The naked truth about Absolute Equity Performance Fund (AEG)

LMI: Absolute Equity Performance Fund (AEG)

Investing Recommendation: Do not invest. Manager claims outperformance for the longer period of the unlisted fund but AEG has had very poor performance and no alpha since Dec 2015. The fees are very high and volatility and drawdowns are elevated.

Trading Recommendation: Short term if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 5%. There is major performance-chasing recency bias in AEG.

Actual Performance:

In its Feb 2019 monthly report AEG reports an Inception To Date return of 1.27%:

Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the Starting NTA ($1.065), 28 Feb 2019 Pre-tax NTA ($1.042), Dividends (7 cents), Franking (3 cents) and Option value at expiry (0.2 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 2.26% 

- Amazingly this is slightly higher than AEG's reported figure. This is because they report "before the investor's tax" and so don't include franking credits and likely also exclude the small option value at expiry. It is refreshing to see an honest reporting of performance.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 16 Dec 2015 to 28 Feb 2019 you can determine comparative Total Shareholder Return annualised performance between investing in the AEG IPO and investing in the most relevant passive index fund:

- AEG has an annualised TSR of -0.28%

- VAS has an annualised TSR of 12.4%

- Obviously, AEG being market neutral cannot be compared directly like a long-only fund. However, the opportunity cost of investing in AEG as opposed to simply buying a low-cost, passive long-only ETF is worth considering.

Performance Impact on NTA Discount/Premium:

The difference between the VAS TSR of 12.4% and AEG's 2.26% NTA CAGR has driven AEG to discounts of up to 10% and has meant the AEG TSR is -0.28%.

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The naked truth about Gobal Value Fund (GVF)

Investing Recommendation: GVF's discount capture strategy is not replaceable by a passive ETF so if its true-risk adjusted performance and volatility or drawdown record suits then it may be worth investing in. The high dividend yield tends to keep the discount from getting too high and provides worthwhile entry and exit opportunities.

Trading Recommendation: Trade when discount is at least 2% greater than recent (1 to 6 months) average. Minimum discount advised is 2%.

Actual Performance:

In its most recent presentation (Nov 2018) with performance comparisons GVF reports the following performance:

Using Excel's CAGR formula I've computed the actual GVF Inception to Date (ITD) performance using the IPO NTA after offer costs ($0.975), 28 Feb 2019 Pre-tax NTA ($1.0733), Dividends (20.6 cents), Franking (6.43 cents) and Option value at expiry (0 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 7.21% 

- This is a long way from GVF's published ITD (p.a) of of 11.8% (inception to 30 Sept 2018)

- GVF's true NTA performance includes dilution due to multiple capital raisings below NTA.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 21 July 2014 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the GVF IPO and investing in the closest index fund to the most useful benchmark.

- GVF has an annualised TSR of 6.21%

- NASDAQ:ACWI has an annualised TSR of 11.81%

Obviously, GVF is not simply a long only ACWI-style equity-only fund and so on a risk-adjusted basis the performance difference is less. However, it is always useful to know the ACWI TSR for the exact same period in determining how good performance has really been.


Performance Impact on NTA Discount/Premium:

The large difference between the ACWI TSR of 11.81% and GVF's 7.21% NTA CAGR has driven the discount down to ~3% and the GVF TSR to be 6.21%. And that's with virtually all investors not having done their own NTA CAGR calculation and likely assuming the true NTA return has been around 8-9%.

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The naked truth about Ellerston Asian Equities (EAI)

Investing Recommendation: Buy only at discount greater than 10%. Has underperformed and yet to demonstrate any sustainable alpha capacity.

Trading Recommendation: Short term only if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 10%.

Actual Performance:

In its Feb 2019 monthly report EAI misleadingly reports the following performance:

The fine print states: "before all tax provisions and after fees, includes the effects of the share buyback, and excluding the effects of option exercise dilution."


