Platypus Asset Management Platypus Absolute Return Australian Equities Fund

Transcription

1 Platypus Asset Management Platypus Absolute Return Australian Equities Fund Investment Management Assessment Report March 2016 Meeting/questionnaire information Meeting type: One-on-one interviews with principals Meeting purpose: Investment management assessment Meeting date: November 2015 Questionnaire type: Questionnaire date: November 2015 Financial Services Council Investment Management Questionnaire

2 Arkaba Adivors Recommendation & conclusion It is recommended that the Platypus Absolute Return Australian Equities Fund constitutes investment grade and should be added to an approved investment list. There is a strong board and Investment Committee in place. The firm is harvesting alpha on the strength of its professional team and a well-constructed investment strategy, investment process, portfolio construction and monitoring. This fund will be beneficial for both institutional and retail investor channels seeking returns from well-understood and researched sources while reducing equity market risk. Against its peers the fund demonstrates strong performance, with similar [limited] levels of investment risk. The Fund should provide a higher return for given levels of risk than a long only fund. We believe that it can be used to harvest returns from Australian equities while reducing overall portfolio risk. Fund details Fund name: Platypus Absolute Return Australian Equities Fund Fund manager: Platypus Asset Management Ltd, ABN , AFS licence number Dominant strategy: Fund issuer: Assessment status: KEY FEATURES Australian equities-focused long/short Australian Unity Funds Management Ltd, ABN , AFS licence number Investment grade DESCRIPTION Fund inception 1 July 2015 Domicile Open Management fee Australia Yes 1.5% (from inception) Performance fee 20% (as from 1 July 2016) Hurdle rate High watermark Australian RBA cash rate Yes Buy/sell spread 0.30%/0.30% Minimum investment Withdrawals Prime broker Address: City: State: A$50, Daily UBS Level 16, Suite 1602, 1 Alfred Street Sydney New South Wales Country: Australia Postcode: 2000 Website: PRIMARY CONTACT Name: Gary Adamson gadamson@platypus.com.au Telephone number: PORTFOLIO MANAGER Name: Peter Brooke pbrooke@platypus.com.au Telephone number:

3 Funds under management (FUM) Investment strategy Product FUM (A$m) Flagship (Core/Concentrated) Institutional mandates (four institutions) 1145 AU Platypus Australian Equities Trust (two institutions) 147 Managed accounts (22 accounts) 36 Flagship strategy direct FUM 1328 Funds under advice (FUA) 434 Absolute Return AU Platypus Absolute Return Fund 15 Systematic AU Platypus Systematic Growth Fund 36 Institutional mandates (one institution) 70 Systematic strategy direct FUM 106 Total direct FUM and FUA 1883 This information is based on conversations and material provided by the fund. periodically checks AUM figures against audited financial information and regulatory disclosures but there is no guarantee that information is 100% accurate. Third-party service providers Administrator: Legal counsel: Australian Unity Investments Internal legal advice from Australian Unity Auditor: Custodian Responsible entity: UBS Australian Unity Investments Background information FUND DESCRIPTION The fund is an Australian equities-only and Australian dollar-neutral fund combining a fundamental long and systematic short approach, predicated on a variable beta strategy developed to suit the Australian sharemarket (ASX). It uses a combination of fundamental and quantitative techniques. By using both fundamental and systematic processes with mutually exclusive but complementary investment styles Platypus aims to construct a portfolio with attractive risk-reward characteristics. The investment objective of the fund is to produce attractive positive absolute returns, outperforming the Reserve Bank of Australia (RBA) cash rate [after fees] on an annual basis regardless of prevailing equity market direction/conditions. The objective is also to generate a better risk-reward status than the broader Australian sharemarket s key indices. To achieve this outcome, the portfolio comprises 10 to 15 concentrated long holdings and 20 to 30 diversified short holdings; that is, 20 to 30 names in the ASX s top 200. The approach is to have a Sharpe Ratio 1 of at least one (1) through the investment cycle, relatively high volatility of circa 18%, gross leverage of circa 200% and a negative correlation to other [non-equities] asset classes. The strategy aims to outperform the RBA Overnight Cash Rate on an annual basis irrespective of equity market movements. It has generated an average return of 1.55% in up months, and an average 3.69 % in down months, based on simulations from December 1998 to June COMMENT The fund s performance returns are matching expectations, and remain achievable given the particular market conditions 1 The Sharpe Ratio (also known as the reward-to-variability ratio) characterises how well the return of an asset compensates the investor for the risk taken. It is a means of examining the performance of an investment by adjusting for its risk. It measures the excess return or risk premium per unit of deviation in an investment asset or a trading strategy, typically referred to as risk.

