Smart Investor: Earning It, April 2013

Smart Investor, April 2013

Earning It

Roadtest

Australian Ethical Smaller Companies Trust

Who runs the fund? Australian Ethical is a socially responsible fund manager, claiming to have the most rigorous ethical screening process in Australia. The portfolio manager is Andy Gracey.

The basics: Smaller companies, but not quite a small caps fund. About 40% of the money goes into ASX100 stocks, and the rest into small-cap industrial stocks. A small amount of the fund goes into international stocks.

The process: Emphasis on technology research, such as emerging biotech companies – the next Cochlear or CSL. The portfolio is a mix of big familiar names like Bank of Queensland, QBE and Westpac, alongside less well-known names like Neuren Pharmaceuticals and Qube Logistics. Looks for growth rather than income stocks, and says its ethical screen actively seeks companies doing good things for the environment, rather than just excluding those that wreck it.

The bottom line: 21.3% net of fees in the year to January 31, and 9.9% a year over 10 years – by far Australian Ethical’s best fund over the long term. The short term number, while impressive, is actually beaten by several others in Morningstar’s mid-small cap Australian equities universe; top performer in that field, over the short and the long term, is the Hyperion Small Growth Companies fund.

Fees: 1.9% investment fee, or 2.14% when all expenses are considered.

Verdict: Suggests that ethical funds don’t have to miss out on good returns.

New fund

Fidelity Global Demographics Fund

What is it?

A global equity fund with a twist.

Which is?

Stocks where Fidelity believes demographic factors – like population growth, the emergence of new middle classes, and ageing populations – are going to be the main driver of growth.

Why?

More and more of the world’s biggest investors look at megatrends – the sweeping themes that will shape our world in coming decades, like sustainability, water scarcity, and population growth. This fund taps into the third of them in the belief that stocks that are exposed to the theme will do best over the long term.

What sort of stocks does that suggest?

A fund that is heavily weighted towards healthcare (41.3%) and consumer staples (25%), and geographically towards the USA (38.4%), all based on numbers from December 31. The top holdings are dominated by healthcare or pharma names like Sanofi, Johnson & Johnson, Colgate-Palmolive and Bayer, but there are some interesting others too: SAB Miller and British American Tobacco, the logic being that if there’s going to be a lot more of us with a bit more money, we’ll probably use some of it to drink and smoke.

Why the USA? The population growth is in Asia and Africa.

It should be said that countries marked ‘other’ make up 22.5% of the fund, which is likely to include some emerging market exposure, and that doesn’t include India and China, which make up 5.6% of the fund between them. But it is often the case that the best way of playing the growth of emerging markets is through developed world companies with a lot of their business in the developing world. Coca-Cola and Nestle are often cited as examples of this.

What’s the benchmark for a fund like that?

It uses the MSCI All Country World Index with a five to seven year time horizon.  Fees are 1.15% per year, relatively low for a thematic global equity product.

GIZMO

TV Ears

Come into my house. The TV is on, and there is about to be a war about it. Child one thinks the volume is just fine. Child two would like it turned up until it shatters the windows. I would like it to shut up completely so I can continue my phone call in which I am pretending to be in my office when I am clearly nothing of the sort.

A new American gizmo called TV Ears allows one person to have an amplified version of what everyone else is listening to. So the TV’s on at a reasonable level for most people, but the person who needs it louder, for whatever reason, gets that with their wireless ears. They do look a little like a horse’s nosebag, and I wasn’t entirely sure why you wouldn’t just wear them as headphones, but still, the thinking behind them is sound. Literally. As the www.tvears.com ad puts it: “TV Ears saved our marriage!” They cost about US$130 over there, to which you will need to add shipping.

Fund watch: Perennial Value Smaller Companies

The so-called Small Ords is a treacherous place to be sometimes, and the index is still in negative territory over the last five years. You wouldn’t know it from this Perennial fund, though, which is up 5.98% a year over that time while the Small Ords is down 3.22% a year. The outperformance is better still over the last 12 months: 18.58% versus 3.07%.

How? The small caps space is where significant bets on unlikely stars can be rewarded (and punished). Perennial’s top holding is Clough, an engineering and project services contractor for the energy industry, followed by Fantastic Holdings, a furniture group. The fund is dominated by industrials and basic materials, making up nearly half the fund between them, with consumer cyclicals and energy stocks making up most of the rest. Financial services? Forget it – less than 5% of the fund.