Investing Recommendation: Is investible long-term if NTA performance continues to exceed VAS. However, be careful of effect and timing of performance fees.
Trading Recommendation: Short term if discount is at least 2% greater than recent (1 to 6 months) average or to take advantage of large franking credits balance. Minimum discount advised is 5%.
Actual Performance:
In its Feb 2019 monthly report CLF reports an Inception To Date return of 10.35% (gross of expenses, fees and taxes):
Actual Compound Annual Growth Rate for Pre-tax NTA: 9.53%
- As noted below VAS delivered 6.74% over the period so CLF outperformed VAS by 2.79%.
- In its 30 June 2018 annual report CLF reports: "As at 30 June 2018 the Company franking account had a franking credits balance of $9.6 million." This equals about 15 cents a share as of 28 Feb 2019. This would take the CLF CAGR from 9.53% to 18.93% (artificially inflated due to the short period CLF has existed in its new internal management form but still a significant boost to current shareholders that is barely known.)
Actual TSR Comparison with relevant benchmark ETF:
Using Sharesight and a performance report period of 01 Jan 2018 to 28 Feb 2019 you can determine comparative Total Shareholder Return annualised performance between investing in CLF post-internalisation and investing in the most relevant passive index fund:
- CLF has an annualised TSR of 7.44%
- VAS has an annualised TSR of 6.74%
Performance Impact on NTA Discount/Premium:
The difference between the VAS TSR of 6.74% and CLF's 9.53% NTA CAGR has driven CLF to a TSR of 7.44% for the same period. If CLF's NTA (after all costs) continues to outperform VAS the discount should tend toward zero with the fee structure and other LMI demand/supply factors determining any discount or premium.
Selected Brief Insights:
- WAM Active Limited (WAA) and WAM Capital (WAM) have accumulated large stakes in CLF likely due to the outperformance, franking credits balance and because it flies a little under the radar currently. Continued interest in accumulating it at a reasonable price will support the CLF price.
Management and Performance Fees:
Management Fee
CLF now has an internal investment team. The equivalent of management fees can be calculated by dividing internal management costs (mostly staff) by the NTA. This will need to be done more accurately in the 2018-2019 FY.
Based on the half year report it is roughly $700,000 / $80 million = .875%
Performance Fee
20% of the increase in the value of investments of the portfolio over the return of the S&P/ASX 200 Accumulation Index for each calendar year, less the gross remuneration of the investment management team paid during that calendar year.
Extracts from most recent Annual Report, Interim Report and Prospectus:
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Noted in the CLF 2017-2018 Annual Report:
"A performance bonus structure for the investment management team was introduced as outlined in the Directors’ Report. The investment management team is eligible for participation in a Performance Bonus Pool each calendar year. The Performance Bonus Pool is equal to 20% of the increase in the value of investments of the portfolio over the return of the S&P/ASX 200 Accumulation Index for each calendar year, less the gross remuneration of the investment management team paid during that calendar year, and is to be shared amongst the investment management team as determined by the Chief Executive Officer. If the S&P/ASX 200 Accumulation Index has decreased in any calendar year, the Performance Bonus Pool will be based on the increase in the value of investments. If the value of the investments have decreased in any calendar year, there will be no Performance Bonus Pool for that year, however the Performance Bonus Pool may be increased in later years if the aggregate performance is positive and exceeds the S&P/ASX 200 Accumulation Index over a three year period."
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Fee Comments:
Total Expense Ratio w/o Performance fees = 3.47% of end NTA
Total Expense Ratio inc Performance fees = n/a
As you can see the operating expenses alone each year take over 3% out of NTA each year, though this includes employee compensation which would be subtracted from any outperformance amount.
Whether the performance fee applies and over how much of the positive return will be a key fee factor. You can normally get some idea of the likelihood of the end of FY performance fee applying by seeing whether the Interim Report has accrued a payable amount in expectation a performance fee would apply. However, for the transition year of 2018-19 you need to estimate. My estimate is that performance fees will apply.
