Question of the Week

Best funds for income and small caps

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Question: I am thinking about investing in the BT Balanced Equity income series offering 7.5% plus franking. My understanding is that the risk is low as they only invest in the ASX 200 and cover the index with a put to ensure the fund is not severely impacted with a substantial correction.

Is this low risk and a good investment for income verses a term deposit? Are there other risks I haven’t thought through?

Answer (By Paul Rickard): I wrote about this product last year. My concerns at the time were to do with BT’s then investment performance, and the management fee.

Over the last 12 months, BT has lifted its game and the performance has improved. According to their last performance report (end May), the fund’s performance since inception is spot on with its benchmark.

It is important to note that the benchmark is 40% shares, and 60% bank bills. Accordingly, the fund only returned 9.36% (total return) in the year to 31 May, compared to around 17% for the S&P/ASX 200.

In answer to your questions, I think it is largely a sound investment. It is not low risk – however, it is lower risk than an outright investment in the share market.

Question 2: We have $30,000 invested in the Vanguard MSCI Australian Small Companies ETF (ASX code VSO) in our SMSF and it has not performed well. Are there any other funds, ETFs or LICs that focus on small caps and are better targeted to provide both yield and growth in the current investment climate?

Answer 2 (By Paul Rickard): Overall, smaller companies have done relatively poorly on the ASX over the last 18 to 24 months, so it is not surprising that an index-based ETF like VSO has not performed that well.

There are a number of alternatives.

Firstly on the ETF side, iShares IVO, which tracks the Small Ordinaries index (stocks from the S&P/ASX 300 ranked 101 to 300 by market cap). Again, the performance here hasn’t been that great – +12.47% for the 12 months to June, however -1.60% for the last six months.

With the LICs, you can see a full list here. While many of these are large cap, such as Argo (ARG) or AFIC (AFI), many have a small cap focus. Have a look at Geoff Wilson’s WAM or WAX, and Mirrabooka’s MIR.

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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