Smart Investor: Earning It, June 2012

ROADTEST

Legg Mason Australian Real Income Fund

Who runs the fund? Legg Mason, one of the world’s largest asset managers with $638 billion under management worldwide as of February 29. Australia is one of 15 countries it has offices in. The Melbourne-based team is led by Ashton Reid.

The basics: Invests in Australian REITs, utility and infrastructure securities listed on the ASX, and aims to provide a consistent income stream over three to five years.

The process: The fund has no benchmark, and says it “aims to look through the short term noise of market cycles and to focus on the sustainability of cash flows”. Holds 20-25 securities with a focus on normalised earnings, intrinsic value and long term cash flow.

The bottom line: Hasn’t been around long but early signs are promising: 15.6% returns in the year to March 31 ranked second in the industry for funds of this type, according to Morningstar.

Fees: 0.79%, but that’s in a wholesale form; check with your platform if it carries the fund.

Verdict: Very strong so far.

NEW FUND

Russell Australian Select Corporate Bond Fund

What is it?

An exchange-traded fund for fixed income, focusing on corporate bonds.

That sounds familiar.

Last month we looked at another fixed income ETF, from iShares. For many years fixed income ETFs were not permitted in Australia, but following a recent agreement between ASIC, the ASX and manufacturers, a number of providers are bringing new launches to market. Russell, like iShares, has launched three at once: alongside this one is a government bond ETF, and a semi-government bond fund.

What will this one hold?

It will track the performance of a Deutsche Bank index called the BDIQ 0-3 year Investment Grade Australian Corporate Bond Index. This index filters all Australian corporate bonds and takes the larger and more liquid ones; the bonds must be rated at least A, from a listed company with a parent domiciled in Australia.

Anything else?

To get into the index bonds must have at least $100 million outstanding and have a tenor between one and three years.

Pretty specific. How many bonds make the grade?

At the time of writing, only bonds issued by the big four banks. This may not be what investors have in mind when they consider a corporate bond fund, so be sure it’s what you want.

Why an ETF?

You can buy them as easily as you buy a share; that’s not the case with most individual bonds.

What does it cost?

Just 0.26%, which is only fractionally more than the government bond ETFs.

GIZMO

Powermonkey Discovery

On a recent trip to the UK I noticed a proliferation of a gizmo called the Powermonkey. It’s a portable battery which is particularly popular with iPhones and iPads, but actually works with a host of different MP3s, Sat Navs, e-readers and the like (including the BlackBerry). And, though British made, it can be ordered worldwide, taking advantage of the lowly value of the North Atlantic Peso (the pound).

The manufacturers say that a full charge from this 107 gram gadget will recharge an iPhone twice, standard mobile phones three to four times, and will give iPods an extra 120 hours of playing time. You can recharge the Powermoney itself through a USB port on your computer, or through the mains (using, in true Apple style, a charger they sell separately). It is small – smaller than an iPhone – and sleek.

Ordered online at powertraveller.com, we were quoted GBP37.50, with a further GBP9.95 for postage to Australia.

FUND WATCH

Vanguard International Smaller Companies

The international small-cap space is volatile at the best of times, but especially in recent years; it’s performed admirably as a sector over the last three years, but badly over one or five.

Vanguard’s fund, as a passive vehicle, largely tracks the MSCI World Small Cap Index. Its sector split looks notably different from the sort of exposure many Australian investors will be used to at home: financial services is only the fourth biggest component, and basic materials fifth. Instead, it’s industrials, consumer cyclical stocks and technology that make up the biggest parts of the index, though it is actually far more diversified than, say, the ASX 200.

The hope of small caps is that they are tomorrow’s Microsoft, but in truth the companies in this index are hardly small. Top holding Wyndham Worldwide, for example, is one of the world’s largest hospitality companies, active on six continents. American Capital Agency, the second biggest holding, is a mortgage REIT with $53.7 billion of assets as of December 31. So this is not a collection of newly-launched businesses being run out of someone’s garage, but proven companies just a step below the blue-chips.