Managed Funds My current approach to managed funds

A number of people have asked me about my preferred managed funds.

I'm not going to list them explicitly, mostly because I've only invested in some of them for a short period (some I'm just about to invest in for the first time), and haven't gotten to know them fully yet ... so I don't want to be seen to make any recommendations which may be uninformed on my part. I've also changed strategy a little recently - and I'm still getting a feel for how well its working.

What I will mention though, is that my approach is (and has been for some time) to focus on fund managers, margin LVRs and high return potential as the primary factors.

• I look at fund managers who have a good track record with creating high performance funds
• I look at fund managers who have products that suit my style (eg. wholesale funds only so no entry/exit fees, funds that are easy to move in and out of, fees not unreasonably high, investments use strategies that I can understand)
• I look at funds that have shown they can produce high returns - even though I know it does not mean they will continue to do so - at least I know their strategy does make it possible (eg a strategy of investing in bonds won't make you the high returns !!).
• I look at the LVRs available through my prefered margin lenders. I figure that if a margin lender is prepared to offer 70 - 75% on a fund, they must be pretty happy with the soundness of their strategy. I do find that some margin lenders tend to favour some fund managers over others. I won't invest in a fund that you can't get at least 70% LVR on ... the higher you can gear, the better your returns will be, and a lower max LVR will simply not allow you enough of a buffer to be confident in gearing very high.
• I take a longer term approach to returns, I'm not fussed about the possibility of negative returns over the short term - unless the fundamentals have changed significantly. Most of the funds I've looked at have had negative years, but they are followed by good positive years which more than make up for them. Even some funds which have very negative years (-10% or worse), will still generally return a much higher return over a 5+ year period when you consider the good years as well. I prefer good consistent returns (even taking into account the occasional negative year), as opposed to extremes of performance.
• I don't invest in multiple funds that have similar strategies (eg invest in the same shares in the same markets with the same approach). I do invest in funds that have a variety of approaches and cover a number of different market segments or sectors.
• My current funds are invested in: Australian blue chip shares, Australian smaller companies, Australian Property Securities, International Property Securities, Asian developing markets (not Japan), International Resources

My current preferred fund managers are Colonial First State (Wholesale), Platinum, and NavraInvest. The NI funds don't really fit my criteria above - but they are my more conservative funds that I hope will continue to return decent income in a down period to keep me afloat long enough to then make excellent returns from the other funds in the future.

I have invested in a few different funds over the last 12 months, but as I got to know and understand them better, I realised that some of them weren't meeting my goals, and weren't likely to. At one stage I had 11 different funds, but I've sold out of a few of them and I'm down to 5 core funds with two secondary funds.

It was only once I started charting the historic returns from the funds that I began to appreciate what the published performance figures actually meant. You can't take a "3 / 5 / 7 year" performance figure at face value without understanding WHY they look so good - and WHEN the returns happend. For example, Platinum Japan looked excellent, but when you investigate why - you see that the 150% they did in the second year of trading has really skewed their long term results - although the 40% they did in 2005 was good - the rest of the returns have been mediocre at best. Here are the annual returns for Platinum Japan starting from inception in 1998 to 2006:
21.14% 146.82% 3.86% 0.44% -1.56% 24.07% 16.03% 45.59% -5.33%
... and while the average return is over 25%, the median is less than 10% ... this is why averages are so misleading - they can be warped by a single excellent year.

So, funds I've sold out of include:

• Platinum International (performance is all over the place - I think they are too exposed to the US, and don't have a coherent enough strategy).
• Platinum Japan (I was sucked in by the performance figures, and don't like the volatility I'm seeing now),
• Platinum International Brands (I really like this fund, and I may well invest in it again in the future if I want to diversify some more - but in the short term it's not quite in the same performance league as some of the other funds I'm in)
• Platinum European (I like this fund too - it's a good solid performer, and I think there's a bit of potential for Europe over the next few years ... but again, it's simply not in the same league as some of the other funds right now).
• NavraInvest US fund (I have high hopes for this fund - and will keep a close eye on it - but until it starts performing at least as well as the Aus funds, I see no point given the extra risk that currency places on the fund)

The one area I'm really not sure of right now is the resources sector. I still think there is good potential for more growth in that sector, but I doubt we'll see the same stellar growth we've seen in the past. The one thing that's making me nervous is how volatile that sector is ... I'm not sure I want to be that exposed to such a volatile market, despite the possibilities for growth. I'll be holding off adding to my investment in that area for a bit until I decide whether I want to continue, or look for something a little less stressful.

