Friday 8th June 2007
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Some of these changes work strongly in your favour: from October, for example, you'll be able to use an expert New Zealand fund manager without incurring the capital gains penalty you used to suffer compared with DIY investing. If you've invested in a good-performing Australian unit trust that delivers a large dividend, you'll likely pay rather less tax than before.
With this in mind, you may well be inclined to make more use of managed investments. At which point you confront the main practical difficulty the everyday investor faces: out of the huge range available, which ones should you use?
As it happens, I've spent a good deal of the past 15 years thinking about that decision. Here's what I've found so far, and with fund managers putting much of the information you'll need on the internet these days, you should be able to replicate a lot of it for yourself.
Concentrate your attention on one subset of managers, namely the 'boutique' fund managers. You'll still have plenty of choice, especially in Australia, though there are some pretty good boutiques here at home, too (such as Fisher Funds Management).
These are typically smaller firms, usually wholly or partially owned by the fund managers themselves, and often specialising in particular asset classes (such as smaller listed companies here or in Oz).
For all these reasons, they tend to do better than the funds from Megabank. Being smaller vehicles, it's easier for them to move into and out of opportunities than it is for the institutional supertankers. They don't carry the corporate office overhead of Megabank, or its sluggish decision-making (or decision-preventing) processes.
Being owned by the managers is a powerful governance incentive for them to do well compared with the salaried employee of the large institution. And you would expect specialists to do better: Megabank will have dozens of funds covering all the bases, but many will be average and some dire. The specialists stick to markets they know well, and the performance tends to follow.
Prefer 'high conviction' managers, the term for managers who put most of the investors' funds in larger lumps into a smaller number of (in their researched view) the best opportunities.
You might well wonder why fund managers would do anything else: why would you spread the money across all the options, rather than focusing on the best ideas? But Megabank will tend to, because it has armies of suits fussing about the risk of the bigger bets going wrong (especially if Megalife Co is also playing it safe). High--conviction managers don't care what the guys in the glass tower next door are doing, and they don't care to buy a little bit of everything - good and bad - and neither should you.
Don't be too afraid of new or young funds. Some advisors will steer you away from funds with less than three or five years' established track record. Trouble is, there's some evidence that performance decays over time and with size, and, provided you feel the relatively new managers have the expertise - perhaps from a previous career - to do the job well, you might well do better investing with them while they are still lean, mean and hungry.
Don't be too hung up on fees. It is true fees over the long haul can be a heavy drag on returns, and there is a case for having some exposure to the odd 'index' fund, since some of them are exceptionally efficient, with very low fees (one good example would be Foreign & Colonial's flagship fund in the UK). And you should never invest in funds that have a higher fee than is usual for their asset class, nor in funds that do not generate enough value-add to pay for their fees.
Check for yourself, and you'll find there are New Zealand funds that invest in fixed-interest securities and mortgages, and after their fee you are left with less than if you'd wandered in off the street and bought some government stock yourself.
But equally, don't be afraid of paying a manager performance fees: properly structured, they reward the manager for doing an especially good job for you.
Look at their published information. I prefer fund managers who tell me in plain English what they are about, and why they've done what they've done. With so many fund managers to choose from, you have the luxury of ignoring all the dull, boring or secretive funds and going with good managers who tell you interesting things.
While you're reading the bumph, look for one very important piece of information. You want to see the fund manager showing you not only how they've performed in money terms, but how they've performed (after their fees) versus some appropriate benchmark.
If it's a world share fund, for example, it should tell you how they compare with the likes of the standard MSCI World index. If they don't show you the courtesy of providing this elementary data, and some don't, you can draw one of two conclusions: either the comparison doesn't flatter them, or they don't care about keeping their investors properly informed. Either way, steer clear.
Declaration of interest: Donal Curtin is chairman of Mint Asset Management, a startup boutique funds manager.
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