FAQs
- Explain the difference between Class A - unhedged units and
Class B - hedged units?
- How much does "hedging" the foreign exchange cost?
- How does NCFM charge fees on the Unit trust?
- Who can invest in the Fund and what is the minimum investment allowed
- How does a unit trust work? What are "distributions"?
- What is NCFM's investment process and how do you apply sustainability to it?
- Why is there a buy/sell spread and what is this for?
1. Explain the difference between Class A - unhedged units and Class B - hedged units? Class A units are unhedged against Foreign exchange movements leaving investors exposed to movements in foreign exchange whereas Class B units are fully hedged against movements of foreign exchange against the AUD.
2. How much does "hedging" the foreign exchange cost? The hedging should not be a high cost as we use relatively simple foreign exchange forward contracts which expire monthly and are reset. The commission cost is relatively low (around 0.6% pa). In addition, we will either receive or pay the IRD (interest rate differential) between the foreign currency we are hedging against and the AUD. As the AUD has higher interest rates than most foreign currencies at the moment we receive a hedging benefit (we actually gain more AUD at the forward rate) so hedging currently pays us a small amount overall. If overseas interest rates rise above AUD rates we will be paying the IRD between the two countries.
3. How does NCFM charge fees on the Unit trust? There are 2 basic fees NCFM charge, firstly we charge a BASE management fee of 1.28% (inc GST) pa and in addition we charge 10% of the absolute PERFORMANCE (after other fees) of the unit trust. Because the unit trust also incurs custody and some other external fees it bears the cost of these up to a maximum of 0.5% pa (NCFM absorbs any costs of maintaining the trust above this level). NCFM charges a performance fee based on the absolute performance as opposed to the relative performance as our mandate allows us to invest 100% of the trust in cash in cases of extreme market uncertainty. By focussing on absolute performance we are more likely to be able to move money into cash and potentially avoid aggressive market sell offs like those seen in 2008.
4. Who can invest in the Fund and what is the minimum investment allowed? NCFM has a wholesale license from ASIC. This means we can accept investors who invest a minimum of AUD$500,000 OR those who are "sophisticated investors" (this will require 1. an accountant's certificate (or equivalent) declaring that the investor has a net worth of more than $2.5m and or gross salary over the past 2 years above $250,000). OR 2. Passing our sophistication checks to ensure that an investor fully understands the risks and nature of the product offered. Assuming the investor qualifies to invest with NCFM we will accept a minimum initial investment of $100,000.
5. How does a unit trust work? What are "distributions"? A unit trust is simply a legal holding vehicle separate from the investment manager (designed to protect investor's money and allow better pass through of tax benefits to the investor). When you invest with us, we will work out the price of a current unit in the investment trust (obviously the sum total of all shares, cash and accumulated dividends and interest) divided by the number of units outstanding. An investor "buys" into this asset at the unit price.
The unit trust is not a taxable entity it therefore distributes all taxable gains to investors once a year in the form of a distribution (it's a bit like a dividend on a share). We pay this around June each year. The amount of the distribution will depend on many things which make it totally unpredictable. What is paid out though is all taxable income (all interest and dividends received and the net of any realised gains/losses on share transactions during the year). The non taxable income is simply reflected in the gain/ loss of the unit price (typically the shares which have gained/lost money over the year which have not been sold at year end).
6. What is NCFM's investment process and how do you apply sustainability to it? NCFM considers that it has two responsibilities - one to maximise returns for investors and two to take into consideration the sustainability of our planet. The two are mutually dependent in our view. Our investment process reflects this dual approach to investing by looking for good investments in companies which are acting or operating sustainably.
By good investment we mean finding listed equities that don't fully reflect their current value. We make extensive use of screening tools to help us zero in on high potential ideas for further work. Our favourite type of investment is in a strong business that has excellent prospects for future growth opportunities, that generates good amounts of cashflow with very capable management. These type of investments, we have found, can be owned for longer periods of time and provide better returns.
By "acting or operating sustainably" we consider a number of things. Firstly we apply a quantitative test which checks to see whether the company is in the "lighter" half of its sector. The quantitative test seeks to measure the environmental damage that a particular business does (which includes; water usage, atmospheric emissions, chemical releases) from both its direct and indirect impacts. The quantitative process ranks companies according to their damage and restricts our investments to the better half of any sector. Secondly we look at the purpose of the company to try to determine whether its process and/or output, positively contributes to sustainability. This is by its nature a much more subjective exercise and requires us to examine the companies operations, dig into its philosophies and test its rhetoric against sector KPI's in order to make our decision.
7. Why is there a buy/sell spread and what is this for? Investing in shares costs a commission which is paid to a broker to purchase or sell shares. NCFM has a buy/sell spread of 0.3% to allow for these costs - the money goes into the unit trust (it is not paid to NCFM) to allow the new investor's money to buy into the existing shares in the unit trust.