4 in Australia. Large Australian investors on the whole invest as one, typically using long equities and they make a point of avoiding hedge fund strategies. This results in low demand for such funds domestically. When combined with the interplay of distance from other developed markets and the limited appetite for banks to deploy proprietary capital, this creates significant opportunity for skilled managers to harvest alpha. Fund manager history Platypus Asset Management Holdings, was established in 1998 by Donald Williams and Nicholas Wright (former chairman and now a non-executive director). They launched their fund with opening subscriptions of A$10 million and grew this steadily to A$50 million in funds under management (FUM) in discrete accounts for some 30 to 40 investors. The initial investment strategy was based on 30 to 40 stocks displaying consistent market outperformance. Some six years after the fund s foundation the principals faced increasing difficulty in securing access to investors and began searching for a jointventure partner. As a result, in 2005 Platypus Asset Management Holdings (30% owned by Williams and Wright) partnered with Australian Unity Funds Management Ltd under a heads of agreement in October 2005, and established a equal voting rights joint venture in February the following year. Under a staff share plan, the balance of 20% of the Playtpus share in the joint venture is held by employees via non-voting shares. The joint venture s first [trust] investment vehicle was launched in May 2006 and the first investor client was secured in October Playtpus still retains its first two foundation investors. The fund grew substantially from A$50 million to A$1 billion in FUM in a matter of months, and to A$2 billion within two years. As at October 2015 Platypus had total direct FUM and funds under advice (FUA) of A$1.88 billion across six investment products managed under three strategies Flagship (Core/Concentrated), Absolute Return and Systematic. It is not ranked within the top 20% of active fund managers within Australia. There is a clearly expressed business strategy to retain and build FUM under the Flagship strategy coupled with a focus on diversifying the revenue mix across both product offerings and client channels. Staffing & organisation Platypus has the one office in Sydney which houses all staff. Platypus currently has 11 employees. The firm s structure is small and focused on efficiency. The analytical team is small and does not have one analyst for each GICs sector. The core staff are well supported by an experienced professional Investment Committee, and the outsourcing of back office activities to Australian Unity. The business owners [ex Australian Unity] are financially motivated through their equity shares to ensure the fund s success. The stated objectives of the firm s short-term incentive (STI) component of remuneration are to: motivate and reward individual performance; focus effort on key business goals and drivers of performance; attract and retain talented people. The allocation of STI to eligible individuals is driven by: the individual s target STI (up to a maximum of 100% of base salary, depending on the individual s role); performance against key performance indicators (KPIs); and the overall performance of Platypus, which drives the total STI pool. Platypus believes in the value of aligning the interests of its team with investors in the fund. To this end all employees are eligible to participate in the profitability of the fund and of the business via a long-term incentive (LTI) remuneration

