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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S&P Fund Services’ alternative strategies sector head, Michael Armitage said: “Most of the alternative equity peer groups have shown risk-adjusted returns that are superior to their long-only indices. Given continued uncertainty and increased levels of volatility, investors will benefit from managers that have more unconstrained strategies—especially those that also concentrate on capital preservation. Additionally, we continue to witness stronger institutional quality offerings, which increased the overall level of competition in our peer review.” 

The report covers the release of 38 alternative equity capabilities in equity beta variable, alternative income, market-neutral, and market exposure strategies as part of S&P’s latest review of the sector. One manager received a downgrade, three managers received upgrades, and with five new ratings (three of which were four stars), the peer group is relatively stable since our previous Alternative Equities review in 2010. 

“With global equity markets experiencing significant effects of global macro events in recent periods and the classic “buy and hold” equity proposition failing many investors over extended periods, alternative equity strategies continue to present a strong case for inclusion in a well-diversified portfolio. Market exposure strategies continue to present mixed returns with fundamentally driven strategies outperforming quantitative-based strategies. In addition, market-neutral strategies have impressed and offer further diversification for investors,” said Mr Armitage. 

Some of the key findings from the sector review: 

• Investors were cushioned on the down side with help from the flexible mandates of the variable beta peer group managers that are continuing to show their strengths since our last review.
• The equity income sub-peer group impresses us as a product that is underappreciated as a potential core allocation for income-focused investors.
• The three market-neutral trading strategies proved their worth as “alternatives”—showing alpha and avoiding significant drawdowns in negative equity environments—demonstrating effectively the portfolio diversification potential of the format.
• Teams and processes with multiple sources of alpha generation continued to score higher relative to peer funds (despite the fact that some may have shown poor performance contribution from one or more of these particular sources over the period since our last review, e.g. active currency positioning).
• Incremental improvement of risk-management staffing, protocols, and systems at certain firms has raised the bar for the sector as a whole, in our view.
• Manager trading ability and understanding of the particular risks of short-selling—and how they might be mitigated—remains mixed.

In what is a continuing point of focus for us, we note that managers are mostly showing good awareness of the credit risks inherent in shorting, fund custody, and prime brokerage arrangements. However, these continue to be addressed only slowly, and not by all.

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Three new funds were added to Lonsec’s universe in 2010 – the Zurich Investments Global Property Securities Fund (Recommended), BT Global Property Securities Fund (Investment Grade) and the Resolution Capital Global Property Securities Fund (Investment Grade).

Key themes from the 2010 review

Performance dispersion

Global real estate securities rallied over the year, driven by an increase in market confidence and renewed appetite for risk. Thembi Matabiswana, the Lonsec analyst who spearheaded the review, commented, “We found that those fund managers holding high levels of cash were more likely to outperform the benchmark over the longer period.”

“Cash levels were generally in the upper ranges of permissible and historical levels which support this view.”

Lonsec accepts that higher than normal cash levels are to be expected given the possibility of increased redemption requests and the more defensive portfolio positioning of many managers. However, advisers should take care when reviewing fund performance so as not to confuse strong fund performance due to high cash levels with strong fund performance due to stock picking skill.

While absolute returns have been positive in the 12 months to 30 November 2010 (average 20.9%), over a three year time horizon performance has been poor. When comparing managers across the sector, the dispersion between performances over the longer term continues to be high.

“Over the three years to 30 November 2010, ING was the top performer. This outperformance was largely driven by the manager‟s emphasis on top-down macroeconomic variables and effective re-positioning of its portfolio to accommodate changing market cycles,” said Matabiswana.

Access to equity and debt markets

REITs continued to tap both equity and debt markets throughout 2010, representing a material increase in activity from 2009. European real-estate securities in particular experienced a significant turnaround during the third quarter, driven by improving economic data and broad anticipation of additional quantitative easing programs.

“A report prepared by Jones Lang LaSalle stated that Europe dominated cross-border investment activity over the first half of 2010,” said Matabiswana.

