There’s no let-up in the number of new managed funds which continue to appear – in the first three months of this year, we here at Morningstar added another 150-odd funds to our database, ranging from those investing in small-cap Australian shares through to global property, emerging markets, and currency trading funds. Let’s take a closer look at five of the more interesting new domestic share funds.
A&T First 200
The “A” and “T” in this fund’s name stand for James Anderson and Laura Tees, two former portfolio managers from the now-defunct Glebe Asset Management business, who launched their own Sydney funds management boutique in 2007.
Their aim is to identify 20 – 30 companies from the top 200 stocks which are underpriced for their expected future earnings growth, and likely to outperform over a six- to 24-month timeframe. Anderson, Tees, and analyst Amanda Ho screen stocks on factors such as management quality, balance sheet risk, liquidity, and industry structure, also undertaking meetings with company management.
Anderson & Tees expects the First 200 fund to have a reasonably low annual tracking error of 2 to 5 per cent, and the shop’s mandate allows it to invest up to 20 per cent in cash. The fund comes with a peer-competitive 0.85 per cent annual price tag, slightly below the average for our wholesale large-cap blend category. And unusually for a boutique, Anderson & Tees doesn’t charge a performance fee.
Anderson & Tees’ process differs from that of former employer Glebe Asset Management, where numerous stocks were screened out from potential investment in line with an ethical charter based on Christian values. At the time of the termination of the Glebe retail funds in March 2006, the flagship Glebe Large-Cap Shares Fund had been a fourth-quartile performer among large-cap blend domestic share funds over the previous one and three years.
Armytage Strategic Opportunities
This invests in 25 to 35 companies across the market-cap spectrum which Melbourne boutique fund manager Armytage Private believes are capable of producing above-average returns along with consistent and replicable earnings and dividend growth. Lee IaFrate and his team also look for strong cashflow from operations, companies trading at discounts to net assets, and contrarian investment opportunities (for example, where a stock has the potential for takeover, asset sale, or corporate restructuring).
This philosophy and process translated at the end of the December 2007 quarter into a portfolio whose major stockholdings included BHP Billiton, Fairfax Media, National Australia Bank, ANZ, Asciano, and Warrnambool Cheese and Butter. Armytage can also invest in unlisted companies it expects will list within the next 12 months, looking to make profits from buying stakes in companies coming to market; up to 10.0 per cent in hybrids; and up to 20.0 per cent in cash.
Prospective investors will have to pay 1.31 per cent each year as an ongoing fee (2.31 per cent for the retail version available through Equity Trustees), with a performance fee on top of that of 10.0 per cent of the performance Armytage achieves greater than 10.0 per cent per annum.
Atom Small Cap
Another boutique fund, this one concentrates on small- and micro-cap stocks, and is offered by newly christened Atom Funds Management (known previously as Indian Ocean Rim). The key decision-maker here is former Westpac, Macquarie, and QBE portfolio manager David Shearwood.
The Small Cap fund invests in companies outside the top 100, down to a market-cap of A$10.0 million, giving it an eligible universe of some 1600 stocks. Atom argues that its broad coverage gives it an information advantage over its competitors, enabling the shop to identify companies which other small-cap investors overlook. The manager does this by employing analysts in India, who use 28 different screens to filter the opportunity set, while the Australian staff undertake company visits (some 190 over the seven months to the end of January) and make the ultimate stock selection decisions.
The final portfolio comprises 25 – 75 companies, with no single stock greater than 10.0 per cent of total portfolio value. To avoid potential capacity problems, Atom has commendably indicated that it will cap the fund’s assets (currently about A$0.70 million) at A$500.0 million. The 23-stock portfolio at February 29, 2008 included names such as Linc Resources; CPT Capital, which provides diagnostic software for computer mainframes; optical chipmaker Arasor; and Radio Rentals.
Cost-wise, Atom’s one per cent annual fee compares favourably with the average for equivalent mid-/small-cap growth unit trusts. The firm also charges an additional performance fee of 19.90 per cent of the return generated above that of the S&P/ASX Small Ordinaries Accumulation Index. This is on the higher side for performance fees, but Atom is at least measuring itself appropriately against a meaningful benchmark, rather than just earning its performance fee from any performance achieved.
Clime High Yield Underdogs
Buffett fan Roger Montgomery’s Clime Capital boutique has created a local version of the well-known “Dogs of the Dow” investment strategy.
Clime’s investment process involves the construction of an equally-weighted portfolio of the 10 large-cap industrial shares with the highest dividend yields, held for one year, after which stocks no longer among the highest-yielding are replaced by those that are. The establishment portfolio comprised ANZ, Boral, IAG, Perpetual, St George, Suncorp, Tabcorp, Telecom New Zealand, Telstra, and Wesfarmers.
In an unusual move, rather than levying an ongoing fee, Clime is charging a 10.25 per cent performance fee linked to any positive performance, with a high watermark for recouping previous underperformance. High Yield Underdogs comes with an A$10,000 investment minimum, and will pay income twice-yearly.
Patersons 80:20 Equity
Our final new domestic share fund is another one with a twist. Stockbroker Patersons’ mandate allows it to have 80.0 per cent of its investments in the top 200 stocks, and the remaining 20.0 per cent outside the top 200 in event-driven opportunities, special situations, and in companies Patersons is helping to raise capital or to list on the sharemarket.
The fund is managed by Murray McGill, who’s run Patersons’ discretionary client portfolios for the past 10 years. He’s assisted by Steve Suleski, whose background includes stints at Patersons and Euroz Securities, and Mark Simpson, a former Deutsche Bank and Macquarie analyst and market strategist who leads the broker’s team of 14 stock analysts.
Stock selection for the portfolio of 30 – 50 companies is by a standard combination of bottom-up and top-down research, beginning with quantitative screening. This is followed by rankings on the basis of relative attractiveness, looking for stocks which are undervalued relative to long-term earnings potential, have sustainable competitive advantages, sound recurring earnings, and a quality management team. The final selections draw heavily on the Patersons stock analysts’ buy recommendations. The ten largest positions at February 29 included BHP Billiton (9.10 per cent), Telstra (7.20 per cent), and CSL (6.70 per cent), while financial stocks featured heavily among the rest of the top 10 stockholdings.
At 1.38 per cent each year inclusive of a 0.44 per cent adviser trailing commission, Patersons’ ongoing fee is competitive at about half a per cent below the average for retail large-cap share funds, and there’s no performance fee.
