New fund launches show taste for the quirky

Australian Financial Review, Managed Funds Quarterly, March 2008

India. Agriculture. Green themes. Water. It used to be that new product launches in the managed funds industry consisted of more and more Aussie or global equity funds, with a multi-manager product here and there. These days, new launches are altogether more focused and quirky.

 According to Morningstar, 44 new retail and wholesale unit trusts have been launched since August 1, not counting the addition of existing investment strategies onto other managers’ investment platforms.

 They are a diverse bunch, but several themes are clear, starting with emerging markets. Morningstar’s list includes four Asian funds in the MQ Gateway range from Macquarie (two covering Asian stocks, with varying degrees of capital protection, and two covering Asian financials); a BRIC (Brazil, Russia, India and China equities) fund from Goldman Sachs JB Were; an emerging market equity fund from DWS; and an Indian equity product from Fiducian.

Another trend is to launch funds designed to exploit something that is becoming scarce: food or water, for example. Goldman Sachs JB Were launched a food fund in January, complementing two agriculture funds in the MQ Gateway range, and retail and wholesale versions of a global water fund from Liontamer. The Goldman Food, Feed, Fuel fund, launched under the manager’s Keystone Funds range, is a capital protected product that gives exposure to sugar, wheat, soybean and corn, for example. Like many products in this area, it does so through strategies built around commodity indices rather than through individual stocks, as it can be very hard to find listed companies with pure exposure to these foods. Strategies like these are becoming popular firstly because of the scarcity of food in the world, secondly because of growing affluence and changing dietary habits in big-population countries like China, and also because of the increasing use of these crops as a source for ethanol or biofuels. Water funds invest in companies which should do well out of the growing scarcity of water – those involved in purification, for example, or simply water utilities.

 A similar theme is funds related to green issues or climate change, which invest in stocks that do something positive about these issues and ought therefore to be well positioned when such services come in greater demand. In this field are the Hunter Hall Global Deep Green fund, DWS’s Global Climate Change product and the Generations Global Sustainability fund from Colonial First State’s FirstChoice platform. So-called 130/30 funds, which can take long and short positions in the stock markets, are much talked about but little launched so far.

 Expect more in this vein. “I expect to see more gimmicky-type funds in this market – perhaps regrettably, given the potential for their slick and sophisticated marketing campaigns to distract investors from some key fundamental issues when it comes to investing,” says Phillip Gray at Morningstar, the research group. More important, he believes, are diversification and asset allocation.

 “What I’d really like to see, though, and what I think would be of greater benefit to Australian investors, is more emphasis by fund managers on cleaning up legacy product ranges – the living dead of the funds management industry – rather than bandwagon-jumping into emerging markets and other trendy sectors like global agribusiness or water.”

Gray is referring to the many funds in Australia with almost nothing invested in them. Morningstar covers 8332 funds launched in 2004 or earlier; 56% of them have A$10 million or less in them, 45% of them $5 million or less and 24.3% $1 million or less.

 One curious new field is funds that appear to be able to look backwards. Late December, for example, saw the launch of the HFA Retrospective Fund and the ABN Amro Global Equities Hindsight Securities. “Participate in Asia’s growth with absolute hindsight,” says the flier for the HFA fund.

 What it means is that, at maturity, it offers exposure to whichever of two different indices had the better performance – the S&P/ASX 200 or an “Asia bucket” made up of a 50/50 split between Hong Kong’s Hang Seng index and Japan’s Nikkei 225.

 Similarly the ABN Amro product, which is capital protected, says it incorporates “a unique feature whereby the allocation to each asset class is set at maturity, when investment performance is actually known. This allows you to invest today with the benefits of hindsight.” In this fund, the investor is exposed to a basket of international equity indices (and a fund) and, at maturity, the best performing market gets the greatest allocation, and the worst performing market the smallest.

 Products like these reflect the nervousness investors feel about choppy local and global markets. Capital guarantees, or structures which appear to take the uncertainty out of investment, are always popular in an environment in which nobody is quite sure which way markets will turn.