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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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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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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Strategically placed to provide investors with a diversified exposure to healthcare related assets, the Trust has traditionally represented a solid investment with exposure to defensive assets on long-term leases and high calibre management. Zenith has issued an updated Product Assessment on the Australian Unity Healthcare Property Trust (Retail, Wholesale and Class A units) and confirms the retention of the Highly Recommended rating across all unit classes.

Zenith’s View
Zenith has retained their view of the Trust as a superior offering within the sector. Since our last review, management continues to pursue value-adding works within the HPT and monitor opportunities to potentially divest mature assets to recycle capital. Historical returns have traditionally performed well against performance benchmarks, generating solid risk adjusted returns with low volatility.

While outperformance has slowed in more recent years, Zenith maintains solid conviction in the Fund’s merit as a defensive play with stable income and growth potential.

Zenith is of the opinion that the HPT continues to represent one of the few ways for investors to access this specialist asset class directly. Fund distributions were given a boost in FY12 from reduced credit margins and while burdened with recent losses from out of the money interest rate swaps, portfolio metrics continue to be very strong and we expected to see solid rental growth going forward.

Zenith has retained our rating based on our continuing opinion that the portfolio of diversified quality healthcare assets which are strongly defensive by nature and with high barriers to entry continues to provide strong risk adjusted returns to investors in this sector over the long term. Zenith rates the Australian Unity Healthcare Property Trust Highly Recommended.

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The number of managers is being cut from eight to three, with JCP Investment Partners (35%) the only incumbent manager to retain a mandate within the fund. Two new managers have been appointed, Antares Equities (45%) and Bennelong Australian Equity Partners (20%). Effective Aug. 31, 2012, the fund’s benchmark will also change from the S&P/ASX 300 Accumulation Index to the S&P/ASX 200 Accumulation Index. 

MLC has made these changes in an effort to address the fund’s poor performance. The manager believes these changes will improve the reliability of the fund’s alpha generation across various market conditions, while also minimising the volatility of performance outcomes consistent with the fund’s core objectives. 

These changes only affect the MLC Australian Share Fund, with no changes to the Australian shares component of the MLC Horizon funds. In late 2010, MLC separated the Australian shares strategy in the MLC Australian Shares Fund from that used in MLC’s diversified portfolios. As a result, MLC now has greater flexibility to vary the Australian equity manager mix between its single sector and diversified funds, which we believe has been the key driver in enabling it to reduce the number of managers used within this fund. 

We are comfortable with the announced changes for the fund and are pleased that there has been a reduction in the number of underlying managers, which was an area where we’d previously had concerns. The Australian equity capabilities of both new managers are also well regarded by S&P.

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From an initial universe of 34 Domestic Long/Short Funds Zenith has rated 3 funds “Highly Recommended”, 14 funds “Recommended” and 1 fund “Approved”. The 18 funds that were rated are shown below with their respective ratings and segregated into Global Funds, Regional Funds and Sector Funds.

Global Funds
Platinum International Brands Fund –  Highly Recommended
Platinum International Fund – Highly Recommended
Five Oceans Wholesale World Fund – Recommended
K2 Select International Absolute Return Fund – Recommended
PM Capital Absolute Performance Fund – Approved

Regional Funds
Platinum Asia Fund – Highly Recommended
K2 Asian Absolute Return Fund – Recommended
KIS Asia Long Short Fund – Recommended
Platinum European Fund – Recommended
Platinum Japan Fund – Recommended
Premium Asia Fund – Recommended
Premium China Fund – Recommended
8IP Asia Pacific Partners Fund – Recommended

Sector Funds
Platinum International Technology Fund – Recommended
Platinum International Health Care Fund – Recommended
Pengana Asia Special Events Fund – Recommended
Pengana Global Resources Fund – Recommended
Premium SAM Asia Property Fund – Recommended

Platinum’s Ratings – Zenith Maintains Strong View
Given the prevalent use of Platinum by our clients and the questions that have come up around the recent underperformance of some of Platinum’s funds, we thought it would be useful to provide a brief comment on why we have re-affirmed our strong ratings on Platinum’s suite of products post this year’s due diligence reviews.

