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Watermark Global Leaders IPO: Market Neutral Global Investing

ETF Watch - Oct 28, 2016

Already one of the most popular LIC managers with their ~$400m Australian Leaders Fund (ALF) and ~$100m Market Neutral Fund (WMK), Watermark Funds Management will soon launch a new LIC IPO for their market neutral Watermark Global Leaders Fund (WGF). Watermark are aiming to raise a minimum of $40m and a maximum of $150m (including oversubscriptions) as part of the IPO.

The fund will invest in the same manner as WMK, with 50% exposure to both long and short equities, meaning no net exposure to the share market. As a result, performance is based purely on the manager's picks rather than the rises and falls of the broader market. The benefit of an approach like this is significant events such as a GFC should result in no broad losses like a traditional fund would see, however the flip side also applies, with the benefits of broad market rallies unlikely to be seen within the fund. Watermark Global Leaders will combine this approach with 100% exposure to global equities. The WMK fund already allows up to 50% exposure to global equities, so we assume WGF will be investing in a similar manner, only with 100% exposure to global equities rather than the 50% WMK has.

According the Watermark: The market neutral strategy is deployed by constructing portfolios of Long and Short Positions of roughly equal size, comprised of the Manager’s best investment ideas. Using a fundamental research process, the Manager will look to invest in the shares of strong, well-managed companies when they appear cheap relative to the Manager’s assessment of fair value, and short-sell weak, poorly-managed businesses when they appear expensive. The Company will profit to the extent that the Long Portfolio outperforms the Short Portfolio. At its core, a market neutral strategy allows the manager to pick winners and losers in each sector or industry group, while hedging the fund’s exposure to the share market. In the same way, the Fund’s net exposure to regional and foreign exchange risks is also hedged.

One of the unique attributes of market neutral funds is that as their returns are unlikely to follow a traditional benchmark, it becomes difficult to benchmark the portfolio performance, as a result Watermark choose to benchmark against the RBA Cash rate, earning a 20% performance fee for any performance beyond the cash rate. Speaking of performance, Watermark promote the performance of the international exposure of WMK to be an impressive 28% between July 2015 and September 2016, however investors should be aware of the short term nature of this, and any investments like this should be considered for a long term investment horizon.

According to the ETF Watch Fund Database, there are 5 LICs available on the ASX which focus on absolute return international equities, including recently listed Antipodes Global Investment Company (APL). However, none of the other absolute return options have a complete market neutral approach, with all having a Long bias to their approach, meaning broad market movements will likely influence their returns. In fact the only other market neutral LICs we are aware of are Watermark's own Market Neutral Fund (WMK) and Bennelong's Absolute Equity Performance Fund (AEG), with both of these funds having an Australian bias. WGF has an opportunity to fill a market niche for those seeking international exposure without the exposure to broad market movements.

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 around 23 months after listing (16 November 2018). Shares will be listed at $1.10, with Net Asset Value of between $1.073 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 $1.073 worth of shares. Management fees will be 1.2% of assets per annum, with a performance fee of 20% of outperformance of the RBA Cash Rate.

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IPO Facts

  • Minimum raise of $40m
  • Maximum of $110m (with $40m oversubscription facility)
  • $1.10 issue price
  • 1 option attached for each share
  • Offer open date 10 November 2016
  • Broker firm offer closes 2 December 2016
  • Offer expected to close 9 December 2016
  • Expected trading on the ASX 21 December 2016

This post was prepared with publicly available information available from Watermark. ETF Watch did not receive any payment from Watermark for this post, but may receive referral payments from OnMarket Bookbuilds.

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