5 component that consists of a Share Purchase Plan. The stated objectives of the LTI incentive are to: focus effort on key business goals and drivers of performance; attract and retain talented people by providing meaningful employee ownership; and provide for succession planning by encouraging second and third-generation equity owners. Additionally, the principal investment staff members have been allocated shares backed by an interest-free loan. Deferred cash bonuses and company dividends are used to pay down the loan. Platypus employees are eligible to participate in LTIs by invitation only. Initial and ongoing participation is at the discretion of the Platypus board. For a compact firm substantial effort has been made to develop its process, and the dedication to building a strong and aligned team should continue to provide a solid basis for growth. There has been limited staff turnover over time. Additionally, a four-member Investment Advisory Committee provides necessary oversight to add value for the firm. Platypus accesses the services of external compliance consultants as and when required. Key principals Donald Williams, Director, Chief Investment Officer Don has more than 20 years experience in the global financial markets, working in research, trading and funds management. Before establishing Platypus Asset Management in 1998, Don spent four years with Credit Suisse First Boston in proprietary trading with a primary focus on managing a trading book in equities and commodities, and undertaking fundamental research for the group s commodity positions. From he worked for AMP Investments Ltd, initially as a commodities analyst then as a portfolio manager. The commodities research role involved forecasting a number of key variables employed by AMP s economics and equity groups. In 1993, Don moved to a specialist small companies team that managed small companies portfolios totalling A$500 million. He holds a Bachelor of Agricultural Economics from the University of Sydney and is an Affiliate of the Financial of the Services Institute of Australasia. Gary Adamson, Chief Operating Officer Gary has more than 25 years experience in financial markets. Before joining Platypus in 2003 he worked privately, advising high net worth individuals on their global portfolio investments. Up to 2000 Gary had spent seven years with Credit Suisse First Boston, the latter four years as Director and Head of Foreign Exchange distribution for non-japanese Asia, Australia and New Zealand. His role with Platypus encompasses growth of funds under management and institutional client relationships. Peter Brooke, Portfolio Manager and Head of Systematic Research & Strategies Peter joined Platypus Asset Management in January 2008 and in addition to managing the quantitative portfolios is responsible for all aspects of quantitative research. From May 2006 Peter worked as a quantitative analyst with MIR Investment Management, concentrating on various research projects and quantitative portfolio management. He holds a Masters of Science degree in Physics and Astronomy from the University of Durham, UK, and a PhD in Physics from Macquarie University, Sydney. Directors Rohan Mead, Chairman, Group Managing Director, Australian Unity Investments David Bryant, Chief Executive Officer, Australian Unity Investments Fiona Dunn, General Manager, Funds Management, Australian Unity Investments Donald Williams, Principal, Founder of Platypus Asset Management, Chief Investment Officer Nicholas Wright, Founder of Platypus Asset Management, Non-Executive Director Geoff Black, Non-Executive Director Investment & risk process

6 The Platypus investment philosophy is the motivation behind the process. The fund is based on the philosophy of absolute return investing. To achieve this goal an equal balance is applied to capital preservation and investment returns, aligning a benchmark-agnostic approach with a capital preservations ethos. The risk is not inherently in the volatility of the market, but in the loss of capital. But it is a case of volatility versus leverage, and to secure high returns means there is a need for volatility (or, in other words, to endure 70% to 80% volatility would require investment returns of 20%-plus). Platypus believes that diversification of traditional asset classes does not always provide capital preservation, and that in times of stressed markets asset class correlations can converge, leading to capital erosion. Capital preservation works best when investors can structurally minimise market exposure at certain points in the investment cycle, and Platypus adopts a dollar-neutral, variable beta strategy to provide a solution to this (dollar-neutral delivers negative beta). The market-neutral strategy is adopted on the basis that this is the most efficient method of exploiting the risk premium available in the Australian market, and that accordingly investors should take both long and short positions. It is founded in the principle that the long/short strategy (sell short, buy long) can produce attractive, positive returns irrespective of market direction. Absolute returns generated by managers performing well at different times are a cornerstone of this philosophy, as they endeavor to deliver returns that are not measured relative to sharemarket benchmarks. Or, as Donald Williams puts it: You can t eat relative return. Absolute return puts food on the table. The rigorous bottom-up company analysis focuses on: understanding the key drivers of a company s performance what is material, how this will affect share price versus earnings, and what are the catalysts for under/out performance; industry attractiveness and competitive positioning within the industry; identifying companies with an attractive earnings profile a proven track record (or the potential for same), typically at least two years of strong performance, and an understanding of how it was achieved; dividend policy stable or improving pay-out ratios management competencies the quality of management, its strategy and their team s ability to execute financial analysis balance sheet strength, preferring low gearing and strong cash flow generation and a strong focus on price-to-earnings trading ranges; and company risk assessment across operational and regulatory risk and environmental, social and governance risk (applying a discount rate to reflect company-specific risk). The strategy aims to outperform the RBA Overnight Cash Rate on an annual basis irrespective of equity market movements, with a Sharpe Ratio 2 of 1, or greater. Portfolio risk is monitored by the Portfolio Manager to ensure that the Sharpe Ratio falls meets this expectation range. The investment process is predicated on long/short portfolio construction. The investment portfolio is divided into four performance expectations relative to the broader sharemarket: longs and shorts both outperforming; longs outperforming shorts; shorts outperforming longs; and longs and shorts both underperforming. 2 The Sharpe Ratio (also known as the reward-to-variability ratio) characterises how well the return of an asset compensates the investor for the risk taken. It is a means of examining the performance of an investment by adjusting for its risk. It measures the excess return or risk premium per unit of deviation in an investment asset or a trading strategy, typically referred to as risk.