While some of the Platinum funds have had softer performance numbers more recently, we are inclined to continue to back the manager. We note that Platinum takes very contrarian views on many stocks and themes in the market and that this style of management does not work consistently across the market cycle.

In more recent times the manager has been positioned in areas that have been overlooked and neglected by the market based on risk off trades. Zenith feels that investors that hold the course with Platinum are likely to be rewarded. Historically, given Platinum’s high conviction style, when performance has turned it tends to turn quite quickly.

Overall, Zenith believes that the level of quality across the Platinum team remains excellent and from the meetings with all of the portfolio managers across the firm we believe that they remain across all the issues in their portfolios.

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Steven Sweeney, Senior Investment Analyst, commented, “The past year has tested the resolve of the most ardent emerging market aficionados.”

“Deteriorating investment returns have prompted a bout of head scratching for many EM investors due to the nonsensical reality of US and European equities outperforming emerging markets while the economic fundamentals across both categories were in such divergence.”

The dominant cause of weak performance through 2011 and 2012 was the relentless pulverisation of investor risk appetite.

“Emerging market equity returns have historically been hostage to investor sentiment, and so it proved once again,” said Sweeney.

“With the escalating European sovereign debt crisis – now in its third year – preoccupying global markets, investors were prompted to bunker down and retrieve capital from higher risk assets. While there were periodic bouts of ‘risk on’ often following news of another hefty cache of tax payer funds thrown at governments and failing banks, these proved short-lived.”

The call for increasing EM exposure finds voice…
Nevertheless, there has been growing support for an increased emerging market exposure, particularly from institutional clients. The ascent of the BRICs and emerging Asia with improved economic muscle, robust balance sheets and attractive aspirational demographics suggests historians will regard the 21st century as the age of the emerging world.

“Institutional clients are accessing the sector in increasing allocations,” said Sweeney. “It is timely for advisers to revisit the portfolio radar to ensure the trend does not leave retail clients stuck in the starting blocks.”

…while changing dynamics of the Chinese economy have profound implications for Australia
“As China shifts gear from an export led to a domestic consumption driven story, it may be increasingly difficult for Australian investors to gain exposure to the Asian consumption story through holdings in Australian resource stocks,” explained Sweeney.

“There are also signs that the commodity cycle is peaking, dampening demand for Australian resource stocks. This shift may reduce the Australian equity market’s historical performance correlation with emerging markets.” 

The review
Lonsec’s Global Equity Sector Review encompassed 24 long only global emerging market and Asian equity investment managed funds.

Of these, five attained Lonsec’s top rating of ‘Highly Recommended’; the Aberdeen Asian Opportunities Fund, the Aberdeen Emerging Opportunities Fund, Fidelity Asia Fund, Premium China Fund and the T Rowe Price Asia ex Japan Equity Fund.

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Rui Fernandes, Senior Investment Analyst who led this review commented, “The number of funds reviewed in this sector is a reflection of the limited options available to Australian investors when compared to global long only funds (Lonsec researches 36 of these).”

“When comparing the long/short global and Australian sectors, a clear concentration in the number of underlying investment managers is evident.”

Platinum Asset Management, which dominates this space (by AUM and breadth of product range), is a significant factor in this outcome – Lonsec currently researches six products managed by this firm.

“Another interesting observation from this sector review is the domination of ‘home grown’ investment managers,” said Fernandes.

“Out of the eight underlying investment managers across the Global and Asian sub-sectors, five of these are Australian businesses with most having their investment operations in Sydney.”

“This contrasts with long-only Global and Asian equity funds where multi-city located investment teams are common and solely an Australian presence a rarity.”

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There is one new manager, Magellan, which was rated in 2008 but withdrew in 2009. Magellan offers a relatively concentrated global infrastructure product, which was assigned a three-star rating—the same rating it had when last rated. The other new rating is an unhedged version of RARE’s Infrastructure Value fund.

