Managed Funds Navra fund outperformance of the S&P200 - #2

{Note: this thread split from original: http://www.invested.com.au/forums/showthread.php?t=441 - Sim'}

Hard question brought on:

OK, still tracking performance of the fund relative the index and its still underperforming significantly and costing me a lot of money. We're now well above the pre-October crash high and closing at record highs daily so I was wondering WHEN I can expect that "unrealised value" to be realised?

To paint the picture in detail:

I bought in as follows:

Date: 14/10/2005
Unit price: 1.0723
Funds invested: $559,000
ASX200: 4410

Current performance is as follows:

Date: 10/01/2006 (almost three months on)
Unit price: 1.1302 (Dec dividend of 2.7 cents added to current unit price)
Value of units held: $589,183
ASX200: 4830
Profit over period: $30,184
Percentage profit over period: 5.40%
ASX200 performance over period: 9.52%
ASX200 comparison profit over period: $53,238
Opportunity cost of buying Navra instead of index: -$23,054

So, my question is a relatively simple one now. Can I expect to receive the $23,054 in under-performance relative the index or is that money never going to be realised? i.e. Is this under-performance locked in, or is there still the potential for this "unrealised value" to emerge and for Navra to beat the index?

I think Steve was going to give us a face-to-face session soon on the trading mechanism of the fund so that we could better understand the way the unit price tracks so look forward to that one.

Sorry for the hard question. Its just that $23K in under-performance is no small amount and I'm still optimistic that this is waiting to be realised somewhere?

Help?

Thanks,
Michael.

 

Michael

It's a fair question. Not too sure it's a hard one though

Steve will be back in the country on Monday so he can provide the definitive answer then. But in the interim there are a few obvious points in response:

1. How long have you been invested? You're looking at far too short a time frame. The PDS says 5 year investment timeframe. Given the way the fund buys and sells there are bound to be short periods of time when the Fund will under perform the Index.

2. The Fund converts realized capital growth into income. Depending on the timeframe within which price movements occur I suppose it may take several cycles to fully realize the benefits from lowering the average buy in price on a number of stocks.

3. Looking at the current spread of stocks comprising the Fund there are a few that have not performed over the recent period...but they may well do so given time.

Just some thoughts...we'll have to wait for Steve to get the last word on it.

Cheers
N.

 

Buying the Index

Hi guys

Pardon my absolute novice nature in the sharemarket (hence my reliance on NI ) but if you were to 'buy the index' as opposed to investing in NI, is there not some risk you'd buy under-performers (or perhaps buy in at more than NI will be paying for the stock in a downturn ?)

I guess what I'm asking is - hindsight is a wonderful thing, but is there not a decent chance the results could be reversed with NI outperforming the index under certain conditions (presumably as the success of NI is predicated on outperforming the index, there is ?) at some time, or many times, over your investment timeframe ?

Have I got the wrong end of the stick ?

Cheers
Carl

 

Nigel,

Many thanks, and I know I'm taking a short view on this as Steve pointed out in his original post below. But, he also mentioned the way the fund realises profits in the "last third of the sales, when the realised prices are greatest". Read the bold bits of his post below.

That's the core of my question to Steve or others associated with the workings of the fund. Gazza and I speculated early in this thread that we were under-performing the index because there was a heap of unrealised value held in the fund. Steve confirmed this was pretty spot on. I'm just wondering whether that "last third" of the sales has occurred since we're well past the previous high and this value should have been released and translated in to profits and reflected in the unit price. If it has, then how come we're still lagging the index significantly? Or, has the algorithm spotted a bull trend and held that value to release on some other future technical indicator that I'm not aware of. Basically, is the under-performance "locked in" or is that value still lurking around waiting to be released...

I'll wait for Steve's guru response. And, again, sorry if this is too poignant, but I know there's a lot of unit holders out there wondering the same thing.

Thanks mate,
Michael.

 

Nah we like poignant!

 

Basically you are right....

It all depends when you could buy the index.

If you bought index at the bottom of the pull back ( approx. Oct 25 at 4365 level ) – sure you could be better off, than staying with NI.

Problem is that nobody knew at that time where the bottom was….

At 4680 NI was neutral ( + - ). So was the index ( + - ).

Would not be nice to trade any instrument knowing in advance what will happen in the future ??.

As Steve says : You cannot predict the market.

The question is:

If you bought it on the bottom would you sell it on the top?

Probably not as it is impossible to predict where the bottom and top is.

 

" And, again, sorry if this is too poignant, but I know there's a lot of unit holders out there wondering the same thing "

Thanks mate,
Michael.

I must be an exception than...I do not have a problem at all.

 

Hi Michael.

Do I think it's good that we're not getting much 'outperformance' at the moment? No......but let's (quickly) look at one reason this may occur......

The Fund while having a reasonable number of stocks(20-30) does not hold all the ASX200 stocks.

