Fat Prophets is known to many by its share tip subscription service. Boasting over 25,000 members, it is one of the most popular of these services in Australia. Launching in 2010 and adopting a contrarian approach to investing, the service has a solid track record according to the performance figures published on their website. Fat Prophets began expanding their service to global equities in 2015, launching their Global Funds Report.
Fat Prophets are now launching a globally focussed LIC, the Fat Prophets Global Contrarian Fund (FPC). The fund is aiming to raise a minimum of $16.5m and a maximum of $66m with the offer closing on 20 March 2017.
According to the prospectus the fund aims to :
...take a strongly contrarian approach and to systematically invest in global themes at key inflection points across multiple asset classes, combining a strong core portfolio of long only positions with active trading to take advantage of shorter term opportunities regardless of market direction.
There's a large focus on 'contrarianism' (if you hadn't already gathered from the fund name), meaning the manager is prepared to go against general market sentiment. Founder Angus Geddes states that he believes markets can be highly inefficient particularly of the short to medium timeframe. As a result, stocks, sectors or markets can become over or under valued and by acting on these inefficiencies it is possible to outperform over the short to medium period. This is a philosophy applied by many successful investors and the most famous contrarian investor of all, Warren Buffett.
Some of the other key components of the fund include an approximately 60% allocation to a high conviction portfolio of 15-25 global shares and ETFs and a 40% allocation to cash and short term trading. The fund can hold up to 100% in cash but does not expect this to typically be more than 20%. The fund also has the ability to employ gearing of up to 250%, meaning for every $1,000 invested it can borrow and invest a further $2,500. The manager typically expects the gearing levels to be around a lower 40-60%.
This isn't Fat Prophets' first foray into LICs, with the Fat Prophets Australasian Shares Fund launching in 2005. One has to do some digging to find out the specifics of the fund, but by all accounts the fund performed reasonably well, however fell to a deep discount to its underlying NTA during the GFC. At this point fund manager Merricks became a majority share holder and ultimately took over management of the fund. Merricks proceeded to change the investment strategy of the LIC, investing in speculative copper and gold companies, which saw shareholder wealth halved and the fund ultimately wound up in 2013.
By no means do we expect history to repeat with this LIC, however it is a reminder to investors of one of the risks of investing in LICs, and one that is currently being played out (although under different circumstances) with Geoff Wilson attempting to replace the board of Hunter Hall Value fund.
According to the ETF Watch Fund Database, there are now 17 LICs available on the ASX which focus on international equities, including some big names such as Magellan and Platinum. Fat Prophets key point of difference is their deep value contrarian approach as well as their ability to employ fairly significant amounts of leverage.
As per the usual LIC IPO process, investors in the IPO will be gifted a free option for every share they purchase. These options have an expiry date of 12 months after listing. Shares will be listed at $1.10, with Net Asset Value of between $1.076 to $1.078. Investors in the IPO should be aware of the above 2 facts, as exercise of options in the future will result in dilution of capital, and for every $1.10 invested, the investor will actually receive between $1.071 and $1.081 worth of shares. Management fees will be 1.25% of assets per annum, with a performance fee of 20% of outperformance.
This post was prepared with publicly available information available from Fat Prophets. ETF Watch did not receive any payment from Fat Prophets for this post, but may receive referral payments from OnMarket Bookbuilds.