers to Lonsec’s Managed Funds Research with a detailed assessment of each participating fund manager’s investment capabilities within the Multi-Asset Class Sector.

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The results were as follows:

• SPDR® S&P/ASX 200 Fund (ASX: STW) – HIGHLY RECOMMENDED (upgraded from Recommended)
• SPDR® S&P/ASX 50 Fund (ASX: SFY) – RECOMMENDED (retained)
• SPDR® S&P/ASX 200 Listed Property Fund (ASX: SLF) – RECOMMENDED (retained)
• SPDR® MSCI Australia Select High Yield Dividend Fund (ASX: SYI) – RECOMMENDED (retained).

The SSgA SPDR ETFs are operated by State Street Global Advisors (SSgA). Three is the ETFs track key Australian equity market indicies provided by S&P with the fourth ETF (SYI) tracking a customised high dividend yield index from MSCI.

The ETF’s objectives are to track their respective defined benchmark indices and deliver index like returns while minimising transaction costs and tracking error. Indexation strategies are essentially full replication with the exception of SLF which is managed on a price basis with accrued income held in cash.

Zenith’s View
Zenith continues to have solid conviction in SSgA’s ETF platform. As a global ETF manager, the ability of SSgA to draw on the knowledge and expertise of their global capabilities is a key differentiator for the firm in designing and managing ETFs in the Australian marketplace. Management fees for the Funds are highly competitive in the ETF universe and the respective market segments. The combination of robust levels of market trading of the Funds as well as the market makers works to keep the market bid/ask spreads fairly tight which we see as a significant advantage as this aids quality of trade execution.

Zenith continues to view these ETFs as being generally suited to investors seeking low cost access to index returns with high transparency. We have upgraded the rating on STW given its position as a highly liquid ETF in the marketplace with very tight tracking error and extremely tight bid/ask spreads which make for excellent, frictionless transaction efficiency.

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S&P Australian Fund Ratings are no longer valid, and all S&P Australian fund ratings and reports cannot be relied upon, effective immediately.

“We have appreciated our clients’ support throughout the wind down of the Fund Services business and we’d like to thank all of our clients for their business and support over the past seven-plus years,” said S&P Head of Research, Fund Services, Leanne Milton.

This action does not affect other products or services offered by S&P Capital IQ or its sister brands, S&P Dow Jones Indices and Standard & Poor’s Ratings Services.

All three brands remain committed to the Australian market. S&P Capital IQ will concentrate local resources on serving Australian institutional clients with a suite of domestic and global multi-asset class data, research, and analytics, delivered through integrated desktop and enterprise solutions.

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The Fund offers to investors an exposure to global fixed income markets through an active, systematic, quantitative investment process. Institutional-grade risk management drives the portfolio construction process, with a target of 6-8% annual volatility and targeted Sharpe ratio of 1.5 over a full investment cycle.

The Fund is managed by the highly regarded BlackRock Fixed Income, Index and Model-Based Portfolio team. In achieving its objective, the Fund invests in a variety of markets that broadly fit into Global Government Bonds and Currencies, Mortgages, Corporate Bonds and Sector Allocations. Strategies employed include relative value, directional long/short and ‘opportunistic’ plays.

Fund facts

• Institutional grade investment process
• Risk management at every step of the investment process

Zenith’s View
Zenith has a high opinion of the Fund’s combination of size, experience and risk management. We believe the team is well resourced and highly experienced; with the portfolio managers well incentivized through performance incentives.

Zenith views the Fund as an alternatives offering, with higher risk and return than traditional fixed income portfolios. The risk/return profile will typically show consistent gains within a tightly controlled risk framework. This offering is most suited to those seeking an enhanced return stream sourced from fixed income with a diversifying effect on the rest of their portfolios.

Zenith has assigned a Highly Recommended rating for the Fund.

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Where a company is domiciled is no longer such a focus for global equity managers.

Bronwen Moncrieff, Senior Investment Analyst at Zenith said “Barriers that may once have existed and encouraged the separation between developed and emerging countries are decreasing. The development of technology such as the internet, near instant access to global events and ease of travel are just a few factors that have played an important part in making the world become a smaller place. As a result, many developed market domiciled company’s now generate an increasing level of revenue from emerging market consumers, and many emerging market domiciled companies are increasing their level of exports to developed market countries.”

