The naked truth about Fat Prophets Global Contrarian Fund (FPC)

Investing Recommendation: Do not ever invest. Has severely underperformed and has not demonstrated any alpha potential whatsoever.

Trading Recommendation: Very short term only if discount is at least 4% greater than recent (1 to 6 months) average. Minimum discount advised is 20%. Trading only when buyback is operational.

Actual Performance:

In its Feb 2019 monthly report FPC reports a pre-tax NTA of 1.0138

FPC provides no benchmark comparisons because its performance has been woefully below any relevant benchmark.

Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the IPO NTA minus estimated IPO costs ($1.075), 28 Feb 2019 Pre-tax NTA ($1.0138), Dividends (0 cents), Franking (0 cents) and Option value at expiry (0 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: -2.98% 


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 22 Mar 2017 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the FPC IPO and investing in the most relevant index fund.

- FPC has an annualised TSR of -11.39% which is truly appalling

- NASDAQ:ACWI has an annualised TSR of 12.64%

Performance Impact on NTA Discount/Premium:

The massive difference between the ACWI TSR of 12.64% and FPC's -2.98% NTA CAGR has driven the discount down to 15-20% and the FPC TSR to be -11.39%. And that's with virtually all investors not having done their own NTA CAGR calculation and comparing it to the ACWI return for the same period..

FPC would need sustained NTA CAGR performance at least matching NASDAQ:ACWI to see this discount close. What is much more likely is that its NTA growth will continue to underperform and thus the discount logically should increase.

Fees:

FPC's prospectus cites the following fees:

"Management Fee
In return for the performance of its duties as Manager of the Company, the Manager is entitled to be paid a Management Fee payable monthly in arrears equivalent to 1.25% per annum (plus GST) of the Portfolio Value calculated at the end of the month (Management Fee).

Performance Fee
In addition to the monthly Management Fee, in return for the performance of its duties as Manager of the Portfolio, the Manager is entitled to be paid a quarterly Performance Fee of 20% (plus GST) of the difference between the Portfolio Value at the end of the relevant period and highest Portfolio Value of any preceding period (Performance Fee) allowing for adjustments based on any dividend payments or capital issues."

These fees are 1.375% management fee and a 22% performance fee (determined quarterly not annually) applying to the entirety of any improvement in Portfolio Value above the high water mark.

This performance fee is obscenely high and the discount applied to FPC should be 5% higher whenever this performance fee may be applicable (i.e. Portfolio Value is not well below high water mark).

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The naked truth about Morphic Ethical Equities (MEC)

Investing Recommendation: Do not invest. Has severely underperformed and has not demonstrated any alpha potential whatsoever.

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:

<<
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.
>>

Fee Comments:

For the FY ending 30 Sept 2018 Total Expenses before tax were $2.287m. There was no performance fee. NTA before providing for tax on unrealised positions was $52.547m at 30 Sept 2018.

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.

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Did Ellerston Asian Investments mislead investors about underwriting its options?

Summary: To encourage EAI option holders to exercise their options Ellerston stated on 1 Feb 2019: "There is no underwriting agreement in place for the exercise of the Options." On 27 Feb 2019 - one day before the exercise deadline - it advised: "it intends to undertake a partial underwriting of options."

Details:

- EAI has options expiring on 28 Feb 2019.

- Its share price is trading close to the strike price of $1 so most would normally go unexercised.

- Ellerston has had a recent flurry of articles, interviews, emails and announcements to promote EAI and exercise of the options.

- On 1 Feb 2019 EAI published an ASX announcement stating: "6. There is no underwriting agreement in place for the exercise of the Options." See image below.

- On 27 Feb 2019 EAI published an ASX announcement stating: "Ellerston Asian investments Limited (ASX: EAI) today announces it intends to undertake a partial underwriting of options in respect of the Company’s listed options due to expire on 28 February 2019"

- Shareholders who exercised their options after 1 Feb but before 27 Feb may well question if they have been mislead and disadvantaged by Ellerston choosing to include the statement it made on 1 Feb about no underwriting being in place.

- Holders or purchasers of EAI options (EAIO) after 1 Feb may well question if they have been misled and disadvantaged in concluding that other parties (including Ellerston) who wanted to exercise EAI options (or see them exercised) would have to buy them on-market before they ceased trading on 22 Feb.

- If Ellerston was looking at underwriting the unexercised EAI options before 22 Feb (as is almost certain) then in waiting till after they stopped trading to announce any new information about underwriting it appears to have shortchanged EAI option holders who owned something of value (at least to Ellerston and those who take up the underwriting offer) but is being given away for free without their consent. Indeed, one could ask how it is legal to not buy the options on-market but then claim them after trading is finished without compensation?

- Imagine if in planning for such an eventuality, Ellerston talked to existing large EAI shareholders weeks prior to 27 Feb about a potential underwriting and their interest in participating. It would clearly be a strong reason for such investors not to buy the options on-market (and even sell them if they owned them) as they would pick up the optionality for free after expiry. Meanwhile retail investors in the shares and options are just left in the dark with only the misdirection of the 1 Feb announcement to go on. Presumably, this is all perfectly legal too in Australia's "fair" investing markets?

- Note that a holder of EAI options (who may for example also own EAI shares) who lets some or all of their options expire unexercised is making a decision with their property that suits their interests. It seems strange that it is legal to claim their property and use it to suit someone else's interests without consent or compensation.

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