Trading Recommendation: Short term only if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 15%.
Actual Performance:
In its Feb 2019 monthly report MEC misleadingly reports the following performance:
The fine print states: "performance is net of investment management fees, before company admin costs and taxes."
Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the IPO NTA after offer costs ($1.075), 28 Feb 2019 Pre-tax NTA ($1.0985), Dividends (2 cents), Franking (0.86 cents) and Option value at expiry (0 cents).
Actual Compound Annual Growth Rate for Pre-tax NTA: 2.63%
- This is a long way from Morphic's published ITD (p.a) of of 5.52%
- MEC's NTA performance includes dilution due to capital raisings at steep discounts
Actual TSR Comparison with relevant benchmark ETF:
Using Sharesight and a performance report period of 3 May 2017 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the MEC IPO and investing in the closest index fund to the benchmark.
- MEC has an annualised TSR of -8.87% which is truly appalling
- NASDAQ:ACWI has an annualised TSR of 10.78%
Performance Impact on NTA Discount/Premium:
The massive difference between the ACWI TSR of 10.78% and MEC's 2.63% NTA CAGR has driven the discount down to 15-20% and the MEC TSR to be -8.87%. And that's with virtually all investors not having done their own NTA CAGR calculation and likely assuming the true NTA return has been 4-5%.
MEC would need sustained NTA CAGR performance matching NASDAQ:ACWI to see this discount close. What is more likely is that its NTA growth will continue to underperform and thus the discount logically should increase.
Selected Brief Insights:
- It's generally hidden but MEC is actually 70% ETFs so its active management decisions and stock-picking has performed incredibly poorly given most of the return is driven by indexes.
- Morphic has a ~95% similar unlisted fund: Morphic Global Opportunities Fund. Its Feb 2018 fact sheet reported a fund size of $145 million. The 28 Feb 2019 fact sheet reports a fund size of $79 million. It is clearly bleeding money due to the massive underperformance over the last few years. Thus Morphic is becoming ever more dependent on the MEC LIC for closed-pool revenue.
- MEC's market cap as of 28 Feb 2019 is $47 million. As total funds under management for MEC and MGOF shrink the Indirect Cost Ratio for MEC will surely increase.
- Morphic continues to claim its ESG approach doesn't subtract from returns and will likely enhance them over the long run. This is false. Only governance has any demonstrable value-add and MEC's performance hasn't shown any net benefit. My estimation is its ESG tilt has been a negative from inception to Feb 2019.
Management and Performance Fees:
Management Fee
Monthly fee which equals 1.375% per year (inc GST).
Performance Fee
16.5% (inc GST) of the outperformance over the benchmark MSCI All Countries Total Return Daily Index in AUD over a 12 month period subject to the Portfolio generating absolute gains since inception and the recoupment of prior underperformance.
Extracts from most recent Annual Report, Interim Report and Prospectus:
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The Manager is entitled to be paid by the Company a fee (Performance Fee) equal to 15% (plus GST) of the Portfolio’s outperformance relative to the MSCI All Countries Total Return Daily Index (“the Index”) in Australian dollars (Benchmark) over the 12 month period, subject to the Portfolio generating absolute gains since inception and the recoupment of prior underperformance.
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Fee Comments:
Total Expense Ratio w/o Performance fees = 4.35% of end NTA
Total Expense Ratio inc Performance fees = n/a
As you can see the operating expenses alone each year take over 4% out of NTA each year. This is so high that MEC is guaranteed to never catch up to its benchmark now. Temporarily extreme discounts may be traded profitably but you should never hold such a fund for more than a few months.
Whether the performance fee applies and over how much of the positive return is a key fee factor normally but MEC has a lot of underperformance to make up before this applies.. You can 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.