In February each year, we announce the finalists and winners in our annual Fund Manager of the Year awards. These awards – now in their eighth year in Australia – are determined using both qualitative research by our fund analysts, and analysis of fund managers’ risk-adjusted performance track records.

It’s now six months since we published the winners for 2007. And what an eventful period this has been. Among the major developments, we’ve seen a substantial correction in the domestic listed property sector; signs of a slowdown in the wider economy, affecting corporate profits and the domestic sharemarket; and gyrating world sharemarkets in response to fluctuating oil prices and the fallout from the global credit crunch.

So how are the winners of our 2007 awards faring, six months down the track? Well, like most fund managers, they’re having a tough year. Most haven’t been able to escape the descent into negative territory. But the good news is that in most cases, they’re doing better than their competitors. (Another way of putting this might be to say that they’re doing “less badly”, as of course they’re generally still in the red.)

Australian Shares – Fidelity

Under Paul Taylor’s leadership, Fidelity Australian Equities has remained a top-performing large-cap share fund. The –2.17 per cent return over the six months to August 31, 2008 was threeand- a-half per cent better than the index and peers, and the fund remains top-quartile over every time period since launch in 2003. Major stockholdings at July 31, 2008 included BHP Billiton (13.10 per cent of portfolio value) and Rio Tinto (7.24 per cent), while among the banks, Taylor’s preferences were for Westpac (7.30 per cent) and the Commonwealth Bank (6.92 per cent).

Australian Smaller Companies – Macquarie

Macquarie has not been doing so well, the flagship Macquarie – Small Companies having underperformed the index by more than 10.0 per cent over the past six months. The fund’s return was –23.12 per cent, and the S&P/ASX Small Ordinaries Accumulation Index –12.43 per cent. The average return from the fund’s peers – the other options in the wholesale Australian mid/small growth category – was –12.87 per cent. Results like these over the shorter term are characteristic of the fund; in our most recent research report, we noted that its “short-term volatility can be stomach churning for many investors”. The fund has recently been loaded up on industrial materials and energy stocks – nine of the 10 largest company stakes at July 31 were from these two sectors, for instance – such as underwater engineering firm Neptune Marine Services (5.57 per cent of the portfolio) and Queensland mining services firm Industrea (3.95 per cent).

Australian Listed Property – APN

The last year has been bloodcurdling for the domestic listed property sector. The benchmark index is down –26.52 per cent over the past 12 months, and down –11.05 per cent over the six months to August 31. APN Funds Management, our listed property fund manager of the year for 2007, has done a better job at minimising the impact of this than many of its competitors: the A$1.01 billion APN Property for Income produced a –6.34 per cent return over the past six months. Property for Income invests in both listed property stocks and direct property assets, and has most recently had 70.65 per cent of its assets in listed property and 24.79 per cent in direct property (the remainder being invested in cash). In the listed component, APN has most recently favoured Dexus Property Group, formerly DB RREEF Trust (12.56 per cent); CFS Retail Property Trust (11.57 per cent); and Westfield Group (10.74 per cent of portfolio value at August 31, 2008).

International Shares – Zurich/Lazard

The award for the international shares category for 2007 went to Zurich and its investment manager Lazard. Zurich Investments Global Thematic Share Pool has had a mixed time of it. Over the six months to August 31, 2008, the fund returned –1.69 per cent. This was below the index (1.98 per cent from the MSCI World ex-Australia Net Dividends Reinvested $A), and a little below the peer average (-1.19 per cent from the funds in the wholesale world large blend investment trusts category). Lazard’s way of choosing stocks in which to invest is different from many other fund managers. The fund manager first identifies broad themes (such as “regulatory change”, driven by intergenerational conflicts, lopsided wealth distribution, and the crisis in the financial system), and then matches stocks to these themes. Among the fund’s recent major stockholdings have been Swedish power and automation firm ABB (1.97 per cent of portfolio value at August 31, 2008); US firm Anadarko Petroleum (1.86 per cent); and Canadian gold miner Barrick (1.72 per cent).

Multi-Sector – BlackRock

BlackRock was the winner of the Multi-Sector award. BlackRock Wholesale Balanced produced a return of –2.49 per cent over the six months to August 31, while the average for wholesale multisector growth funds was –1.86 per cent. At August 31, 2008, BlackRock’s highest allocations were to Australian shares (38.0 per cent), international shares (26.0 per cent), and Australian fixed interest (15.0 per cent). One source of relative outperformance was the below-average investment in listed property – 4 per cent, compared to the average of 7.50 per cent – which, given that sector’s vertiginous slide over the past year (as discussed above), has been a decision which has paid off for BlackRock’s investors.

Fixed Interest – Macquarie

As well as smaller companies, Macquarie also took out the most recent award for fixed interest. The five-star Macquarie Master – Diversified Fixed Interest invests in a range of debt sectors. Macquarie employs both internal and external investment managers to assemble a portfolio of domestic and global government and investment-grade corporate bonds, and tilts the allocations in favour of the best-available opportunities. (The Fund’s asset allocation breakdown at June 30, 2008 was 40.0 per cent in domestic bonds; 27.50 per cent in global government bonds; 20.0 per cent in corporate bonds of investment-grade status or higher; 10.0 per cent in emerging markets debt; and 2.50 per cent in high-yielding debt securities.) Macquarie’s been able to navigate the last six months relatively well, posting a return of 2.72 per cent for the six months through to August 31, better than the 2.36 per cent average from the funds in the world/Australian bond category.

Emerging – Greencape Capital

The winner of the emerging award for 2007 – which goes to a fund manager which doesn’t have a long-term track record, but which we think has the ability and opportunity to create one – was Melbourne boutique Greencape Capital. David Pace and Matthew Ryland’s Greencape Wholesale Broadcap is run according to a “growth at a reasonable price” investment style. Over the past six months, this fund’s –2.91 per cent return was better than the S&P/ASX200 Accumulation Index’s –5.67 per cent, and the average for the wholesale Australian large growth investment trusts category of –4.78 per cent. The fund has recently had above index exposures to industrial materials, financial services, and healthcare companies, while being underweight energy and utilities stocks.

Most Improved – Colonial First State (Global Equities)

Finally, we have the “most improved” award, which goes to the fund manager we consider to have made the greatest strides over the previous year. For 2007, we gave this award to Colonial First State for its global shares capability, describing the team under Habib Subjally’s leadership as “well on the road to recovery”. Subjally and his colleagues are implementing a more rigorous approach to stock picking which incorporates both quantitative screens and detailed fundamental analysis of companies being considered for investment. Colonial First State is generally maintaining this improvement – Colonial First State Wholesale Global Share’s six-month return to August 31 of –1.04 per cent was marginally ahead of the peer average of –1.19 per cent, while over the past year, Colonial First State’s –14.98 per cent return was less bad than both the market index (–16.99 per cent) and the average from other world large blend funds (–15.79 per cent).

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