CFS’ small caps slip

ColonialFirst State’s in-house funds management arm suffered another blow with both of its small caps funds downgraded to a ‘hold’ rating by research house Morningstar.

Previously the Colonial Future Leaders and the Colonial Developing Companies funds were rated ‘investment grade’.

To the year ending April 30, 2005, the Future Leaders fund returned 21.29 per cent, about 1.5 per cent above benchmark, while the Developing Companies fund returned 4.05 per cent, almost 16 per cent below benchmark.

“Since our last review two years ago we have noticed that both funds have generated some pretty ordinary returns relative to the universe they function in,” Morningstar analyst Bianca Rose said.

Morningstar cited poor stock selection and the sheer size of both funds as key reasons for their demise.

“Colonial’s hefty fund size — over $1.2 billion in its Future Leaders and Developing Companies strategies, not to mention the house’s $17 billion-plus Australian equities strategies, which also invest in smaller companies — has exacerbated the effects of this poor stock selection,” Morningstar’s report said.

Although Morningstar credited Colonial for closing off both funds to retail investors, it has still encouraged investors to hold off further investments until “Colonial’s team can prove it’s more adept at dodging the duds” and funds under management have been “lightened considerably”.