“The report specifies that global real-estate investment totalled US$132 billion, almost double for the same period in 2009, with more than 50% of this occurring cross-border in Europe.”

As it stands, REITs continue to enjoy far superior access to capital compared to their unlisted real-estate counterparts and are therefore well positioned both offensively and defensively as economic recovery continues to strengthen or worsen.

Currency headwinds

The Australian dollar has experienced a significant amount of volatility over the last two years. The largest fall was seen over the three months to October 2008, where the Australian dollar dropped from a high of 91 cents in July to as low as 60c. With all the funds in the review offering fully hedged products, most of them have been unable to pay distributions as a result.

This is because July 2008 saw tax law changes that required all classes of income to be included in the calculation of taxable income. This included realised currency hedge gains/losses. Realised currency losses, in some instances, reduce the level of distributions that a fund can pay, if significant enough to cause a net loss on its taxable income. Importantly, currency losses continue to be carried forward until they are completely offset by future income.

“Therefore, for most of the hedged funds, such currency losses will continue to be carried forward until they are completely offset by future income. It is therefore possible that some funds‟ future distributions may continue to be affected by previous currency losses,” said Matabiswana.

“AMP and RREEF were the exceptions as these managers have continued to pay distributions; they have done this by funding the hedging losses through the sale of stock in the portfolio.”

In fact, both approaches should result in a similar outcome and not have a material effect on total returns. Those funds that will reduce or not pay distributions will benefit by a commensurate increase in their Net Asset Value (NAV) per unit. Those funds that do pay distributions will fund this by selling down a portion of their portfolio. This will act to reduce their NAV equal to this distribution amount.
Greater conviction at the regional level, for a more active global portfolio

In the past Lonsec has criticised managers for not being active enough at a global portfolio level. Managers’ active positions relative to their benchmarks were considered too small when compared to other sectors. This continues to be the case with high fees for mid conviction “active management”.

This is particularly disappointing given the extensive investment teams and resources afforded to most “active” global property securities fund managers.

“Some managers, such as RREEF and Principal, have acknowledged this. These managers have undertaken further research at a portfolio construction level and found that in order for an active position to be significant at a global level, there would have to be sufficient flexibility to take even larger regional bets,” said Matabiswana.

“These managers have adjusted their risk management systems accordingly, as well as encouraging regional teams to take larger active positions. Lonsec continues to encourage this evolution in portfolio construction, as long as it is supported by adequate resourcing and the appropriate tools and systems.”

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Zenith Investment Partners Pty Ltd (Zenith) Investment Analyst Steven Tang has announced the completion of the 2010 Fixed Income Sector Review and confirmed that from an initial group of 91 fixed interest funds, 7 were rated HIGHLY RECOMMENDED and 12 were rated RECOMMENDED.

In addition to being added to the Zenith Recommended List these 19 Funds are also candidates for client model portfolios.

The key changes to the Recommended List post the review include the addition of 5 new funds across various categories as well as upgrades for 2 existing funds. The 19 funds that were rated Recommended or above are shown below:

Australian Fixed Interest – Bonds

• Australian Unity Vianova Strategic Fixed Interest Trust (Recommended)
• Legg Mason Australian Bond Trust *NEW* (Recommended)
• Tyndall Australian Bond Fund (Highly Recommended)
• Vanguard Australian Fixed Interest Index Fund (Recommended)

Australian Fixed Interest – Corporate Debt

• Macquarie Income Opportunities Fund (Highly Recommended)

Australian Fixed Interest – Specialist

• Goldman Sachs JBWere Core Plus Australian Fixed Interest Fund (Highly Recommended)
• Perennial Tactical Income Fund (Recommended) International Fixed Interest – Bonds
• Advance International Fixed Income Multi-Blend Fund *UPGRADE* (Highly Recommended)
• EQT PIMCO Wholesale Global Bond Fund (Recommended)
• Vanguard International Fixed Interest Index Fund *NEW* (Recommended)

