Smart Investor magazine, Up To Speed column, November 2008

NEW PRODUCT

JP Morgan ASX 20+Series 2

What is it?

It’s a capital protected product giving you exposure to 20 big Aussie stocks.

Capital protection – popular now, presumably?

Expect to see more and more products which guarantee your capital in this volatile market. The problem is, most professionals would argue that capital protection is more important after a bull run, not at the end of a crash – but that’s not the way people tend to invest. Also be aware you need to hold this for seven years to get the protection.

What do I get?

It invests in two things. One is the ASX20 – the really big stuff like BHP, Commonwealth Bank and Westfield. The other is something called the FRM Alpha Diversified Fund, a multi-strategy fund of hedge funds (that is, a fund that invests in other hedge funds) which it expects to generate “up to 10% income a year”.

How much is invested in each?

That varies. Each side has between 20 and 200% invested in it at any given time (the 200 comes about through use of gearing). Generally, if the ASX 20 is moving up, more and more of the money is allocated there; if it starts falling, the bulk starts to shift the other way towards the hedge fund.

So why would I do this?

Your up front cash is safe, you get exposure to the markets if there’s a bounce, but there’s an alternative to give you income if there isn’t.

And why wouldn’t I?

Paying for capital protection may be foolish if this turns out to be the bottom of the market, seven years is a long time to wait for that protection, and some may find it all a bit complicated.

ROADTEST

Perennial Global Shares High Alpha

A global equity fund tilted towards emerging markets

Performance

This is a high-conviction global equities fund, often putting unusually high amounts into emerging markets – so it’s looking pretty sorry at the moment. It is down 24.3% in the year to September 30. That’s especially bad when you consider the fund is benchmarked not against a world equity index but the UBSA Bank Bill Index, which is up 7.6%.

 Holdings

The top holdings are not the obvious players like Exxon Mobil or Microsoft you tend to see in other global equity portfolios. Instead the top five are America Movil, Cap Gemini, Barrick Gold, Apache and Activision. Until recently, the fund was known for its high allocation to the developing world – sometimes as much as one third – but according to Perennial’s web site as of September 30 it had retreated to more developed markets. Recent emerging market purchases have included China’s Chaoda Modern Agriculture.

Experience

Perennial is an Australia-based boutique, and some wonder whether a team based in Sydney can truly handle the world equity markets in the same way as a manager like Fidelity with hundreds of analysts on the ground worldwide. Still, there’s been no solid evidence that boutiques like Perennial and Platinum who venture overseas consistently lag more multinational rivals.

Fees

Management fee is 1.25%, there is a 0.8% buy/sell spread, and the minimum entry level is $25,000.

 Gripes

High conviction approaches like this either do really well or really badly, depending both on stock selection and the behaviour of the broader market. Right now it’s doing really badly.

 Verdict

The ideas underpinning the fund are attractive and this could become a great buying opportunity but right now it’s not getting results.

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