“We upgraded one fund—the Macquarie International Infrastructure Securities Fund—to four stars from three stars due to our increased conviction in the team. It is one of the largest teams in the peer group and the team has access to broader resources within Macquarie for ideas and opportunities, which we consider a strength. The manager has also simplified the fund’s fee structure and with a relatively low management fee, the product is very competitively priced,” said S&P Fund Services analyst Simone Gavin.

The sector’s relative immaturity, given the long-term nature of investments and limited track records, has led us to be somewhat cautious in upgrading ratings. Most funds in the peer group are rated three stars and there are currently no five-star rated products. The capabilities that we rate as four stars are Vanguard for its customised index approach, RARE for its global listed infrastructure fund, and the recently upgraded manager Macquarie. Macquarie and RARE have the largest teams in our peer group which we believe allows greater depth and breadth in coverage.

Ms Gavin added: “We will continue to gain conviction over time as managers show they can meet objectives over the market cycle while consistently investing to their style.”

The 2011 sector review is our fourth formal review of listed infrastructure and covers 12 listed-infrastructure capabilities and eight managers. It includes 10 global capabilities, one emerging markets infrastructure product, and one domestic fund. We will publish a sector report in due course, including the key findings and sector themes from our review.

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Libby Newman, Senior Investment Analyst responsible for this sector commented, “Traditional income funds include the more conventional Australian, global and diversified fixed interest products that are generally managed with reference to a widely accepted fixed interest market benchmark such as the UBS Composite Bond Index.”

“On the other hand, alternative income funds are typically absolute return in nature, managed with the aim of generating returns that exceed cash or a cash proxy, such as the UBS Bank Bill Index, by an arbitrary margin.”

In the traditional income space, four funds attained Lonsec’s highest rating, Highly Recommended. These were the PIMCO EQT Global Bond Fund, the PIMCO EQT Wholesale Australian Bond Fund, the PIMCO EQT Wholesale Diversified Fixed Interest Fund and the Schroder Fixed Income Fund.

Two alternative income funds were rated Highly Recommended – CFS Global Credit Income Fund and Macquarie Income Opportunities Fund.

Index Funds and ETFs vs. benchmark agnostics

One of the trends noted in the report is the continued popularity of index funds as a low cost alternative to active management.

“In Lonsec’s opinion, given the dislocations and upheaval in global financial markets since the GFC, that active managers are better placed to add value than they have for a number of years,” said Newman.

One of the discussion points in the industry has been that while fixed income indices make good benchmarks, they don’t necessarily make good investment strategies. The reasons for this include:

• Some fixed income indices exclude large parts of the universe including floating rate notes, inflation linked securities and sub-investment grade issues which can have performance and diversification benefits to a portfolio
• Construction of fixed income indices tends to reflect the market capitalisation of fixed rate investment grade sectors – i.e. issuers with the greatest debt  have the highest index weights
• In the US, fixed income benchmarks currently have an increased weighting to government exposure at a time when interest rates are at 60 year lows and the risk of rising interest rates (and falling bond prices) is arguably the highest it’s been in decades.

“Lonsec has observed the emergence of Funds which are constructed without regard – or with less regard – to benchmarks in a portfolio construction sense and instead seek to deliver positive returns in all market environments,” said Newman.

“Faced with the prospect of rising bond yields, these managers can significantly increase the weighting to cash or floating rate securities which are likely to perform better than fixed rate bonds in a rising yield environment.”

These products include:

• Vianova Strategic Fixed Income, which invests in 100% investment grade securities, with an Australian focus and relatively low exposure to credit
• Kapstream Absolute Return Income, which retains a minimum 85% in investment grade quality credits and seeks to add value via a number of trades in global interest rate markets, largely via derivatives
• Perennial Tactical Income, which aims to be a one stop shop for cash, floating rate and fixed interest exposure, potentially relieving advisers from what is essentially a duration decision, allocating between cash and Australian bonds.

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