Warning – this airbag might deflate

Co-founder of the Switzer Report
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One of the more infuriating things I have experienced in the financial services game is briefing advertising executives about financial products. They just don’t get it. They don’t understand why you can’t make claims about investment products similar to the ones that are regularly made about laundry products, such as the “whitest of the whites” or about a fizzy drink being “the real thing”.

No one can ‘predict” how an investment product is going to perform.

So, when I saw an advertisement last week headlined “Finally, a share fund with an airbag”, I immediately suspected that this was yet another case of an advertising guru not understanding their brief. The alternative scenario, arguably a little more scarier for someone who thinks they know something about investments, was that there really was some new investment technique that offered all the upside potential of a share portfolio, with no downside risk. As you can imagine, I had to find out more.


Enter the ‘Perennial Value Wealth Defender’

Road Test – Perennial Value Wealth Defender Australian Shares Trust

For the record, my beef is not so much with the product, but with the marketing. A share fund that can deliver share market like returns, without too much downside risk, can’t be a bad thing. The question is – will it?

So, let’s start with the product. It is an actively managed, bottom up share fund. It will also use equity derivatives and cash to “dynamically cushion” the portfolio through market cycles, thereby reducing the magnitude of significant negative returns as they occur.

The fund will typically have between 35 and 100 stocks (large cap and small cap), and work within the following asset allocation bands:

  • Australian equities: 50% to 100%
  • Cash: 0% to 50%
  • International assets: 0% to 10%
  • Derivatives (net effective exposure): 0% to 50%

By actively managing allocations between equities, derivative protection and cash through market cycles, it aims to enhance long term performance by maximising returns when markets rally and minimising the magnitude of significant losses when markets fall.

The manager

Perennial Value is a leading active equity manager, with more than $8.2 billion invested on behalf of institutional and retail clients. Headed by John Murray, its flagship fund, the $1.8 billion Perennial Value Australian Shares Trust, has a pretty robust track record – strong over the last two years and the long term, mixed over the medium term, as the following table shows:

Performance of Perennial Value Australian Shares Trust to 30/6/14 and S&P/ASX 300 Accumulation Index

The dynamic portfolio protection strategies will be overseen by Dan Bosscher, formerly of UBS Investment Bank. According to Perennial, he heads a risk management team with over 30 years specialist experience in this area.

Perennial will charge an investment management fee of 0.98%pa, and will be entitled to a performance fee of 15% of the trust’s net return in excess of the S&P/ASX 300 Accumulation Index. The minimum investment is $25,000.

Will the airbag stay inflated?

Perennial Value can boast a fairly impressive track record – so on that score, this fund starts in good shape. At the end of the day, this is all about the manager’s competence to identify attractively valued stocks and get the timing right to implement and adjust protection strategies.

Protection is not costless, nor is it perfect. Therefore, an expectation that the fund can “outperform the S&P/ASX 300 Accumulation Index, while reducing the magnitude of significant negative returns in falling equity markets” (the fund’s investment objective), feels on paper to be a bold claim. While the magnitude of the negative returns may be reduced, it doesn’t mean that the fund won’t have negative returns – something a casual reader of the advertisement would not fully appreciate.

Ultimately, the proof will be in the eating and it is up to John Murray and his team to show sceptics like me that our fears were unwarranted. Until he does, this advertisement should come with a warning.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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