Smart Investor: Earning It, January 2013

Smart Investor, January 2013

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Smallco Investment Fund

Who runs the fund?

Smallco Investment manager, which is, as the name suggests, a specialist in small cap stocks. The managing director is Rob Hoskins, who before founding Smallco in 2000, had been head of small company research at Macquarie Equities, BT Alex Brown and ANZ.

The basics: Looks for small caps below fair value. Can invest up to 20% in larger companies and some cash; it can also short sell, meaning it seeks to benefit from a falling share price.

The process: The focus is on what Smallco calls the sweet spot, of companies with a market capitalisation between $50 million and $100 million, the theory being they are small enough to be under-researched but large enough to be sustainable.

The bottom line: Remarkable. According to Morningstar it returned 42.71% in the year to October 31, 17.99% per year over three years, and 6.98% a year over seven.

Fees: 1.4% investment management fee, plus 0.52% administration costs, and a performance fee of 18.64% of returns above the previous high water mark. Those are big fees, but lately the returns are worth it, particularly since the fund has only just taken out a high water mark from five years ago.

Verdict: Great returns in a tricky environment.

New fund

Vanguard Australian Fixed Interest Index ETF

What is it?

An exchange-traded fund for fixed interest.

Wasn’t there a flurry of these at the start of 2012?

Yes. For a long time ETF manufacturers couldn’t launch fixed interest products, because of concerns at the regulator and stock exchange that the underlying assets weren’t listed. But about a year ago, they reached agreement on how to structure the ETFs, and a wave of them came out.

What’s special about this Vanguard one?

It doesn’t really provide anything that wasn’t already out there, but it does round out Vanguard’s product set from the government bond ETF it launched earlier in 2012. It’s a straightforward diversified bond product, including Australian government, semi-government and corporate bonds.

What’s the appeal of these products?

Buying bonds yourself is not straightforward, and most people historically have gained their fixed income exposure by buying a managed fund. That’s fine, but the appeal of ETFs is that they are very easily bought and sold – just like buying and selling any share – and they are listed on the stock exchange so it’s very easy to check the price. They’re also very cheap.

How cheap?

A fee of 0.2%.

GIZMO

The clumsy and hopeless among us are beyond help when it comes to losing things. If you attach something to a phone and have a tracker to figure out where it is, you can guarantee we’ll lose the tracker.

So a new gizmo called the Find One Find All (FOFA) may give us hope. Basically, attach them to everything you lose. One for your wallet, one for the car keys, one for the house keys, one for your glasses, one for the remote control. Then the idea is you use one to find all the others – press a button on one and the others make a noise and flash. Use your wallet to find your keys! Use your keys to find your glasses! Fantastic idea. You’ll have realised, though, a slight security issue here: if someone finds your keys, then in the wrong circumstances they’ll also find your wallet too…

Fund watch: Perpetual Ethical SRI

It is commonly said that ethical funds have to fight with one hand behind their back, impeded from investing in a full range of stocks. SRI managers, in turn, argue that any ethical screen is a positive one, since only sustainable companies have a long-term future.

A look at Pereptual’s numbers support the latter view, having dramatically outperformed the market over one, three and five years – one of the few funds, in fact, that has generated a positive return over five years.

A look at the stock holdings shows you the key differences from other typical funds. While most Australian funds have heavy resource holdings, neither BHP Billiton nor Rio Tinto appear in the Perpetual portfolio, with banks holding the top positions alongside a couple of less familiar names like Breville, the kitchen appliance manufacturer, and Reckon, the finance software group.