Smart Investor: Earning It, June 2013

Smart Investor, June 2013

Earning It

Roadtest

Acadian Wholesale Geared Global Equity

Who runs the fund? Acadian Asset Management is a Boston-based manager specialising in global equities. Its fund is usually accessed in Australia through Colonial First State.

The basics: A geared fund, meaning it borrows to invest and so increases the exposure for every dollar put in. Invests in stocks worldwide.

The process: Acadian talks about structured stock and peer group valuation models. These look closely at value, earnings growth and price-related factors. The option used for gearing does not hedge currency risk except for the currency exposure of the borrowing itself. Top holdings on February 28 were Exxon Mobil, Philip Morris (the cigarette group) and Royal Dutch Shell; probably fair to say it doesn’t run an ethical screen.

The bottom line: The returns show you exactly what the pros and cons of a geared product are: when it’s good, it’s very good, and when it’s bad, it’s very bad. To March 31, it was up 24.11% in a year, and 24.75% in the last six months alone; over five years, it was down 7.18% a year, and in fact is down 12.03% a year since inception in April 2007 (which was, in fairness, about the worst time one could possibly have launched a global equity fund, in hindsight).

Fees: Through Colonial First State’s FirstChoice platform, the fees come out at 1.2% of gross assets and 2.57% of net –the figures are different because of the gearing involved.

Verdict: Not only illustrates but magnifies the dismal performance of global equities through the financial crisis, but has clearly turned a corner more recently.

New fund

Charter Hall Direct Industrial Fund No 2

What is it?

A fund that will buy Australian industrial property.

Why?

Industrial property should act as a good diversifier from shares and other assets. This is an unlisted property trust, so won’t rise and fall with the markets like an A-REIT; it should have very little volatility.

What sort of returns can you get from industrial property?

The fund is aiming for 8%, fully tax deferred, per year, with an emphasis on stability. It will make distributions quarterly.

What exactly will it invest in?

The first Charter Hall Direct Industrial Fund, launched in 2010, ended up with seven industrial properties in Australia, now worth $208 million. This new fund will look similar: its mandate is to buy new or near-new industrial properties, tenanted by the government or by blue chip companies on long leases with built-in rental growth.

To get started, it will buy a new Australia Post Distribution centre which at the time of writing was approaching completion in Rowville, Victoria; and will acquire a 25% interest in a joint venture trust which owns the Coles distribution centre at Perth Airport.

What’s the downside?

Chiefly, illiquidity. You can’t just buy and sell out of industrial property like shares or bonds, and consequently, you can’t chop and change with a fund that invests in them. Once you’re in, you’re in. This one has a seven year term, towards the end of which there will be a unitholder vote on whether to redeem or extend.

It’s also always worth looking at gearing (the level of debt) in a fund like this. According to advisor Lonsec, initial gearing will be around 48%, which it says is around the mid-point for funds like this.

Who’s the manager?

Charter Hall is a specialist in property and has about $10 billion in funds under management across office, retail, industrial and residential property.

What are the fees?

Fees can be complicated on funds like this. The manager can charge up to a 2% acquisition fee for new properties. Then there’s a management fee of 0.6%. Lonsec calculates the total management expense ratio at 0.8%, and indirect cost ratio at 1.45%. There’s also a performance fee of 15% on returns over 10% per year.  Minimum investment is $10,000.

What does Lonsec conclude?

Gives it a ‘highly recommended’ rating. “Lonsex considers the fund suitable for medium to high risk profile investors with a five+ year investment time horizon.”

GIZMO

Nio TAG

It happened in an instant. I was working on my laptop on the train; put it in my backpack as I pulled into the crowded station; struggled through the crowds up the stairs to my next train; looked in my backpack; no laptop. Thousands of dollars worth of hardware and a huge amount of irreplaceable work, gone.

So I’m looking at the nio TAG with interest. It’s a small white tag that links wirelessly with devices such as iPhones, iPads and laptops through an application from the App Store. If they are separated, an alarm goes off on both devices. Sells for US$69.99 at niostore.com

Fund watch: Arnhem Australian equity

Do people still want equity funds that stay close to the benchmark? Over the last year the Arnhem Australian Equity fund has almost exactly matched the S&P/ASX 200 Accumulation Index, which would have been cheaper to do using an ETF. Over three years it’s about a percentage point behind the index, over five years, a percentage point ahead.

A look at the top holdings shows why: a heavy allocation to obvious blue chips with only the 10^th largest holding, ResMed, looking like a clear active view. Much like the index, the fund is dominated by financial services. It doesn’t seem to like Rio Tinto much though, so at least that’s a clear opinion.