Smart Investor: Earning It, March 2012

ROADTEST

Colonial First State Wholesale Premium Cash Enhanced Fund

Who runs the fund? Colonial First State in its wholesale range.

The basics: Cash with a twist. Enhanced cash funds are designed to deliver nice stable cash returns, but with a bit extra from exceptionally safe securities.

The process: Combines “negotiable certificates of deposits” – pure cash, really – with term deposits to make up the bulk of the fund (as of December, 60.17% in CDs, 12.17% in term deposits). Then there is 12.12% in mortgage-backed floating-rate notes, 10.44% in promissory notes, 4.65% in commercial floating rate notes, and a negligible amount in bank bills.

The bottom line: It does what it’s meant to do in that it beats the cash rate; over the last five years it has produced 6.21% a year, according to CFS’s own numbers (pre-fees), while Morningstar says 5.73%, which is the best five-year performance of all cash funds it covers.

Fees: 0.45% ICR.

Verdict: Nothing wrong with a nice stable near-6% return at a time like this. A well-performing enhanced cash fund.

NEW FUND

Cleaview New Millennium Emerging Markets Fund

What is it?

A fund investing in emerging market equities.

They’re the future, right?

In theory, yes – emerging markets, particularly Asia, are the places with the highest GDP growth rates and prospects. But it’s also true that emerging market equities underperformed the developed world last year – the US, the UK, even most European indices. That’s because emerging markets are still seen as risky bets for asset managers, so when things turn tough money continues to flee back home, no matter how illogical that might seem.

What’s Clearview’s approach?

Aims to provide a total return before fees that exceeds the MSCI Emerging markets Accumulation in Australian dollars over five years or more. You’d have to say that just exceeding the benchmark before fees is not much of an argument so let’s hope they’re aiming higher. Emerging market shares must account for 50 to 100% of the allocation and it can go up to 50% cash. Like many such funds, it can invest in securities listed in developed markets where they have major exposure to emerging markets – some funds will hold names like BHP Billiton or Coca-Cola based on this rationale. But a look at the underlying manager (see below) suggests a strong focus on listed infrastructure.

Who’s it for?

Clearview describes the risk level as “very high”. A look at emerging market equity performance over the years shows you why; it tends to be very good or very bad.

So who’s actually running the fund?

Clearview itself is a financial advisory group rather than an investment management group; it uses underlying managers for its funds, such as Schroders on local equities and AllianceBernstein, MFS Investment Management and Franklin Templeton, among others, in global shares. The only manager named under the emerging markets fund is called RARE Infrastructure, a boutique investment manager investing in listed infrastructure. “Clearview chose to invest in emerging markets through a very specialised emerging market listed infrastructure fund with RARE, rather than a more conventional emerging market investment,” the manager explains. This is because otherwise, emerging market funds tend to double up what you already have in Australia. “For example, an investment in Chinese shares and investment in Australian resource companies such as BHP or Rio may have their investment returns driven by exactly the same set of factors, as China is the world’s biggest buyer of resources.”

Does that make sense?

It does insofar as avoiding duplication, but investing in a subset of emerging markets suggests a more concentrated risk than a broader exposure.

GIZMO

Kingston Wi-Drive

Most of us these days have data spread across numerous devices: desktop, laptop, handheld. The idea of the Wi-Drive is to make it easy to move files to and from devices, and it’s particularly targeted at iPads and iPhones (and is winning good reviews in the Apple specialist press right now).

It holds up to 32GB and allows you to share data with three users simultaneously. It’s also wireless. So, for example, you could drag content from your desktop onto the Wi-Drive, and then view that content through wi-fi on your pad/phone/pod or whatever you have. The company is based in California; its sellers in Australia are Avnet, Express Online, Ingram Micro and Synnex.

FUND WATCH

Invesco Global Matrix Fund

This is a global equity fund using a quantitative approach – that is, based on numbers, and on the theory that an inefficient market offers opportunities to add value. It takes no country, industry or style bets, but focuses only on bottom-up stock selection.

So how’s it done? Well, no global equity portfolio has looked much good over the last five years; Invesco has beaten the market over the last one and three years but lagged it over five. Its biggest holdings are some of the most recognizable stocks in the world – ExxonMobil, IBM, Microsoft, Nestle, our own BHP Billiton – and by sector it’s a pretty well-balanced mix, with financial services and energy the biggest constituents but not to anything like the same degree one might find in an Australian portfolio. There’s no question these are hard times, and the currency hasn’t helped, but losing 10% a year over the last five years is not much of a recommendation.