Smart Investor: Earning It, March 2013

Smart Investor, March 2013

Earning It

Roadtest

Bennelong Kardinia Absolute Return Fund

Who runs the fund? Bennelong Funds Management, a boutique established in 2001 with five investment teams for different specialist areas. The Kardinia Capital team, running this fund, is portfolio managers Mark Burgess and Kristiaan Rehder.

The basics: A long/short Australian equity fund. That means it can take positions that benefit from stocks going up or down.

The process: Holds between 20 and 50 stocks, and aims to achieve double digit annual rates of return. Uses long-term fundamental stock selection – which means picking stocks individually because they look promising over the long haul, rather than stocks that ought to benefit from a broader market movement.

The bottom line: Had an apparently very good 2012, returning 13.52% net of fees in a year in which its benchmark (the RBA cash rate) was up 3.76%. But here’s the catch: that’s completely the wrong benchmark for a fund that holds stocks, and 13.52% is not much more than the market last year. Still, it’s up 14% a year since inception in 2006, which is impressive.

Fees: 1.5375% management fee, and a performance fee of 20.5% of returns over the RBA official cash rate. That’s high – and especially high since the benchmark is the cash rate instead of the stock market.

Verdict: It’s unusual to find a long-short fund that has never yet logged a negative year. You are paying big money for the service but so far the managers are earning it.

New fund

UBS IQ Research Preferred Australian Share Fund

What is it?

An exchange-traded fund (ETF).

Ah, one of those passive products that give you exposure to an index like the ASX200?

Yes and no. Exchange-traded funds can be bought and sold like any other share, but they represent a portfolio, often an index. What’s different about this one is that instead of following a market, it follows a portfolio of companies that UBS equity research analysts like. That’s unusual in the Australian market because it adds a subjective element of stock selection, rather than being passive like most other ETFs.

So what does it follow exactly?

UBS has what it calls a Research Preferred Index, containing 40 ASX-listed securities that UBS’s equity research team have a ‘buy’ recommendation on it.

What’s the advantage of doing it this way?

You still get a diversified portfolio through just one investment. But with any index investment, you get the duds as well as the stand-outs, the overvalued as well as the bargains. The idea of this one is it only includes the better candidates.

Will it work?

That depends how good UBS’s analysts are. UBS analysts are among the most highly rated in the industry, but there’s no guarantee.

What are the fees?

0.7% per year. That’s higher than most ETFs – about double, in fact – but lower than most actively managed equity managed funds, which can be two or three times as expensive.

What happens to the dividends from the stocks it tracks?

They get passed on to you, and will normally be reinvested unless you say differently.

Is there a downside?

Some people prefer to invest in ETFs just for cheap, passive, predictable investment – diversified by an entire market, so that you know roughly what you’re going to get without surprises. An ETF based on analyst recommendations has the potential to beat that, but it’s also a less certain outcome.

GIZMO

Blue Tiki microphone

If you Skype – and if you have distant family, conduct conference calls through your PC or travel a lot for work, you probably do – you are somewhat hostage to the quality of your computer’s microphone. In modern PCs and Macs they’re not so bad, but often in laptops – which, travelling, is one of the key ways you’ll use Skype – they can vary.

This new mic from Californian company Blue Microphones is designed for those who Skype or who use dictation software on their computers. Blue are serious microphone engineers, and this one operates through a USB so you can plug it straight into the computer. There’s also a fly mic, one that doesn’t have to be attached to the USB connection, so you can have it closer to your mouth. It has two modes: Intelligent speech mode aims to bring your voice forward while minimising background noise, and natural record mode instead captures exactly what’s out there, whether it’s you or a guitar. Selling on Amazon in the US for US$59.99, to which you’ll have to add Australia shipping costs.

Fund watch: Peters Macgregor Global

For the longest time in this fund’s early days about 10 years ago, it stayed mainly in cash, refusing to put money to work when it couldn’t find value. Well, one thing the financial crisis most certainly did was bring valuations down, and the fund has reaped the benefits of waiting, beating the market dramatically over one, three and five years. It takes a 10-year investment horizon and believes that patience is a virtue.

It has done so with a mixture of familiar and unlikely holdings. Bank of America is well known but it took impeccable timing to find an absolute car crash of a stock that then turned into the Dow’s best performer last year. Berkshire Hathaway, Warren Buffet’s vehicle, is also a safe bet, but who would have picked New Zealand’s very own Michael Hill International jewellers as the biggest holding, way ahead of Johnson & Johnson or Tesco?

The last thing you could accuse the fund of doing is hugging a benchmark. So far, it’s working.