Funds get inventive on foreign exposure
By Robert Gottliebsen, Business Columnist, The Australian. July 10, 2018.
Step aside from the current market tussle between the bulls and the bears and we see that weaknesses have emerged in the main pooled equity savings structures for smaller investors — listed investment companies and exchanged traded funds.
Such pooled equity structures are a vital part of many self-managed fund portfolios and self-managed funds dominate the retirement sector of superannuation.
Listed investment companies are not working as well as we might have hoped and secondly if, as seems likely, the best returns are going to be achieved via stock selection in the looming environment, then exchanged traded funds (ETFs) might not be as effective as they have been in the past. In recent times, the pooled equity structures market has been dominated by ETFs that are usually related to an index and have the great advantage of having lower fees than most mutual funds and listed investment companies and they have provided good returns.
Listed investment companies have also delivered good rewards covering both property and share investments. Their biggest disadvantage is that over time most of these listed investment companies go through periods where their share price is well below asset backing and periods where the share price is above the asset backing.
This creates lots of problems for investors and often obscures the performance of the manager whose returns are boosted or deflated by the sharemarket price rather than the true measure — the underlining asset value.
In addition, if a manager wants to raise money from existing holders the discount to the market can be severe if the stock is already selling at a discount to asset backing. Existing holders, who don’t take up the issue suffer because their equity is watered down.
Of course, on the other hand, listed investment companies provide fund security for the manager and there is no possibility of a run on funds.
Given these underlying problems, I was fascinated that Paul Moore, who owns the fund manager PM Capital, is launching a unique listed structure to try to overcome at least some of these deficiencies.
PM Capital already has several listed investment companies including the PM Capital Global Opportunities fund which have all the drawbacks facing listed investment companies. Global Opportunities is a fund that seeks individual stock investments and, currently, almost all its money is invested overseas which is where Moore thinks best value exists. Moore’s new listed investment company is tagged with an unusual name — PTrackERS--- but has been designed to overcome some of the problems.
The new company promises stockholders that in seven years’ time, 2025, all unit holders will be offered cash at their net tangle asset backing. Alternatively, if PTrackERS stock holders don’t want cash, perhaps because of capital gains tax, they will be offered units in the Global Opportunities Fund on an asset backing exchange basis.
The portfolios of these two listed companies will be the same. Paul Moore hopes that the cash back option in seven years will cause the units of PTrackERS to closely mirror their net tangible asset backing, especially as 2025 nears.
And, if that occurs with PTrackERS, it will tend to equate the market price and asset backing of the current Global Opportunities Fund, which does not have the seven-year facility. At the moment Global Opportunites units are trading close to asset backing.
A structure like this would be much more difficult to duplicate in property or in an investment company that invested in small Australian stocks because the investments are not liquid but if you are investing in larger overseas companies rapid sales are easy to arrange. Interestingly, Moore is raising $500 million dollars (The Global Opportunities fund offers a one-for- one entitlement) at a time when Moore himself is not as optimistic about the overall market as he was a year or so ago when his fund was 110 per cent invested in equities via leveraging.
Now the fund is down to around 90 per cent in equities via a process where he shorts global indices as an offset to his selected securities.
And the percentage may fall further. Moore believes that despite the current risks in the overall market, he and his people can select stocks that over a seven-year horizon will do well.
An issue for all those investing in mutual funds are the management fees. Moore charges a not inexpensive 1.5 per cent a year but with no performance escalator. In the new fund he will personally absorb the initial costs of around 3 per cent so the investors will start with the full $1.40 per share that they subscribe. And over seven years that averages the investment management charge down to around one per cent.
I am not in the business of predicting whether Moore’s funds will do well or badly but we have a situation where a large number of self-managed funds are underweight in international securities and this is an attempt to give them exposure on a mutual fund structure and does not have some of the impediments that others have. But for this to work for subscribers Moore has to get his stock picking right because this is not an index fund. Meanwhile, if the structure works and aligns market price and net tangible assets, I hope others will follow.
https://www.theaustralian.com.au/business/opinion/robert-gottliebsen/funds-get-inventive-on-foreign-exposure/news-story/4075db24c8d7d85e105f8ede46ffcec0?csp=58bbf298cf4ccd62108793825d980a58 (subscription required)