Do the fundango

Crack open the bubbly and strike up the band. It's not just the big end of town that made big money in 2006-07. The legions of investors in managed funds have ridden the wave of booming investment markets and will receive double-digit returns for the year. Many will enjoy returns of more than 20 per cent, and a lucky few will see returns as high as 80 per cent.
The place to be was in the Australian sharemarket, which rose by almost 29 per cent during the past 12 months, including dividends.
According to figures provided by research group Morningstar, share funds reported average returns of 25 per cent after fees, and the strength of that performance trickled down into the returns of multi-sector or balanced funds which reported average returns of 12 to 15 per cent for the year - depending on their level of exposure to equities.
Mid-teen returns can also be expected by the bulk of super fund members, with early super fund returns coming in at about 15 per cent.It was a year when investors were well rewarded for taking on risk.
The stand-out performers were small companies and geared share funds, many of which returned more than 40 per cent.
The top 10 funds all returned more than 50 per cent, and the best performing fund, Macquarie's Small Companies Fund, returned an impressive 82 per cent.
"After four very good years investors should be happy with their funds," says Morningstar head of research, Anthony Serhan. "Even over 10 years, multi-sector funds have returned around 7.9 per cent a year, and that includes one of the worst bear markets of the past century."
The strength of both the economy and the sharemarket meant few investors lost money in 2006-07. But there were still disappointments.
The biggest losers were funds investing in Japan, with four funds losing more than 9 per cent.
The worst of these was Skandia's Fidelity Japan Fund, which was down 16.97 per cent for the year. BT's Global Bond Fund incurred the second heaviest loss of 13 per cent.
Serhan says the BT fund "got crunched on currency, as it is one of the few global bond funds that does not hedge out all currency risk".
Funds specialising in bonds and cash (fixed interest securities) were generally left behind by the booming sharemarkets, with many reporting returns of less than 6 per cent.
International share funds also showed patchy performances depending on where they were invested and how exposed they were to the strong Australian dollar.

The average diversified international fund returned about 9 per cent, although funds favouring small companies and emerging markets did much better and those concentrating on Japan and North America struggled.
Serhan says strong markets also disguised the fact that a growing number of managed funds failed to beat their benchmarks.
He says the average small company fund return of 44 per cent might sound impressive, but it was achieved in a market where the main barometer, the Small Ordinaries Accumulation Index, was up by 44.4 per cent - meaning many funds hitched a ride on the market.
The average fund specialising in the shares of large-capitalisation companies failed to achieve the benchmark return of 28.7 per cent and the average property securities fund returned slightly less than the 25.9 per cent index return.
"Australian equities funds have been struggling to beat the index over the past two years," says Serhan. "If markets are going up by more than 20 per cent a year, funds are less willing to diverge from that. You would expect returns to gravitate around the index because clients aren't going to complain too much. We also have the situation where a stock like BHP is constituting a greater slice of the overall market and fund managers are less willing to take overweight positions."
Serhan says some of Australia's most popular funds have also underperformed in recent years - including the largest fund in the market, Platinum's $9.7 billion International Fund.
A strong performer when times are tough, this fund returned just 6.18 per cent last year, compared with 23.55 per cent for the top-performer in the large-cap category, the Equity Trustees Intrinsic Value International Sharemarkets Fund.
"In a rising market, Platinum will always struggle a bit because it typically holds short positions," Serhan says. "The portfolio still has a lot of defensive characteristics and will trail when things are going well."
In the local market, Macquarie's Small Companies Fund has been the stand-out with annualised returns of 51.43 per cent for the past three years.
Portfolio manager Neil Carter believes small companies are an area where fund managers can add real value through smart stock selection and active management.
"The market is inefficient," he says. "The big brokers prefer to focus on big companies, so when we go to visit companies we are generating research that can add a huge amount of value.

"Small company portfolios are also very selective. We invest in about 60 stocks out of a potential universe of 1800 so we're cherry-picking the best 3 per cent. Large-cap fund managers are trying to pick 50 stocks from 150 or 200."
Companies that have done well for the fund this year include Neptune Marine Services and AED Oil.
Carter says Neptune is exporting new underwater dry welding technology, which will generate massive time and cost savings for repairs of gas platforms. Macquarie bought the stock on a price-earnings multiple of just four; it is now trading at a conservative 13.
He says the fund bought AED Oil, which operates in the Timor Sea, at around 80c a share a year ago and it is now trading at around $8.50.
Both Macquarie and Australia's second-ranking retail fund, Pengana's Emerging Companies Fund, tend to focus on companies capitalised at $100-$500 million.
Pengana find manager Steve Black refers to this as the "happy sweet spot" in the market, where original research can add big value.
Pengana's fund returned 70.78 per cent last year and has returned a total 171 per cent since it opened in November 2004. Like Macquarie, Pengana puts a lot of effort into stock picking.
Black says it looks for quality management and earnings fundamentals - particularly a growing cash flow. But, unlike Macquarie, it does not invest in resources, though it does invest in mining services companies, which have been a substantial contributor to results this year.
Black says Pengana's better-performing stocks include Mineral Resources, which manufactures crushing devices for the mining industry, Australia's largest car dealership, Automotive Holdings, and Cabcharge.
And while neither expects to repeat this year's returns (though Black says he and joint fund manager Ed Prendergast will "do our darnedest"), they do believe they can continue to outperform.
"Valuations are not excessively expensive and the Australian economy is firing on all cylinders," Carter says. "This is one of the classic boom times when you want to be strong in equities."
Across the wider Australian sharemarket, the best performers were the geared share funds, which use borrowings to leverage their returns. Four of the top five large-cap share funds were geared funds, with the best performer, Colonial First State's 452 Geared Australian Share Fund, returning 53.64 per cent.
This fund is managed by former Perpetual fund manager Peter Morgan's boutique firm 452 Capital, and focuses on finding quality companies trading at lower values.

