Two of the big trends in Australian equity capital markets come together with the imminent listing of a new listed investment company, Spheria Emerging Companies Ltd.
Spheria, which is expected to raise more than $150 million before its offer closes on Friday, puts the spotlight on the strong investor demand for LICs and the growth in boutique funds management.
LICs are beneficiaries of the move by the $700 billion self-managed super fund sector to seek out direct access to fund managers offering capital growth and fully franked dividends.
The SMSF demand for LICs is obvious from the fact that the bulk of trading in LICs is conducted through the CommSec online trading platform.
LICs provide investors with direct access to managers who are increasingly sophisticated in their marketing and communications with investors.
A good example is the current roadshow being conducted by Wilson Asset Management chairman Geoff Wilson and his team. Over a two-week period he will meet about 3500 shareholders in WAM Capital and the Future Generation LICs.
WAM has two of the top five LICs measured by value traded on the ASX – WAM Capital and WAM Leaders.
Latest statistics from the ASX show LICs had the strongest percentage growth in the number of listings in the year to October. The number of LICs listed on the ASX rose 19 per cent to a record 105 companies.
In the year to October, the market capitalisation of LICs rose 24.7 per cent to $37 billion, putting them just ahead of exchange traded products in terms of total size. ETPs, which include exchange traded funds, managed funds, structured products and single asset managed funds, rose in value by 38 per cent to $33 billion in the year to October.
The second big trend brought out by the Spheria Emerging Companies listing is the surge in boutique funds management.
Spheria Asset Management is led by three fundies, Matthew Booker, Marcus Burns and Adam Lund. They have set up under the umbrella of Pinnacle Investment Management, which has stakes in eight boutique managers with $29 billion in assets under management.
The funds in the group apart from Spheria are Antipodes, Hyperion, Palisade, Plato, Resolution Capital, Solaris and Two Trees.
The boutique funds management business model adopted by Pinnacle and the Challenger-owned Fidante Partners ensures the fund managers have an incentive to perform.
Pinnacle and Fidante take stakes in fund managers and then manage all their compliance and back office administration.
Burns says Spheria will place a cap on the amount of money it will manage to ensure it can maximise returns to investors.
This capping of capacity is a feature of many boutique mangers who are focused on fund performance as opposed to growing funds under management to boost fees, which is the accusation levelled at large wealth managers.
The Spheria LIC is the latest example of a boutique under the Pinnacle umbrella going direct to retail investors. Until recently, the Pinnacle funds have only been open to wholesale investors.
Ian Macoun, who is managing director of Pinnacle, says that Pinnacle realised the importance of going direct to investors following the success of the Antipodes Global Investment Company, which raised $300 million and listed in October 2016. Its performance in the year to October was 19 per cent.
The Spheria listing has exposed one of the anomalies of the fund rating system. Spheria Emerging Companies has obtained a rating from Lonsec based on the prior performance of the fund managers at their previous employer, Schroders.
This has annoyed at least one fund manager who has been working for a long time to convince Lonsec to rate his fund, which has a long track record.
The Spheria marketing documents provide examples of at least three small cap companies that fit its criteria – Vita Group, Sirtex, Monadelphous and Class.
The fund’s top five holdings at September 30, 2017 were Platinum Asset Management, Sirtex, Bega Cheese, Cabcharge and Isentia.
Isentia has suffered four profit downgrades but Burns said he thinks the company will come good.