The Firetrail Absolute Return Limited (FTA) IPO is open unitl 19 October 2018. Find out more and download the prospectus here.
One of the first of the late 2018 run of LIC listings, the Firetrail Absolute Return Limited (FTA) IPO is currently open. Offering access to Firetrail’s Long Short Strategy, the offer is open until 19 October and seeks to raise up to $378m. We take a look at the offer below.
Launched just this year, Firetrail is a new fund, but includes an impressive pedigree of investment managers. Firetrail is led by ex Macquarie stock pickers Patrick Hodgens and Blake Henricks. At Macquarie the team managing the Absolute Return fund were responsible for the Macquarie High Conviction Fund, which according to Firetrail returned 10.6% per annum after fees between 2005 and 2017.
Firetrail are part of the Pinnacle Investment Management stable, a company who invests in fund managers, including a range of recently listed LICs offered by the likes of Antipodes, Plato and MCP Credit Partners. Pinnacle provide the managers that they invest in much of the operations support, allowing the investment managers to focus on what they do best, managing their portfolios.
Firetrail also have an unlisted fund of this nature, launched this year and managing $86m in assets.
With an Absolute Return focus, FTA has a mandate to both buy and sell (short) Australian equities. The portfolio aims to be market neutral. This means that the net long position aims to be similar to the net short position, in other words they will have the same exposure to both long and short positions. This means that FTA should not move in line with general market movements, rather aims to perform by buying companies it expects to outperform and selling companies it expects to underperform. The company can have up to a 30% difference between the long and short positions, but aims for less than a 5% difference.
In an earlier post, James Miller of Firetrail discusses how shorting can benefit investment returns.
The portfolio aims to be widely invested, with around 30-40 long positions and 100 short positions. Short positions are split between 20-30 fundamentally driven positions and 70-80 ‘risk positions’. The high volume of short positions is likely designed to reduce the risk of making an incorrect call on a short position, where a wrong call can lead to unlimited losses, compared to a wrong call on a long position, where the potentially losses are capped (to the share price reaching $0).
The portfolio can have a gross equity exposure of up to 400% of the portfolio’s Net Asset Value (NAV). Investors should be aware of this fact, as this essentially allows the company to employ leverage within their portfolio and will magnify both gains and losses.
FTA’s Investment philosophy is built on four key principles:
Every equity security has a price:
Any equity security may be an investment opportunity if it is mispriced. In the Manager’s experience, investment opportunities are not confined to a particular industry, company type or investment style (e.g. value or growth).
Share prices follow earnings:
No matter how undervalued a company may seem, if earnings expectations are downgraded, the share price will generally fall. Earnings downgrades represent an opportunity to profit through shorting.
Entities become mispriced when recent information is incorrectly extrapolated:
The market is generally trying to value a company by pricing the future. Often, the market will take current information and extrapolate it. But in the Manager’s experience, the status quo rarely prevails. For example, an industry cycle may turn or a company’s fortunes may change. Significant investment opportunities arise when the market’s view on the future is inaccurate. To uncover and capitalise on these opportunities, you must be willing to look beyond the present.
Fundamental analysis allows the flexibility to capture unique opportunities:
Every entity is different. So is every investment opportunity. The Manager believes that fundamental analysis is the best way to capture all the different opportunities available in the market through time; a simple rules-based approach is not effective.
We’ve found 15 LICs in the ETF Watch Fund Database that are Australian focused with long/short bias. This may seem like a saturated market, however each of these funds has a differing levels of long/short focus, with many employing just a small amount of shorting. There is only a handful of Absolute Return focused funds, including Watermark Market Neutral Fund (WMK) and Monash Absolute Investment Company (MA1).
The manager will collect a management fee of 1.5% per annum, and is entitled to a performance fee of 20% of outperformance beyond the benchmark.The benchmark is the RBA Cash rate, giving FTA a reasonably low hurdle before collecting performance fees.
The manager will cover all costs of the IPO, meaning investors in the IPO will not have their share holdings diluted.
This post was prepared with publicly available information available from Firetrail Investments. ETF Watch did not receive any payment from Firetrail for this post, however has received payment from Firetrail for other marketing activities. The Firetrail Absolute Return Limited (FTA) IPO is open unitl 19 October 2018. Find out more and download the prospectus here.