7 PORTFOLIO CONSTRUCTION Stocks included in the portfolio typically display a history of consistent earnings growth, a clearly defined future growth path and a high return on equity (ROE). They also tend to have a stable or improving dividend pay-out ratio, a strong balance sheet and cash flow generation and are headed by trustworthy management. The portfolio avoids companies with significant earnings volatility, those in structurally challenged industries and businesses exposed to potential [substantial] regulatory change. Because Platypus is focused on performance (for which it gets paid) it avoids stock gathering against the trend that bigger is more stable. The focus is on returns not the size of the portfolio. The shorts in the portfolio have the same dollar value as the longs. LONG PORTFOLIO The longs are selected fundamentally. The long portfolio is constructed from the top 10 absolute weights in the Platypus Flagship portfolio, and is typically dominated by ASX100 companies. The maximum weighting in any one stock is 20%, and the long conviction adheres to a 2% to 4% position, increasing with a company s improved earnings profile, The stock weightings are normalised so that the proportionally larger absolute bet will attract a higher weight in the long portfolio. The portfolio is rebalanced every month, and no intra-month trading takes place (selling intra-month on average is no better than selling at month s end). SHORT PORTFOLIO The shorts are selected using model-based [simulated] trading. The short portfolio has outperformed the broader sharemarket since inception, although this is not the intention (that is, the business could readily run a short-only fund if it so chose). The short process is not allowed to short any position in the Flagship portfolio, providing a counter measure during market dislocations when the systematic process tends to underperform. The turnover of the short portfolio is high. It is rebalanced at least monthly which ensures that poorly performing positions are closed out. Given that stocks on average experience reversion following a strong move, immediate covering often produces a worse result than covering at month s end. Risk management process & limits Risk control is embedded in the investment process with monthly rebalancing of the portfolio forcing the sale of those stocks identified as losers. From January 1999 to July 2015 the portfolio level loss of the worst short position did not exceed 40 basis points over any one month, with the largest position loss being less than 8% over the month. There is an embedded ability to cover the short position, but not to re-short. Transparency Portfolio level information that is available in monthly reports is adequate. Access to senior investment professionals is good. Reports to investors are provided by Platypus on a regular, ongoing basis:

8 Monthly Performance report providing portfolio review, market commentary and strategic allocations. A statement of individual investor holdings. This is generally ed to investors on the same day that the net asset value (NAV) figures are finalised. Annually Audited financial statements. Taxation statements. COMMENT There is no reason not to have a high degree of confidence in the process and systems in place as a result of meetings and interactions with Platypus and Australian Unity executives. Compliance The responsible entity of the fund is Australian Unity. Additionally, Platypus has its own internal Risk & Compliance Committee which meets quarterly. The Platypus Compliance Officer is Steven Best. The committee includes an external compliance advisor, Larry Simon, a principal of Sydney-based licensing and compliance consultancy Lazorne Group, which monitors and assists in the maintenance of appropriate records. Compliance procedures hold that any breaches actual and suspected are reported to the board by the Compliance Officer. Included in any such report would be details of the nature of the breach, disclosure of the breach and the action take to correct the breach. To date no breaches have been recorded.

9 Performance review The net monthly returns since inception are shown in the following table. MONTHLY SIMULATED PERFORMANCE (%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec CYTD Data is simulated from 1 January 1999 to 30 June Live data used from 1 July Source: Platypus Asset Management. PERFORMANCE & RISK METRICS* Average return (monthly) 2.2% Standard deviation (monthly) 5.2 Value at risk (99%) -10.0% Annualised return (before fees) 27.7% Annualised volatility (before fees) 18.8% Maximum months to high-watermark recovery 31 Largest drawdown from high-water mark 13.9% Worst month -10.1% Best month 21.2 * As at end December Source: Platypus Funds Management. PERFORMANCE INTERVALS* Fund RBA cash rate Daily 0.03% % Month to date -1.07% % Financial year to date 4.70% % Calendar year to date 4.70% % * As at close of business 10 November Source: Platypus Funds Management.

