Value Fund Hits the Ground Walking
Value Fund Hits the Ground Walking
Sometimes you need hindsight to realise that one particular day represented a turning point in your life. Looking back, the day the Macquarie HR lady called me and said ‘I’ve got good news and bad news, what would you like first?’ was a turning point. At the time, 21 years old, I thought the fact that I had been rejected for a job in the credit department but asked to attend an interview in Nicholas Moore’s Project Finance division was moderately bad news. It turned out to be a Godsend.
As was the day I got a job in the mail room at UBS, 18 years old. I thought I had landed a job at parcel company UPS. Little did I know I was working for one of the world’s largest banks, that I was about to spend three years working with a very bright bunch of people and that they’d spark my interest in finance and send me off to university to study economics.
But some days you wake up and know it’s going to be a turning point. My first day at Macquarie was 14 February 2000. I clearly remember arriving about 15 minutes early and sitting in Sydney’s Martin Place soaking up the atmosphere of the city. The future was hardly clear, but I knew I was about to embark on a new life (a ‘secret admirer’ also sent a large bunch of Valentine’s Day flowers to the office, making it a day my colleagues didn’t forget for the next four years either).
The second of November this year was another day like that. No flowers, fortunately, but an undoubted turning point in my life. On a normal Monday morning for the past six years, I’d peddle my bike up the hill to our Bondi Junction office, sit down with the team and plan the week ahead.
On 2 November I strolled down the street to our new space in Rushcutters Bay and sat down in front of a computer with $7.7m of other people’s money to invest. That money belongs to the Intelligent Investor Value Fund and it’s now my job to invest it, and the contributions that come in on a monthly basis, sensibly.
I’ve made a start and invested about 20% of the fund. One short-term ‘arbitrage’ looks like it’s going to play out well (I’ll explain for anyone interested towards the end of next week). Other than that I’ve made a few high-yielding investments in the infrastructure space and am working hard to find attractive places to invest. There’s obviously no rush, but I’d like to get a decent chunk of the funds invested in the first few months.
I’ve got a lot I’d like to write about the funds management industry. I am, of course, now a part of it. But that’s only confirmed and crystalised the concerns I had before I started. Add up the advisors, distributors, wraps and multiple layers of managers, and the transfer of wealth from those that have it to the ‘helpers’ is truly extraordinary. I’ll explain more in future posts, along with a few solutions that I think could revolutionise the industry (wishful thinking, I’m sure).
For now, though, please post any questions you have about the fund in the comments box below and I’ll do my best to answer them. It’s an exciting time for the business, for me personally and, as many initial investors have already told me, for the early investors in the fund. If you want to join us, applications are processed at the end of every month. The next batch will be processed on 30 November, so get your paperwork in before then to be invested before Christmas.
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Sounds great! Wish you and the first round of invsetors all the best, and am looking forward to your insights into the superfund industry as there's probably valid reasons why more DIY superfunds are popping up all over the place, despite the inefficiencies.
Congrats Steve - I have absolutely no doubt you will be the best person for the job. It was funny reading your TII article handing over your portfolio to the other guys. It was then that I realised that 90% of what I have been buying were your recommendations.
On the fund management side - I have nearly finished reading Klarman's "margin of safety" and Ch3 is particularly insightful (The Institutional Performance Derby: The Client Is the Loser).
He talks about some of the disadvantages of 'normal' institutional investors, including:
1) short-term, relative performance goals (chasing the index to look good). Its good that you are staying away from this approach.
2) Compensated for funds under management, rather than performance. Again great to see you go against this trend!
3) Investing other people's money. I can see a trend here!
There are a couple of others however I wanted to ask your opinion about two big disadvantages & your approach to them:
-> How will the funds size influence your decision to buy small / illiquid stocks? Will you limit yourself to, say, 5% of a company? Would you buy out a micro-cap to realise its value (eg. trading below cash assets?). Will you limit the fund to a small number of stocks in order to keep yourself well informed of the companies & vote on resolutions accordingly?
-> Also, traditional managed funds remain fully invested to have the highest chance of beating the index. Given the long-term nature of the value fund, I wanted to say I trust in your ability to choose for me what proportion is held in cash and what is invested. Please don't feel compelled to invest, say, 60% in securities because you feel people have given you their money to choose stocks when there are no "screaming buy" opportunities. That's my 2c anyway.
Keep up the good work!
Hi Steve. Were you pleased with the amount of "startup" support for the fund you received? I am currently located in London and would have liked to have some money in the fund, but the process of getting money into your fund is just too difficult from overseas. Who can afford to take time off work to go to the consulate etc etc? Will have to wait until next Oz holiday!
I wish you the greatest of success in this new venture, and hope you are able to continue to contribute to this forum.
