Update No. 24 – 11/09/11

The Fund NTA dipped a bit this week (more than the market) as our largest holding which is the subject of a corporate action declined in price, as the bidder games the target.  If the takeover falls over at current prices, I truly believe it will serve our fund-holders better, though it may hurt short-term performance.

It has been a little while since I passed comment on the managed fund industry.  For a starting point, in order to find funds operating in a similar area to ours, I went to the Comsec website.  I filtered for ‘Equity Region Australia mid/small value’ as I feel this sector most closely resembles the area I focus our capital on.  I thought I’d display the performance of some of the better ranked funds, since April 1 which was our inception date.  The top 3 (by last 12 months performance) were:

1. Perpetual Smaller Companies Fund.  This fund has fallen 14.3% since April 1.  From $3.063 to $2.625 (as retrieved here Thursday)
2. Invesco Australian Smaller Companies Fund. This fund has fallen 11.4% since April 1.  From $1.125 to $0.99652 (as retrieved here Thursday)
3. SandhurstFuture Leaders Fund. This fund has fallen 7.9% since July 1 (I couldn’t find an April 1 price).  From $0.7216 to $0.6649 (as retrieved here Thursday)

I don’t point this out to gloat, despite our performance over 5 months being as much as about 20% better than the funds above.  More it is to harp on (again) about one of my favourite topics, the alignment of interests between fundholders and money managers.  Each of these funds have handsomely beaten their benchmarks over the medium to longer term (over 5 years or more), but each are trailing, or at least cutting very close to their respective benchmarks in the period examined.  Despite this period of weakness, each of the above funds is charging an MER (Management Expense Ratio) of between 1.95% and 2.14%, which is eating into fundholders capital despite weak performance.  When a client lodges their funds with a money manager, they do so in the hope (or dare I say expectation) of the performance of their investment being better than the benchmark their fund competes against.  While I think most investors will understand the odd period of underperformance (no fund ever will out-perform a benchmark in every period), what I can’t understand is people tolerating payment of fees for such underperformance.  As I have pointed out many times before, there are a variety of exchange traded funds that closely track a variety of benchmarks for negligible fees.

In my view a confident money manager should have no problem working as EGP Fund No. 1 Pty Ltd does on a performance fee only basis.  If you truly believe you can beat the indices in 70 or 80% of periods, a performance fee only manager still knows they will get paid; they just need to budget for the odd period when you miss the mark – budgeting is something a competent money manager should know how to do!

With each passing day, there is more and more information suggesting we are in for a period of relatively poor global financial health.  Australia still seems to be holding up pretty well, though a case could be made either way.  For example, there were solid GDP figures for the June quarter on Wednesday, followed Thursday by an unexpected rise in August unemployment.  I still maintain the best protection we can have against a weak period is a concentrated portfolio of superior stocks, to my view, that is what we hold – Tony Hansen 11/09/2011

EGP Fund No. 1 Pty Ltd. Down by 2.76%, leading the benchmark by 4.94% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 5.41%, leading the benchmark by 16.82% all-time (April 1^st2011).

EGP 20.  The EGP20 index is Down by 6.85%, leading the benchmark by 0.85% since July 1^st.  Since inception the EGP20 is Down by 17.68%, lagging the benchmark by 6.27% all-time (since April 1^st2011).

S&PASX200TR  The benchmark index is Down by 7.7% since July 1^st. The benchmark is Down 11.41% all-time (since April 1^st2011).