10 Summary view: ranking (grade 5 = high, 1 = low) SUMMARY RANKING CURRENT COMMENTS People Quality and Experience of Senior 4 A small team led by experienced individuals. All appear motivated to succeed. Team is small and dedicated. Investment Professionals Depth of Investment Team Investment Platform The Edge: Uniqueness and Creativity of Investment Process Quality and Depth of Research, 4 Applying a technically strict method for investing in Australian equities. The edge is that it relies on an adherence to fundamental and qualitative research and analysis and investment structure to take advantage of this opportunity. Quality of Trading Systems Risk Management 3.5 Risk management is part of the process. Degree of Focus on Risk in Investment Process Quality of Risk Systems and Reports, Independence of Risk Oversight Portfolio Construction Appropriate Position Sizing and 3.5 It takes some time to understand how the two sides (long and shot) come together. Concentration Methodology Access and Transparency Access to Investment Professionals, 3.5 Standard reports are easy to analyse and there is good access to senior personnel. Timeliness of Reporting Quality and Details of Information, Availability and Timeliness of Performance Estimates Performance Returns versus. Peers, Sharpe Ratio, 3 Performance of the live portfolio is short, however, the back tested model looks to perform well. We base our opinion on the live track only Volatility Diversification Benefit to Portfolio Assets/Investors Firm Size and Stability of Investor Base 4 Platypus has built a solid brand and a loyal following. We expect that there will be interest in the Fund, given current market volatility. Concentration of Investor Base, Investment by Partners and Employees Fund Terms Liquidity, Fees 4 Fees are in the market for local funds. Liquidity terms are daily, which is in keeping with leading products now being offered in Australia.

11 Differentiating factors Talented and experienced investment professionals. A stable business model and sensible, alpha-driven investment approach providing a portfolio with low correlation to the Australian sharemarket. The performance, albeit short is robust. Independence and flexibility of a boutique investment house. A disciplined investment program in place providing for both long and short positions to provide alpha over a long time horizon. Capital and support for the long term via a major corporation in Australian Unity that provides a range of business management, governance and infrastructure services and access to the retail customer channel. Issues to monitor The following summarises issues requiring further monitoring: Monitor the monthly performance Monitor how both sides of the portfolio manage to produce alpha Capacity could be a trouble in the medium term, if investors embrace the strategy Model drift could be a problem (as with all quantitative process) for the short book. Disclaimer This report has been prepared by Daniel Liptak (trading as ), an authorised representative of Minerva Capital Partners Pty Ltd (ACN ) (authorised representative no under Australian Financial Services Licence no ) (Licensee). Except to the extent that any liability under statue cannot be excluded, the Licensee, its employees and authorised representatives do not accept any liability for any error or omission in this report or for any resulting loss or damage suffered by the recipient or any other person. This report is for informational purposes only. This report is neither an offer to sell nor a solicitation of any offer to purchase any securities investment product or investment advisory services in any investment fund (in particular, the Platypus Absolute Return Australian Equities Fund) described herein. Any such offer would be made pursuant to a formal offering memorandum to be furnished to prospective investors at a later date. The memorandum would contain more complete information necessary to make an investment decision, including the risks associated with investing in the fund, loss of the entire amount of principal and/o lack of liquidity. A prospective investor considering a direct investment in a fund should rely on such memorandum. Any investment in a fund involves a high degree of risk. All opinions and views expressed constitute judgment as of the date of writing and may change at any time without notice and without obligation. Such information may be based on certain assumptions and involve elements of subjective judgment and analysis. Actual results may differ. This material is intended for informational purposes only and does not constitute investment advice, or a recommendation or an offer or solicitation to purchase any fund. There has been no independent review of the information presented in this report. This report is private and confidential and is intended exclusively for the use of the person to whom it has been delivered by. This report does not constitute an offer to sell or a solicitation to invest in any jurisdiction where the offer or sale would be prohibited or to any person not possessing the appropriate qualifications. This report is not to be reproduced or redistributed to any other person without the prior written consent of Arkaba Advisors. receives payment consideration to undertake research reports.