“The flow through impact of this change is influencing the portfolio construction approach for many managers. Where a company is domiciled is becoming less and less relevant. Research is focusing on where a company’s source of revenues or target market demand is coming from – not where a company is domiciled or listed.”

“At a fund or product level, this is influencing factors such as the choice of benchmark, and the % of a fund that can be invested in emerging markets. For the benchmark, there has been a gradual move away from the MSCI World Index to the MSCI All Country World Index, which broadens a fund’s potential investable universe by virtue of the inclusion of emerging markets. The other change has been a gradual increase in the degree a fund can be invested in emerging market domiciled companies. Funds that may have once had a restriction on holding emerging market domiciled stocks may now be allowed to hold a portion of the portfolio in emerging markets, or funds with an existing emerging market allocation limit have been increasing that limit.”

“There may come a time when you don’t need to have separate global and emerging market funds – one fund might be able to provide you with exposure to both, in fact many funds now do just that.” Moncrieff said.

Performance over the last 12 months has clearly been very difficult. The MSCI World ex Australia ($A) index generated a very modest positive return of 2.3% for the 12 months ending 31 July 2012. The majority of regions have experienced declines.

The financials sector continued to post negative returns and the energy and materials sectors have suffered with the decline in resource demand and commodity prices. On the positive side, sectors such as consumer staples, consumer discretionary, healthcare and technology have all fared well.

Certain investment styles (core, value, growth for example) are suited to different market environments, and it is fair to say the market environment has generally been tough for all managers. However, for this review, it was the value managers that generally outperformed their core and growth style counterparts over the short, medium and long-term (5 years).

Zenith’s International Shares Sector Review represents the largest sector review undertaken by Zenith. Of the 59 global, regional and specialist funds that undertook the full due diligence process, 17 funds achieved Zenith’s top rating.

Zenith’s Highly Recommended Funds
* Aberdeen Asian Opportunities Fund
* Aberdeen Emerging Opportunities Fund
* Arrowstreet Global Equity Fund
* Arrowstreet Global Equity Fund (Hedged)
* Goldman Sachs International Wholesale Fund
* IFP Global Franchise Fund
* IFP Global Franchise Fund (Hedged)
* Magellan Global Fund
* MFS Concentrated Global Equity Trust
* MFS Fully Hedged Global Equity Trust
* MFS Global Equity Trust
* Platinum Unhedged Fund
* Walter Scott Global Equity Fund
* Walter Scott Global Equity Fund (Hedged)
* Zurich Investments Global Thematic Share Fund
* Zurich Investments Hedged Global Thematic Share Fund
* Zurich Investments Unhdg Global Thematic Share Fund

The following new funds were added to the Recommended List following the completion of due diligence for this sector.

Fund Name/New Rating
* Altrinsic Global Equity Fund/Recommended
* Aubrey Global Conviction Fund/Recommended
* Fidelity China Fund/Recommended
* Franklin Global Growth Fund/Recommended
* Martin Currie Emerging Markets Fund/Recommended
* MFS Concentrated Global Equity Trust/Highly Recommended
* MFS Fully Hedged Global Equity Trust/Highly Recommended
* Schroders Global Quality Fund/ Recommended

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The Manager is expected to add value through a number of factors which include their combined skill in preserving capital while taking advantage of strong growth in Asian equity markets. OCTIS uses a combination of three strategies to achieve its low volatility objective: Asian Equity, Asian Volatility and a Qualitative Overlay.

• The Asian Equity strategy is designed to capture alpha based on quantitative models that mix fundamental and technical factors.
• The Asian Volatility strategy exposes the portfolio to volatility and credit exposures through Asian convertible
  bonds and large regional indexes and is primarily conducted by maintaining delta neutral positions.
• The Qualitative Overlay strategy aims to neutralise non-Asian risks and hedge against world market correlation using currencies, bonds, global stock indexes and volatility instruments.

These strategies are complementary in terms of being either negatively or lowly correlated to each other in all market environments.

OCTIS was founded by Jerome Ferracci, CEO and Derivatives Portfolio Manager in July 2007. The Manager currently employs six full time employees based in Singapore. In July 2012, Treasury Group (ASX:TRG) purchased a 20% stake in the company which Zenith believes adds considerable strength to the business, with the remainder of the company owned directly and indirectly by Ferracci. We consider this a positive step forward for OCTIS given that Treasury Group will provide business support services to the company.