Using Excel's CAGR formula I've computed the actual EAI Inception to Date (ITD) performance using the IPO NTA after offer costs ($0.975), 28 Feb 2019 Pre-tax NTA ($1.0864), Dividends (1 cent), Franking (0.43 cents) and Option value at expiry (0.1 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 3.6% 

- This is a fair way from Ellerston's published Net ITD (p.a) of of 5.81%

- EAI's NTA performance includes dilution due to options being exercised. A large proportion of which were "underwritten" - not bought on-market but taken after expiry and offered to large and institutional investors.

- Unlike many LICs with options EAI's options traded in the money for much of their time so IPO investors may have recovered some value from them.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 15 Sept 2015 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the EAI IPO and investing in the closest index fund to the benchmark.

- EAI has an annualised TSR of 0.98%.

- NASDAQ:AAXJ has an annualised TSR of 9.45%

Performance Impact on NTA Discount/Premium:

The large difference between the AAXJ TSR of 9.45% and EAI's 3.6% NTA CAGR has driven the discount down to ~10% and the EAI TSR to be 0.98%. And that's with virtually all investors not having done their own NTA CAGR calculation and likely assuming the true NTA return has been around 4-5%.

EAI would need sustained NTA CAGR performance matching NASDAQ:AAXJ 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.

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The naked truth about Future Generation Investment (FGX)

Investing Recommendation: Can be a worthwhile medium to long term investment if NTA return doesn't lag VAS/A200 significantly when risk-adjusted as entry and exit prices can be timed opportunistically compared to passive ETFs.

Trading Recommendation: Short term if discount is at least 2% greater than recent (1 to 6 months) average. Minimum discount advised is 5%.

Actual Performance:

In its Feb 2019 monthly report FGX reports an Inception To Date return of 8.6% before expenses, fees and taxes:

Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the Starting NTA ($1.0625), 28 Feb 2019 Pre-tax NTA ($1.196), Dividends (14.8 cents), Franking (6.35 cents) and Option value at expiry (0.5 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 6.66% 

- This is a considerable difference to FGX's published ITD (p.a) of 8.6%

- FGX is not long only and has less risk exposure. E.g. As of 28 Feb 2019 it was "43.4% long equities, 33.7% absolute bias, 13.0% market neutral and 9.9% cash."


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 30 Sep 2014 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the FGX at commencement and investing in the closest index fund to the benchmark.

- FGX has an annualised TSR of 7.48%

- VAS has an annualised TSR of 8.42%

Performance Impact on NTA Discount/Premium:

The difference between the VAS TSR of 8.42% and FGX's 6.66% NTA CAGR creates proportionate FGX discounts when share prices are rising or flat.

If FGX outperforms when markets fall and, through a full cycle, delivers lower drawdowns with only slightly reduced returns than VAS you can expect it to trade much closer to NTA and even at small premiums.

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The naked truth about Perpetual Equity Investment Company Limited (PIC)

LMI: Perpetual Equity Investment Company Limited (PIC)

Investing Recommendation: The high fully-franked dividend is often chased and also keeps the discount from getting too much above 5%. The NTA performance lags VAS by 2% a year. I would not invest long-term.

Trading Recommendation: Short term only if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 5%

Actual Performance:

In its Feb 2019 monthly report PIC reports this performance comparison with an Inception To Date figure of 7.9%:

Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the IPO NTA after offer costs ($0.973), 28 Feb 2019 Pre-tax NTA ($1.102), Dividends (14.3 cents), Franking (6.12 cents) and Option value at expiry (0 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 7.27% 

- PIC's NTA performance includes dilution due to capital raisings at discounts


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 18 Dec 2014 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the PIC IPO and investing in the closest index fund to the benchmark.

- PIC has an annualised TSR of 5.64%

- VAS has an annualised TSR of 9.3%

Performance Impact on NTA Discount/Premium:

The difference between the VAS TSR of 9.3% and PIC's 7.27% NTA CAGR has driven the discount to around 5% and the PIC TSR to be 5.64%.

It's likely the discount is less than it would normally be due to PIC high level of fully-franked dividends which is driven by the stocks it invests in.

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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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