It is around 50 per cent geared, which accentuates returns when markets are rising but will detract from returns in a falling market.
As a comparison, Morningstar's data shows the CFS 452 Australian Share Fund returned 27.15 per cent over the past year.
BT, Advance and Perpetual also have geared share funds that made the top five, all with returns of more than 40 per cent.
The top performing ungeared Aussie share fund was the boutique absolute return fund, the FSP Australian Equities Leaders Fund, with a return of 44.3 per cent. Other top-performing ungeared large-cap funds included Australian Unity's Platypus Australian Equities Trust (37.09 per cent), Perpetual's Ethical SRI Fund (36.73) and ING's Select Leaders Trust (33.92).
Leverage also played a role in the property securities market with units in the top performing fund, Australian Unity's Property Securities Growth Fund, returning 43.73 per cent for the year compared to a 26 per cent return for the S&P/ASX 200 Property Trusts Accumulation Index. While it doesn't borrow, Australian Unity has income and growth units.
The growth units are entitled to a higher proportion of the growth in the portfolio.
The fund's ordinary units returned 25.51 per cent for the year and the income units 13.28 per cent. But in June, when listed property trusts lost 4.5 per cent, the growth unit fell by 8.8 per cent.
"It shows how leverage can accentuate returns," Serhan says.
Other top performing property securities funds included Equity Trustees' SGH Property Income Fund (29.11 per cent), UBS's Property Securities Fund (29.10 per cent) and Pengana's Property Securities Fund (28.74 per cent).
For multi-sector funds, Serhan says the key to performance last year was how heavily funds were invested in Australian shares and property and, to a lesser extent, whether their international exposure was hedged against movements in the Australian dollar.
Four of the top five performers were 80 per cent or more invested in growth assets. Russell's High Growth Fund returned 21 per cent.
Serhan says the second-ranked fund, ING's Tax Effective Fund (20.64 per cent), benefited from holding only Australian shares, which performed better than their overseas counterparts.
The Macquarie Managed Growth, ipac Pathways 95, and Mercer High Growth Plus funds also made the top five with returns of around 20.6 per cent.
But it was in international equities where the biggest divergences occurred.

Serhan says hedging made a difference of about 15 per cent to the returns of global share funds and many of the top performers had hedging strategies in place.
The best performing diversified large cap global fund was Equity Trustees' Intrinsic Value International Sharemarkets fund, which returned 23.55 per cent for the year against an index return of about 9 per cent.
Equity Trustees head of fund management, Harvey Kalman, says the fund uses selective hedging and was about 50 per cent hedged last year.
He says it differs from most international share funds in that it uses research by Scotland's Value Track to decide which countries to allocate funds to. The fund then buys financial products that give it exposure to those markets. There is no stock selection involved, which Kalman says means the fund can be used to complement funds that focus on active stock selection.
Other top performing global funds included AMP's Future Directions Hedged International Share Fund (23.42 per cent) and Skandia's Custom Choice International Share Performance Fund (22.99 per cent).
In the fixed interest and mortgage markets, Serhan says higher performance was usually due to higher risk.
The top ranked Australian bond fund, the SCM Optimal Choice Coupon Securities Fund, returned 6.78 per cent, the top global bond fund, ING's Credit Suisse Syndicated Loan Trust, 7.91 per cent, and the top mortgage fund, Mirvac's AQUA High Income Fund, returned 9.46 per cent (see sidebar above).
"The better performing bond funds either held shorter-dated securities which gave close to cash returns or picked up extra yield by moving into riskier credit assets," Serhan says.
"Bonds were definitely the weakest category but they're not gone and done with. It wasn't that long ago that long-term bond returns were similar to those from shares.
"One of the issues for investors is that many people have been moving away from bonds but no one will ring a bell to tell them when they'll need them most. They're still important as a defensive asset class."