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Monash Investors launch absolute return LIC - Long / Short Australian Equities

ETF Watch - Mar 02, 2016

Monash Investors recently announced that they are launching a long short, absolute return listed investment company that will list on the ASX in April 2016. Named the Monash Absolute Investment Company (MA1), Monash has been managing a similar strategy as a managed fund, but after a number of clients asked to access their strategy in a listed form, the firm decided to launch their first LIC.

Unlike most Australian equity based LICs offered in the market today, this one has a number of distinctive features, including its ability to short overpriced stocks, invest in Pre-IPO securities, an ability to hold cash if there are not enough stocks that meet its high hurdle requirement and investment criteria, as well as being indifferent to a stock's market capitalisation in assessing whether to buy or sell a security.  Further, unlike many funds, this one uses the best of all invest styles such as value, growth and discounted cash flow because according to the manager, different styles work at different stages of an investment cycle.  

Monash Investors have also set themselves an aggressive target of 12-15%pa return over a 7 year cycle as well as avoiding loss of capital in each financial year. As a result they have abandoned a traditional 'outperform the benchmark' target. Of course this is not guaranteed, but the unlisted managed fund that this is based off has returned 15.9% p.a. after all fees from 2 July 2012 to 31 January 2016, which is around 5% more per annum that the S&P/ASX300.

Having worked in markets for over 50 cumulative years managing billions of assets, Simon Shields (formerly head of equities at UBS and CFS) and his co-founder Shane Fitzgerald (also from UBS and prior to that JP Morgan), designed their unique investment philosophy based on direct insights learned managing large pools of capital.  They believe that most stocks are fairly priced most of the time but that some stocks can become significantly mis-priced because of recurring patterns of market participant behaviour.  As such, the have shown how they can make investments with large payoffs because the market cannot price big change very well. In a recent presentation by Monash, they show some of their successful positions which include successful long positions in fund manager Challenger and short postitions in retailer Myer as well as a successful Pre IPO investment in sports technology provider Catapult.

Generally (but not always), absolute return strategies have lower volatility and lower drawdowns than major market index, but if well managed, this is not at the sacrifice of returns.  This can result in higher compounding rates of return over time, as the losses can be less severe than the market in times of market stress, and to date, that has been Monash Investor's experience as mentioned above with returns exceeding the ASX 300 in the 3 & 1/2 year life of the unlisted managed fund. Importantly, these results have been achieved with materially lower volatility than the market, a great outcome for investors who don't want to see large fluctuations in their portfolio. Further, unlike some absolute return strategies that can use a lot of leverage, the Monash fund has used little to none since they founded, which might make it an ideal candidate for those investors who still want access to growth assets, but with lower volatility and more consistent returns. Of course past performance should not be used as a guide for future returns.

There are a few Absolute Return LICs listed on the ASX. In our Fund Database, we've classified 11 LICs as absolute return with a focus on Australian equities. These funds however implement a wide variation of investment strategies, with some having strict limits on short selling proportions of the funds, some using leverage and some focusing on certain sectors. There's one common trend though, and that is that those funds with strong investment performance tend to trade at a significant premium to their Net Asset Value (NAV) or Net Tangible Assets (NTA). Recent market volatility has seen this premium rise for some funds, as investors rush to funds that do not track market indexes. The Monash IPO provides investors with an opportunity to invest at close to NTA, with $1 invested picking up a share with a value of $0.971 to $0.976 (depending on the total subscription). Investors in the IPO will also pick up an option with an exercise price of $1, common with LIC IPOs and providing a sweetener to the deal, however investors must be aware of the impact that these options will have on dilution of the fund assets if exercised. Management fees are in line with funds employing similar strategies with a 1.50% fee, and 20% outperformance fee for performance exceeding the RBA Cash rate, subject to a high water mark.

For more details refer to the prospectus, dated 23 February 2016.

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Background to Monash

Monash Investors established an absolute return long short fund in July 2012, and since that time, the fund has experienced an annual net return of 15.91% p.a. to 31 January 2016 (>5% p.a. in alpha), with materially lower volatility than the major market indexes, with far lower drawdowns and a lower beta - importantly these returns have been achieved with little to no leverage, as opposed to a number of other absolute return offerings in the market.  The firm was founded by one of Australia’s most respected investors - Simon Shields, the former Head of Equities at UBS Asset Management and Colonial First State and Shane Fitzgerald who worked alongside Shields at UBS Asset Management.  

Launching Monash Absolute Investment Company 

Recognising that many investors prefer direct holdings versus managed funds, the team are now launching a listed investment company that will offer the same strategy as the successful fund - key details are provided below.

Strategy Overview

  • Long short Australian equities
  • A targeted return over a full investment cycle (7 years), whilst aiming to avoid loss of capital each financial year
  • Absolute return and capital preservation focus
  • Benchmark unaware
  • Stock size agnostic
  • Style agnostic
  • Variable beta
  • Can include Pre-IPO stocks
  • Management fee of 1.50%, plus 20% of performance above the RBA Cash Rate subject to a high water mark.

IPO Facts

  • Minimum raise of $25m
  • Maximum $80m (with $20m over subscription facility)
  • $1 issue price
  • 1 option attached for each share
  • Offer opens 2 March
  • Broker Firm Offer closes 23 March
  • Paul Clitheroe to be Chairman
  • Ord Minnett, Bell Potter and Taylor Collison Joint Lead Managers

This post was prepared with some information provided to us by Monash Investors. ETF Watch did not receive payment from Monash for this post.

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