International Fixed Interest – Corporate Debt

• Colonial First State Wholesale Global Credit Income Fund (Highly Recommended)
• Bentham Global Income Fund (Recommended)
• Bentham Syndicated Loan Fund *NEW* (Recommended)

Diversified Fixed Interest

• Colonial First State Wholesale Diversified Fixed Interest (Recommended)
• EQT PIMCO Wholesale Diversified Fixed Interest Fund *NEW* (Recommended)
• Macquarie Diversified Fixed Interest Fund (Highly Recommended)
• MLC Diversified Debt Fund *NEW* (Recommended)
• Schroder Fixed Income Fund *UPGRADE* (Highly Recommended)
• Vanguard Index Diversified Bond Fund (Recommended)

Last year’s Fixed Interest Sector Report focused on the changing nature of Bond Indices and the effects this could have on future performance of fixed interest portfolios as well as the importance of maintaining Strategic Asset Allocation.

While these topics remain relevant today, this year Zenith chose to address some investor concerns, specifically whether to use diversified fixed interest funds or specialist sector funds and the veracity of the ‘Bond Bubble’ claims.”

The last few years have been a roller coaster ride for investment markets and investors alike. During this period many investors were understandably disappointed with the performance of their investments, particularly those they thought were defensive.

Unfortunately, many products labelled as diversified fixed income funds were among these defensive investments that failed to deliver on expectations.

Following this disappointing period it’s not surprising that many investors questioned their fixed income allocations. The natural question became ‘if the diversified offerings had failed to deliver on expectations would it be better to segregate the fixed income allocation and allocate to specialist managers?’

In response, Steven Tang offered the following insight, “While a simple portfolio construction exercise, in which mandates are separated and return data over the past few years is used, lends credence to the intuitive appeal of this idea (based on the presumption that these specialised managers have superior skills within their more defined mandates), the outcome is highly dependent on the investor making the correct initial and ongoing asset allocation decision.”

Although it’s simple in hindsight it’s historically a very difficult task to execute successfully and can dramatically change the outcome. Performance over the past few years by diversified fixed income managers has been more a reflection of their strategic benchmarks than their lack of skill in this area.

Given the changing fixed income landscape these managers remain better placed to exploit the diverse range of opportunity sets, alleviating investors of the complex asset allocation decision.

It’s for this reason that Zenith’s Recommended List and fixed interest portfolio exposures remain biased to Diversified Fixed Interest Funds.”

In reference to the debate concerning the existence and threat of a ‘Bond Bubble’ in the US Treasury market Steven Tang observed that using the typical definition of a ‘Bubble’, i.e. irrational market behaviour driven by speculative mania, it’s unlikely that the US Treasury market represents a ‘Bubble’.

Unlike other financial markets, investors know exactly what returns they will receive if they hold until maturity (assuming no defaults). Additionally, short-term gains are likely to be very modest given current yields. More likely investors are looking for a safe haven for their savings given their torrid experiences of the last few years and the current uncertainty in global financial markets.

Steven Tang concluded, “Nevertheless, it’s definitely possible that investors could face a capital loss as bond yields rise. However, while they may not remain at their current lows, it’s difficult to see a near term catalyst for a rapid rise in yields which would result in large investor losses.”

“In the future, US growth may surprise on the upside, the US Federal Reserve may maintain its loose monetary policy for far too long, creating massive inflationary pressures, or demand for US Treasuries could dissipate making US Treasuries an appalling long-term investment.

“But not in the near-term.”

The post Zenith Releases Fixed Income Sector Review appeared first on AdviserVoice.

Of those multi-managers reviewed, four received Lonsec’s highest rating, Highly Recommended. These were Optimix, Mercer, Russell and Advance.

Key themes to emerge from the Sector Review

Dynamic asset allocation

“A number of managers introduced Dynamic Asset Allocation (DAA) in 2008-2009 to take advantage of the severe mis-pricings post the GFC,” commented Fuller.

“2010 has seen most managers wind back their DAA positions as market dislocations have abated.”

