Wednesday, 20 February 2008

Investment Strategy: Managed/Mutual Funds

The chart below shows the performance of one of my managed funds, Perpetual’s Geared Australian Fund over the last 24 months. As the name implies, this fund invests in the Australian share market, mainly buying blue-chip stocks. It is internally geared up, which means it also borrows some money to increase the size of the fund – potentially magnifying all returns (both positive and negative) on investment.

During the last 24 months, the fund was up as much as 65% at one point (from $2.50 to $4.20). There have been 3 sizable corrections so far: May-July 2006, July-Aug 2007, and Nov 2007-Feb 2008. The latest correction is the biggest, nearly erasing all of the previous 24 months gains – enough to make me sweat when looking at it!

But if we look at the fund’s performance over a longer period, there is a different story - it has been doing great, returning a total of 170% over the last 4 years or an average of 42% per year even after the current market correction.

Had you invested $100K in October 2003 in this fund, your investments would be worth $270K now - a profit of $170K in 4 years, or $42K per year. The fees you would have to pay would be less than 2% a year in fund management cost.

So clearly managed fund is an good investment strategy if you can leave it for 5+ years, as any stock market corrections will likely be smoothed out over time. Plus, minimal effort is required to maintain the portfolio as you don't have to monitor it everyday or even week.