New fund offers low fees with a small-cap twist

Fledging Sydney-based fund manager Valuestream Investment Management has launched a new fund of funds that has a capped management expense ratio (MER) of 90 basis points and exposure to boutique small-cap managers. The fund is open to retail investors, with Valuestream hoping to capture interest from people who have self-managed superannuation funds.

The Australian Equity Fund has been set up by Robert Marie, Ben Griffiths and Brian Eley and currently has A$2 million under management. Griffiths and Eley are the principals behind one of AustraliaÆs top performing small cap funds, while Marie is new to the team and will function as managing director of Valuestream.

Marie says the new fund is designed to give investors exposure to the S&P/ASX300 index while providing a small cap ôkickerö. The portfolio is invested 80% in the Macquarie True Index-Linked Australian Share Fund, 10% in Eley Griffiths Group Small Companies Fund, and 10% in Macquarie Master Small Companies Fund.

ôMost investors arenÆt very clever at picking the right management style to suit the cycle, which means they tend to trade in and out of funds at the wrong time,ö says Marie, explaining the philosophy behind Valuestream. He says research shows that the median Australian value manager has actually underperformed the index over the past three years. ôInvestors in these funds would have been better off if their money was with an index tracker. Our new fund gives them this exposure to the index and then provides alpha through active small cap managers that bring independent research and proprietary market knowledge to the table. ö

MacquarieÆs True Index-Linked fund tracks the S&P/ASX300 and guarantees its performance against the index with a guarantee provided by a Macquarie Life subsidiary.

Marie says historical performance modelling put together by Zenith Investment Partners shows that the Valuestream blend would have returned 28.27% in the 12 months to end October 2006, compared to 24.99% for the median large cap manager and 26.31% for the S&P/ASX300. Over three years, the performance comparisons were similar.

The capped management fees and the low minimum-investment threshold of A$5,000 should be appealing to retirement investors, says Marie. ôThe fund gives retail investors access to wholesale funds at wholesale prices. Unlike a lot of funds of funds, we absorb fully the management fees of the underlying funds, which allows us to cap the MER at 90bp. There is a performance fee payable to the Eley Griffiths Group Small Companies Fund, and if this is triggered it is paid by the underlying fund out of the unit price.ö

Marie says the Australian Equity Fund has the capacity to grow to assets under management of A$500 million before it would need to add another small cap manager to the mix.

Valuestream says it plans to launch more funds in the future, and is also offering an outsourced administration model for boutique managers wanting to set up shop in Australia.

ôWe can act as a responsible entity for managers, who may be offshore, and are keen to get into the Australian market," says Marie. "We are targeting those firms that donÆt have the back-office processes or the detailed knowledge of the Australian regulatory environment to launch a fund themselves.ö

ValuestreamÆs relationships with custodians, registry firms, fund accountants and law firms will allow boutique managers to launch a new fund quickly and cost effectively.