DAA is the medium-term (6-12 months or longer) tilting away from strategic asset allocation positions and there will often be long periods when no positions are taken.

“According to attribution data supplied by the managers, DAA contributed positively to the performance of the majority of multi-manager funds,” observed Fuller.

Index and enhanced index strategies in global equities

Index and enhanced index strategies have long been used in the Australian property and fixed income sectors, but this year has seen a significant increase in the use of such strategies within the global equities space.

“The key driver behind this trend is the desire to reduce the pressure on the fee budget as managers increase exposure to alternative assets. A secondary aim is to achieve consistency and diversification,” said Fuller.

“In Lonsec’s view, while the use of index and enhanced strategies will have the desired effect of reducing fees, it will also lead to a reduction in the alpha potential in this part of the portfolio.”

Alternative strategies

Alternatives continue to gather momentum, with nearly all multi-manager funds now employing a range of strategies. Managers continue to widen their search for new sources of uncorrelated return within their diversified funds.

“The average multi-manager growth fund now has a 9.2% allocation to alternatives, which is generally funded half from growth assets, half from defensive assets,” observed Fuller.

“The most commonly used alternatives include hedge funds, commodities and infrastructure.”

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The first sector reviewed focuses on Market Neutral and will be followed in the near future by CTA / Global Macro, Long / Short Domestic Equities, Long / Short Global Equities, Event Driven, Multi Strategy, Fund of Hedge Funds and Fixed Income.

Commenting on the Market Neutral Sector review, Daniel Liptak said, “Currently significant risk in diversified portfolios arises from equities exposure and this is due to the assumption that over the long run equities outperform. The purpose of the Zenith Market Neutral Sector Report is not to dissect such an assumption, but rather highlight that a significant portion of that equity risk is on the downside.”

“Any investment allocation decision that ignores the consequences of risk and the associated long-term drag on compound returns is deficient. Zenith advocates an investment approach that is designed to minimise this exposure risk.”

The events of 2008 and the subsequent period created an opportunity for the Zenith Hedge Fund Review Team to rationally review the benefits of alternative investments.

“The objections (to hedge fund investments) that were voiced by many commentators regarding liquidity, transparency and leverage are clearly being addressed by the industry,” added Daniel Liptak.

“The negative impact of draw-downs from traditional equities and the affect on long-term compounding is a concern for all investors. Australian market neutral funds have over the last 5 years captured all the upside of the Australian All Ordinaries but importantly did not participate in the downside.”

Zenith’s composite index of approved market neutral funds has delivered a cumulative return of 105%, net of fees, since July 2005.

Over the same period the Australian All Ordinaries Equity Index has returned to investors only 2.24% (gross of fees).

Zenith Investment Partners, Director and Co-founder David Smythe further notes, “Zenith affirms that market neutral funds, when combined with long only equity funds can significantly reduce volatility of the portfolio and simultaneously increase the expected return over the longer term.”

On the issue of fees, David Smythe states that while it is true hedge funds do charge higher fees they are in fact not higher than those charged by benchmark aware managers on the active portion of their portfolios.

There is a compelling argument to suggest that hedge fund managers are charging less for alpha than benchmark aware funds.

“Zenith contends that the focus on fees in the benchmark aware space is therefore warranted – but also notes that any discussion on fees should be undertaken with reference to alpha, not just the headline fee rate,” said David Smythe.

Post review of the Market Neutral sector Zenith’s Approved Listed funds were:

Commenting on the successful establishment of Zenith’s Hedge Fund Review Team David Smythe confirmed that the national research provider is targeting a segment of the research market that currently is not being well serviced.

“There is a “middle market” comprising Private Banks, Family Offices, Self Managed Super Funds and Small Institutions that are demanding specialist consulting services on innovative alternative investments that are not currently being serviced by the large asset consultants or by the research houses.”

“Zenith has therefore sought to extend its coverage, particularly in the Alternatives space for the benefit of not only this target market but also for our existing clients who are interested in more in-depth coverage of Hedge Funds,” concluded David Smythe.

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