G'day Steve,
I just wanted to wish you the best of luck with your new endeavours. I have known for years there are some shocking rorts on the go with managed funds and the superannuation industry in general but through being a TII investor I have been introduced to Platinum Asset Management and have invested a large part of the family's self managed super into the Platinum Asia Fund. I have little doubt your new fund will perform just as admirably or better. Thanks for being one of the few realists in this crazy financial world that brought me to my senses and once again I wish you the very best in your new endeavours. Regards, Mick.
G’day Steve,
I am looking forward to learning about the positions you build with the fund and the long rocky road that will provide further experience and education for me personally and hopefully my children.
It will be great to see how this portion of our portfolio performs against that part which we will continue pull the cobweb encrusted levers to buy or sell pieces of businesses with the constant advice from our friends at TII.
I’m in no hurry to seek a quick windfall. The funds we’ve entrusted to you have a time frame of at least 15 years. Then they may be turned into a tertiary or worldly education, a business or heaven forbid a house. If my children find an interest in following the path of their future investment, you never know, they may want to stay invested past your and my retirement.
I hope the road down to Rushcutters finds you more often skipping. We all make better decisions when we love what we’re doing. And it sounds like there’ll be a lot of good decisions made at TII Value Fund.
Hi Rowan and thanks for your comments.
- We don't have any fixed guidelines for what percentage of a company we're allowed to own and I'll assess each situation on its own merits. If it's a small business that I'm investing in because I think it's going to become a big business and I want to hold it for the next 10 years, I'll be a lot more comfortable owning a substantial percentage of the company (say, 10-15%). If it's an arbitrage situation, an NTA play or just something I think is too cheap to ignore, then I'll be making sure there's enough liquidity for me to exit the investment. That might mean I'm limited to 1%, not 5%.
- I'm definitely not in a rush to invest all the money immediately but I also don't want to anchor myself to what we saw 6 months ago. We might be waiting a long time to see opportunities like that again and, even if we were 60% invested, we'd still have a lot of ammunition to take advantage of it. So, as I find stuff I'm happy with, I'll add to the portfolio and see where we end up in a few months' time.
Hi Scott, I've been in contact with a number of overseas investors and it's a real hassle - tax wise as well as AML wise. All I can do is throw my hands in the air, I think the whole process is ridiculous.
As for the $7.7m, it's a perfect amount to start with. My original business plan was to raise $8m in the first month. Then, as I put the fund together and spoke to people in the industry, they all told me I was living on another planet. So I started to temper my expectations. And with a week to go we had received less than $1m in applications. So by the time Friday the 30th rolled around I was a happy camper. I know there are also plenty of people like you who want to invest but haven't yet. So, as long as I do my job properly, there will be plenty of support.
Hi Steve,
To say I'm not a fan of managed funds would be an understatement, but I am still considering making an investment into your fund.
One of my main concerns with managed funds (besides excessive fees, taxes, turnover and benchmark hugging) is the lack of adequate reporting on where the investors money is being invested (and the rationale for the decision). Considering only a handful of managers (eg Platinum / PM Capital)provide what I believe to be adequate reporting, what level of detail / disclosure and frequency are you hoping to provide to investors in the fund?
Rowan, you said:
"2) Compensated for funds under management, rather than performance. Again great to see you go against this trend!"
It seems to me that the fund will still charge a fee based on FUM
0.75% investment fee
0.26% admin fee
0.10% recoverable expenses fee
So a total fee of 1.11% based on assets under management. And of course the obligatory performance fee of 10% of returns in excess of 8% per annum.
Hardly breaking the mould are we?
Just returning to that performance trigger of returns in excess of 8%. How hard is it going to be to hit that performance hurdle?
Not really I think.
This may not format properly, but I hope it is readable. I'm just looking at the annual cap gain of the XAO (not even accounting for dividends)
In the past 30 years, the annual return for the XAO has only been below 8% thirteen times. With an average return of 9.39%. So the fund gets a performance fee for underperforming the average?
Date Annual return Return above 8%
31-Dec-79
31-Dec-80 42.70% 34.70%
31-Dec-81 -16.54% -
31-Dec-82 -18.49% -
31-Dec-83 59.72% 51.72%
31-Dec-84 -6.35% -
31-Dec-85 38.25% 30.25%
31-Dec-86 46.76% 38.76%
31-Dec-87 -10.48% -
31-Dec-88 12.77% 4.77%
31-Dec-89 10.93% 2.93%
31-Dec-90 -22.43% -
31-Dec-91 29.04% 21.04%
31-Dec-92 -6.63% -
31-Dec-93 35.50% 27.50%
31-Dec-94 -12.15% -
31-Dec-95 15.69% 7.69%
31-Dec-96 9.88% 1.88%
31-Dec-97 7.27% -
31-Dec-98 4.55% -
31-Dec-99 15.27% 7.27%
31-Dec-00 1.48% -
31-Dec-01 6.51% -
31-Dec-02 -11.44% -
31-Dec-03 11.11% 3.11%
31-Dec-04 22.60% 14.60%
31-Dec-05 16.18% 8.18%
31-Dec-06 19.87% 11.87%
31-Dec-07 13.76% 5.76%
31-Dec-08 -43.01% -
I believe the 0.75% is to pay fundhost (the responsible entity) and Steve gets the 0.26% to pay the bills. With 8m FUM, thats only $20k. I believe that is a strong incentive for Steve to do well. I can't remember what the 0.1% is for.