To achieve 'outperformance' if the Market dipped and then rose again we would hope the basket of Stocks in the Fund also did this and because we should have bought them 'relatively' cheaply, we would also hope we got some 'outperformance'.

However, what if there are a few Stocks that don't recover in the same period as the rest of the Market? Then there's a good chance that there won't be much 'outperformance' at that time and I guess this is one of the risks of the Fund. While DCT probably does work quite well in many cases, it would( I assume) still strongly rely on picking stocks that are highly likely to recover within acceptable time periods. Is this a guarantee? I wouldn't have thought so. In fact, every now and again, even after good fundamental checks, they'll probably get the odd one wrong or it may not recover quickly enough to make it a strong performer.

What I'd like to do when I get the time(not in the next couple of weeks! ) is look at how some of the currently held stocks are shaping up to the actual Index and see where some of the 'issues' may have arisen. My guess is(without checking yet) that there have been a few stocks at least of late that have not recovered as would have been hoped and hence the current situation.

These Stocks may well recover in the next couple of months and provide an even stronger result, or they may not. If we're not going to be predictive, then for all we know, anything could happen to some of these Stocks.

Lack of 'outperformance' doesn't concern me over short periods of a few months or so, however for DCT to be considered a success, it should certainly be achieving closer to its goals over the medium term.

Will be interesting to watch how some of these individual stocks perform over the next few months.

 

This is something I think may be right (eg BSL).
But also, this is where the US Fund will produce outperformance - its is not picking 20 out of 200 stocks, but rather 30 out of the top 30 - i.e DJIA index.
With some luck this may be the year where the Dow puts on 20% and the Navra US fund does 30% (wouldnt that be something!!) - but who knows??

 

Yes........that's a very good point for the proposed US Fund/s Perky.

How the US Fund/s are set up from a 'hedging' point of view will also be interesting.

'Unhedged' would presumably add another variable to income received depending on currency movements above and beyond actual trading profits, while 'hedging' would presumably come at some cost.

My guess would be that there would be a lot more variables(and hence less reliability) in trying to backtest the Australian Fund as some of it comes down to individual Stock Selection. If some of this individual Stock selection was based on points such as 'the opinion of the current management' then it becomes a very subjective thing open to huge variables.

With a relatively fixed, 'full' basket of Stocks such as the DOW, and knowing when some have entered and exited the Index, backtesting should be a breeze and far more reliable.

I'll go one step further, since the Index has been in place since 26th May 1896, I'd love to get a copy of what these results have been at year end since then!! Wars, depressions, crashes........would be a most fascinating document to view...........

 

Hedged/Unhedged - definition for dummies

I'm keen to direct some funds into the US fund. Eagerly awaiting news of how it's been going. Wasn't Steve going to start trading it late last year??

But.................I haven't got a clue as to the intricacies of "hedging".

Could someone please post a plain english definition.

Thanks
Jenny

 

The purchase or sale of a commodity, security or other financial instrument for the purpose of offsetting the profit or loss of another security or investment.
So, any loss on the original investment will be hedged, or offset, by a corresponding profit from the hedging instrument.
Eg:
Investors frequently try to hedge against inflation by purchasing assets (eg, gold) that will rise in value faster than inflation.

 

Basic concept :

"There are currency pairs that work in opposite directions.
For example USD/CHF and EUR/USD.

If one pair goes up the other goes down.

So when you BUY one of them and want to hedge you BUY the other one at the same time."

 

Thanks Troppo - got the basic idea, but what exactly would people do with regard to Navra US fund for example??

 

Sorry Jenny that am applying with some delay but so far my hangover is bigger than Parliament House in Canberra so....
I doubt that I am the right person to give you an answer to your question....
Steve could explain this.
I think this is Fund Manager's job not individual unit holders.

 

Hi Jenny,

I'm not in the finance industry but I can explain hedging on a basic level. Essentially Navra or any other international fund would be buying shares of companies in foreign currencies. These companies post profits in foreign currencies. What happens if the currencies rise or fall vs our own? The answer is that our returns subsequently fluctuate, which can be a good or bad thing.

Alternatively, the fund can 'hedge it's bets' by insuring against currency changes, stabilising the fluctuations. Again this can be a good or bad thing, depending on the direction of the fluctuation.

So there you have it, two forms of international funds - a clean/pure/unhedged fund vs a hedged fund. There is (I believe) a small cost built into the cost of the hedged fund to pay for the hedging, someone on the inside can perhaps elaborate on that.

 

"There is (I believe) a small cost built into the cost of the hedged fund to pay for the hedging ..... "

Some investors are comfortable with a full currency hedge while others disregard hedging as useless and costly.
Basicaly hedging decision vary depending on the time frame, the volatility of currency, the market view on the specific currency and risk.
Equity fund managers ( some of them ) are reluctant to hedge the currency side of investments held for more than 3 years - but they used to hedge short term investments.
The time as a hedging factor should be considered along with the type of currency and the view of the specific currency.
So, to hedge or not, it's a very difficult question...