I would like some more international diversification - but I don't think we have enough good funds out there yet to offer the broad choice of investments and strategies I'd like. I suspect that is mainly due to the continuing stength in the Australian market and recent weaknesses on international markets. Once international markets start to perform more strongly and local markets slow down a bit, I think we'll see more international products become available.

 

Please don't consider my post as advice - I'm merely suggesting my own strategy at the moment, which has only recently developed and is largely untested. I'm taking a much more aggressive approach than most people are comfortable with, and only time will tell whether this was siccessful.

 

I've been with Leveraged Equities who offer generally good LVRs - and I've had excellent service from them - would gladly recommend them to anyone. They have stopped offering new margin on the Navra funds, although I asked nicely and they did allow me to increase my holdings in Navra Wholesale with the full 70% margin.

However, I'm refinancing with St George, who are offering better LVRs than LE ... between 70 and 75% LVR (plus 10% buffer) on the funds I want to invest in - which gives me much more flexibility and a much larger buffer to work with in the case of a downturn. They now offer 75% margin on the Navra AUS funds, which is nice too.

I do have Platinum Asia - have held them for nearly a year now ... and I intend to keep them - although I do consider these to be one of my "second tier" funds ... I won't be putting quite as much into it as the other funds at this point.

I take all my distributions as "cash" paid directly into my margin loan - which is what the margin lender prefers anyway. I haven't been capitalising interest up until now ... since I had the surplus cashflow to be able to pay for it myself, thus maximising my borrowing power. However, I've now exceeded my own capacity to service my rapidly growing margin loan (growing because I'm adding more capital all the time from IP equity etc to increase my investments) ... so I've decided to capitalise.

All interest will come out of the margin loan and all distributions will be paid back into the margin loan. Any left over, I will reinvest into whatever fund is needing more capital (I have targets for the amount of capital invested in each fund).

 

I liquidated my holdings back in early 2008 as the various funds reached my sell triggers.

With any highly leveraged strategy, you need to be able to de-leverage if the market turns against you. Several of the funds I held dropped by 70%+ from their Nov 2007 highs ... that's more than enough to sink you if you borrowed heavily to invest - you have to recognise the change in market conditions and pull the plug early to preserve your capital.

The only fund I continue to hold is CFS W/S Geared Share fund via my SMSF (with a 30+ year timeframe on that investment).

I continue to monitor various funds (via Compare Funds :: Managed Fund Comparison Charts and Statistics ), but mostly I'm sitting on the sidelines right now - I have some other business related projects I'm saving my capital for, so I'm unlikely to re-enter the market at this point, even though we're approaching some of my buy triggers.

 

Hi Redwing, several funds I track have reached buy signals - but unfortunately I am still relegated to the sidelines, all my cash is currently committed so I can't get back in right now

I have spent quite a bit of time thinking about what I'm going to do with Compare Funds - there's not enough data there yet I feel, I'm thinking I would like to extend the functionality to include a lot more data about ETFs and LICs for comparison with managed funds. Once again, getting access to timely data is the challenge.

 

Unit prices are generally quoted net of fees - ie management fees are calculated on a daily basis and subtracted from the NAV / unit price of the fund - so taking fees into account tends to happen automatically. Similarly with buy/sell spreads - unit prices are quoted with the spread added. LICs and ETFs would need to have a similar factor for brokerage added to make it comparable, but that's easy enough to do.

I have a couple of other projects to get finished first, then I plan to extend the functionality of Compare Funds to include more LIC/ETF/etc support along with a complete redesign of the site with more functionality - will take me a couple of months yet *sigh*

 

Can you please remind me again in a couple of days to revisit this question - I have a big uni assignment due yesterday

 

... and two big assignments due next week

I did manage to spend some time updating CompareFunds last week (fixing a bug actually, but added a couple more CFS funds). I also managed to get the BT funds working again after BT fixed their website - yay.

You've got to love the statistics though - our old friend Colonial First State Colliers Geared Global Property Securities fund is going gangbusters and topping the performance charts ... but what you don't necessarily see from the "recent returns" style statistics everyone else publishes is that the unit price is currently at $0.1041 after bottoming out at $0.0358 back in March.

Considering that the price was at $1.00 only 30 months ago ... imagine investing $100,000 at fund inception and then finding 24 months later that your investment was now worth $3,580 It has now grown to over $10,000, but you've still lost 90% of your capital!

Performance Chart: Colonial First State Wholesale Colliers Geared Global Property Securities (FSF0892AU)

If you're game, you could try and jump in on the growth - but that's a huge risk (especially when the unit price is changing by up to 10% each day in either direction!).

Anyway - I'll post some more thoughts later.