Dear Steve,
I met you at the Wollongong information night. It was an exciting night seeing you introduce the fund to prospective investors for the first time. I am delighted to have been able to be one of the fund's first investors and will hang in there through thick and thin. I truly wish you all the best and congratulate you on the initial sum that people invested with you. It must make you proud, excited and just a little nervous with the faith others have shown in you. I know you will do well over time and be quite successful. I look forward to hearing about your initial investments over the coming months.
That's exactly the reason I picked 8%. It's pretty close to the long term average return from the Australian stockmarket.
Our base fee is 0.74%, so if we return 18% p.a. our fee would be 1.74% p.a. I don't think it's the world's cheapest fund but I think it's fair.
The reality for us is that FUM and performance will be highly correlated. If we perform, we'll get enough FUM to make a profit. If we don't, we won't.
The reality for AMP is that they have an army of 'advisors' incentivised by commission. They seem to be able to under perform year after year and still make extraordinary profits because of the constant flow of advisor money.
There's no guarantee I'll do well. But I can guarantee that everyone that has invested with me has done so for for the right reasons and with their eyes open about the risks and potential rewards. That's a good start.
Two questions about the Value fund. My first question is if this is being treated as a trust fund (versus LIC) can you advise what sort of individual tax reporting will be available to investors? Secondly is the fund being treated as a long term investor for tax purposes. Apologies if I should have sent the questions somewhere else.
Yes i wanted to invest and i live overseas at the moment and what a hassle, is there a easier way? I dont think so.I wish you all the best steve.
No problem Alan, I want this post to be a forum for questions.
1. You'll get a report in July every year explaining how much the distribution is and the different tax components of that distribution (capital gains, franking credits etc).
2. Yes, we'll get concessional capital gains treatment.
And that performance benchmark 'runs away' in a down year. That is, it's not reset. So to cite the 17 out of 30 years that the market has put in a greater-than-8% return I don't think is relevant; though the average return certainly is.
If we go into a Japan-style period of lower returns, though, the 8% fixed may prove a massive hurdle.
Hi Steve,
I live overseas like some of the others here, but stage regular visits to Australia. I'd like to throw a little cash your way as quickly as possible, though. Does the AML stuff have to be satisfied on the way in? Or just on the way out? Failing that, is there a grace period associated so that I could invest now, but self-identify later?
Thanks so much, and all the best with the new venture!
Thanks for the info. I am considering investing and wish you all the best. A recent report "Treasury group faces the critics" contained a comment I found interesting. It stated, "The problem with making investments in emerging fund managers, though, is that they are generally unprofitable, which means they can be a drag on Treasury’s earnings until they accumulate sufficient funds under management to cover costs."
What time frame and level of funds do you think your new fund requires to overcome this "problem"? Cheers
dc
I'll check with Fundhost John but, unfortunately, I don;t think so. We need to have the AML documentation in order to process your application.
Hi DC, it's not such a 'problem' when you don't need to report your earnings to the ASX. Our break-even is something like $30m under management - but we're prepared for that to take some time.
Steve, I just finished Bill Gross's December market outlook. He makes some interesting comments on utility stocks which may be of interest to you and other fund investors.
It's titled Anything but 0.01%.
Hi Steve
I and wondering for those who invested for December intake what the application unit price was? Will there be an update of unit pricing available to new investors before each next month deposits are processed?
Kind regards Ian Brown
Hi Ian, we'll be able to publish a unit price tomorrow but it's going to be close to $1.00 still. It's no problem for us to publish an estimate a week or so before month end - that might make things a little more transparent for potential investors.
Hi Steve, are you still planning to give an approximate value of the units a week before the deadline each month?. I have just invested more funds today for April but I am in the dark regarding what price the units will be. I understand the price will not have moved much but it feels funny buying something without knowing an approximate price before hand. Also I have registered for two tickets for the Information night. Is that all we have to do or will you actually send out tickets. Thanks and I look forward to catching up in April.
Hi Joe, we're actually considering going to weekly pricing. I'll push it with Fundhost.
Unless something dramatic happens tomorrow, the unit price will be very close to $1 (again).
We'll send you a confirmation for the information night closer to the event - thanks for your support and I look forward to catching up.
Cheers,
Steve
Thanks Steve, let's hope it stays at or around $1 for a bit longer! Once I have invested what I want I will then give it permission to rise..... Weekly pricing would be useful although perhaps not necessary. May I suggest pricing once a month as of the 15th of the month so that we have a rough price guide and time to invest in the last two weeks of the month. This might be easier to facilitate if you can't get the weekly pricing up. Thanks again.
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