Successful fund-raising is primarily about good timing and execution, and occasionally, a transaction appears that achieves its aims with considerable style. Cuffelinks does not normally write about particular funds, but the Future Generation Global Investment Company (to list on the ASX under code FGG) offers an appealing structure and delivers great benefits to needy charities.
Much has already been written about this new Listed Investment Company (LIC), and details can be found on their website, linked here. In brief, many of Australia’s most prominent global fund managers have agreed to provide their services at no cost, and the 1% management fee charged by the LIC will be donated to charities committed to young Australians with mental illness problems. A worthy cause in need of much funding. This type of charitable structure was pioneered in Australia by Chris Cuffe when he launched the Third Link Growth Fund in 2008, but FGG is the first time it has been applied to global equities.
Rather than repeat what other articles have written (and not understating the charitable merits), I met with the Joint Chief Executive Officer of FGG, Chris Donohoe, to delve a little deeper into the investment side. Chris handled the IPOs of the two global offerings of PM Capital, and under the guidance of Geoff Wilson, he has been brought in to manage the fund-raising. The FGG team has been criss-crossing the country talking to brokers and investors, and is confident of going close to raising its very ambitious $550 million potential. This is a spectacular result for a LIC, and would have been unthinkable even a year or two ago.
Allocation to managers
On manager allocations, Donohoe says, “FGG has been careful to pick managers who do things differently. It’s not about index replication.” The prospectus lists 17 managers who have committed initial capacity of $790 million to FGG. This is not a trivial issue: nine of the managers are closed to retail investors, and consciously limit the amount they manage to focus on generating superior results. For example, VGI Partners has allocated $30 million from its small $1 billion capacity. Six of the managers are not yet available in Australia.
Such managers usually make up for the limited capacity by charging clients higher fees, and Donohoe estimates the range of base fees for the individual funds of these managers would be up to 2.475% with performance fees up to 27.5% above some agreed index (with an average of 16.1%). This makes the donation amount of 1% of average NTA with no performance fee a highly competitive offer. In addition, with the majority of participants in the ongoing business of the LIC providing their services for free (including accounting, secretarial, tax advice, board and investment committee members and annual listing fees), the additional costs extracted from investor returns may be as low as two basis points a year.
Manager allocations will be determined by the investment committee in consultation with expert advice, but it is likely to be about 55% to the long-only managers, about 30% to the absolute return and 15% to the more quant-style. Maximum allocation at cost to any one manager is 10%. Some rebalancing over time is possible if, for example, a manager produces excellent results and goes well over the 10% level. Donohoe expects allocations will be “… done as if the initial allocations will be retained for a long time”. Changes may be warranted due to personnel changes or a shift in manager style.
Likely performance
The prospectus cannot say how the fund is likely to perform, but Donohoe says, “We have checked the numbers on how this portfolio would have performed in the past, and the gross outperformance is too big to state.” This is a strong result given many of the managers have an absolute return focus. It is fair to expect such a fund to underperform an index like the S&P500 when it runs strongly, since some managers rightly have a low beta emphasis and focus on capital protection. This is one of the strong features of the fund, as it should outperform in a falling market. Downside protection always has appeal if it comes without sacrificing returns.
The absence of performance fees should also not be underestimated. A manager which outperforms its index by 10% based on a 25% performance fee earns a healthy 2.5%, perhaps on top of the base 2%. In FGG, this manager would forgo the 4.5% and only 1% would be ‘charged’ to the investor for the charitable donation.
Another clever point is the initial price of $1.10. Geoff Wilson is probably Australia’s foremost LIC expert, and he believes that some LICs with an initial price of $1 but a NAV of say 97 cents (with attached options worth say 5 cents making up the value shortfall) struggle to breach the psychological $1 barrier. Starting at $1.10 and based on a subscription of $550 million and known expenses, the NAV of the fund is estimated at $1.089, and it should trade initially around that level. Better than starting trading at 98 or 99 cents.
What are the costs?
This transaction is as close to a win (for investors) and a win (for charities) and a win (for doing-good service providers) as any in financial markets. At the risk of being churlish, a balanced review should ask who is making money from such benevolence. On page 51 of the prospectus is part of the answer. At the maximum of $550 million, total estimated expenses are $8.6 million. With most participants acting pro bono, the cost comes down to two main items: broker stamping fees of $7.7 million, and ASX listing fees of $537,000.
Stamping fees are paid on valid applications bearing an AFSL holder’s stamp, excluding any money lodged in priority offers to either Wilson’s clients or those who hold shares in the domestic equivalent of FGG, the Australian equity fund listed as FGX. Stamping fees are a healthy 2% (actually, 1.81% plus GST). If anything, this is higher than normal. So the obvious question is, why should fund managers and other service providers commit to an indefinite provision of services pro bono while brokers are paid a healthy fee?
Donohoe is open in his response. “We asked ourselves how we could do the most good with this offer, and the answer is by bringing in the most money. We are leaving it to the brokers to decide what to do.” Some have committed to donate their fees to charities, while others will split in some proportion. Donohoe is confident a lot of the money will be donated back. He also expects the large take up of priority offers and general applications without stamping will keep the cost down.
And half a million dollars paid to the ASX? They have waived ongoing costs, keeping the fees for running the business highly attractive. Donohoe says there’s even a wealthy individual meeting whatever audit costs they have.
What else to consider before investing
Most retail investors are underweight global equities, where 98% of companies are listed and most of the big global opportunities lie, often in sectors not available in Australia. SMSFs, for example, have only an estimated 10-15% of their assets offshore (see this article for more details). Large super funds normally have around 20-25%, and many retail investors should consider higher offshore allocations.
Investing in a minimum of 17 managers prevents the investor having a material exposure to any one name, and while this may be good, if an investor really likes a global manager, then it may be better to go directly to that manager’s fund. It's also not practical to form a view on 17 or more managers in the way an investor can with only one or two, but this is true of any multi manager fund.
LICs offered with options have the complication of the potential dilution from exercised options affecting future returns. In FGG’s case, the options expire on 15 September 2017. This issue is discussed here.
And the Australian dollar is now at a six-year low against the US dollar, and while many expect even lower levels, ideal timing would have given the currency upside more potential.
But the bottom line is at $550 million (or $1.1 billion if all options are exercised), this LIC will generate $5.5 million (or $11 million) a year for mental health, which Geoff Wilson says will make it the largest funder of such services in Australia other than governments. It’s worthy of consideration for most diversified portfolios.
Graham Hand is Editor of Cuffelinks and has no connection with the Future Generation Global Investment Company. This article is general background and any individual considering an investment should seek professional advice for their own circumstances.