The investment team of three is spearheaded by Ferracci, an investment professional veteran in trading equity and equity derivatives. The Fund’s multi-strategy approach also involves an additional two portfolio managers, Joel Guglietta – Macro-Micro Analyst, and Wu Yuan – Quantitative Equity Portfolio Manager. The three portfolio managers have 40 years of combined investment experience and are backed up by an IT and platform development specialist in derivatives.

Zenith’s View
Zenith considers the team highly experienced in their field and are capable of managing a multi-strategy portfolio. The Manager is very risk aware and their adopted approach to risk management is consistent with their objective to manage a Fund with low volatility. We believe that such a risk-aware attitude adopted and ingrained in their investment philosophy is more likely to be applied consistently across all processes on both an investment and operations level.

Zenith’s conclusion is that the Fund offers a reasonably attractive risk / return profile coupled with a strong focus on capital preservation. The product will suit investors that are seeking a diversified exposure to Asian equities and will blend well with a portfolio that currently does not have any exposure to this region. The Fund’s focus is to produce capital growth over the long term and therefore Zenith recommends that investors adopt a 5+ year investment time horizon.

Zenith rates the Fund Recommended.

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David Erdonmez has been appointed General Manager – Managed Funds Research and will join Lonsec in early October. In this role, David will be responsible for managing the team of analysts undertaking core managed funds research, ensuring the continued high quality of Lonsec’s research material and ongoing enhancement of the research process.

Amanda Gillespie, Chief Executive of Lonsec’s research business, commented, “David’s strong technical background, knowledge of investment products and respect within the industry will make him a valuable addition to Lonsec’s research team.”

David joins Lonsec from Standard & Poor’s Fund Services where he was Head of Fixed Income Managed Funds Research. As well managing the fixed income research team, he had full accountability for all fixed income stakeholder relationships, client communication and analytical output.

Lonsec’s coverage of investment products is categorised into two sub-groups – core managed fund products – such as equity and fixed income funds – and specialised products, spanning structured products, direct assets, ETFs and SMAs.

As a result of this, Michael Elsworth’s role has been expanded to General Manager – Specialised Research.

“Michael has been responsible for undertaking and overseeing research across these specialised products for a number of years. As investor demand for research on specialised products has increased, Lonsec has boosted the number of analysts covering them,” said Gillespie.

“This expansion of Michael’s role will position Lonsec to continue delivering high quality research across these evolving sectors,” said Gillespie.

Other notable changes within Lonsec’s research team include Paul Pavlidis, who has been promoted to Chief Operating Officer, with overall responsibility for business management.

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The Fund is managed by Bennelong Australian Equity Partners (BAEP) and provides investors with access to a unique Australian equities portfolio that invests in companies outside the top 20 ASX listed stocks.

Experienced investment team
Lonsec Investment Analyst, Thembi Matabiswana, said the depth and breadth of experience across BAEP’s investment team is above average compared to industry peers, despite BAEP’s smaller team size. The team consists of six members including five with sector and stock research responsibilities and a dedicated quantitative research resource.

Key principals Paul Cuddy and Mark East (Chief Executive Officer and Chief Investment Officer respectively) previously co-headed the Australian equities operation at ING Investment Management, underpinning Lonsec’s increased conviction in Paul and Mark’s experience.

“The investment team has remained stable over the years, a clear demonstration of the cohesive culture in the organisation,” said Matamiswana.

Solid research and portfolio construction process
The Lonsec report considers BAEP’s stock research process to be solid, using a fundamental bottom-up active process supported by a multi-factor quantitative research platform. The multi-factor model is used to monitor and rank stocks on a series of alpha sensitive factors. “The tool allows for greater transparency and consistency across the research process,” the report noted.

Lonsec also stated that the Fund’s one-year return sits well above the Lonsec assessed peer average, and the Fund has clearly outperformed the small cap and mid cap sectors over the same period.

Paul Cuddy, BAEP’s CEO, said the team were delighted with the outcome of Lonsec’s review. “We are obviously very pleased with the rating upgrade – a great endorsement of the team’s efforts and processes,” Cuddy commented.

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