The VGI Partners Global Investments IPO – Why I’m giving it a miss

VGI Partners Global Investments is a global long/short equity fund that is floating as a listed investment company (LIC) on the ASX. The float hopes to raise between $100 to $300 million.

I was initially quite interested in the upcoming float and thought it was admirable that VGI was absorbing the costs of the float so that the LIC’s net asset value (NAV) per share would be the same as what subscribers to the float paid for their shares. However, my admiration soon evaporated when I read the fee structure detailed in the prospectus.

VGI will charge a management fee of 1.5% (plus GST) on the value of the fund – this is par for the course and I have no major issues with this. What I do have major issues with is the performance fee. VGI will charge a 15% performance fee (plus GST) on any positive performance (less management fee).

What this means is that there is no benchmark performance hurdle that VGI Partners Global Investments has to exceed before it pays performance fees. It will pay performance fees on any positive performance.

This is highly unusual. I can’t think of any other similar type of fund that does not have to exceed a performance hurdle (usually the return on a benchmark index such as the MSCI World Net Total Return Index) prior to being charged performance fees.

Performance fees should only be paid to managers who generate “alpha”, i.e. performance which is above a relevant benchmark index. The fee structure for VGI Partners Global Investments allows the LIC to be charged “performance” fees for under-performance of a benchmark index!

To understand what this means, the following table estimates what the results will be for shareholders over a 10 year period based on different annual average compound rates of return for the LIC (assuming that the LIC’s shares trade at NAV). It also shows the estimated dollar value of fees that VGI will charge based on those rates of return:

 You can begin to see how lucrative this fund will be for the proprietors.

The very unfavourable terms for shareholders are that the performance fee is calculated on a “high water mark” which is the initial value of the fund, when in fact the high water mark should be the initial value of the fund plus the return on whatever benchmark index is comparable.

For example, if VGI raises $300 million and earns a return of 8% in its first year, it will have earned $24 million (pre-tax). The management fee of 1.5% will be charged (it will be more than $4.5 million, but let’s say it’s $4.5 million for simplicity). That $4.5 million is then subtracted from the $24 million to arrive at $19.5 million and the 15% performance fee is then charged on $19.5 million which equates to $2.925 million (exclusive of GST).

Ok, so of that $24 million return, investors share in approximately $16.575 million (pre-tax) after fees. And if the benchmark index has returned say 10%, the investors (in aggregate) could have put their money in a low cost index fund and received the equivalent of close to $30 million for the year.

The total fee in the above example represents just shy of 31% of the fund’s return.

Nothing that VGI Partners does is rocket science. I would happily pay Renaissance Technologies their incredibly high fees for what they do. I would also pay someone like Manoj Narang (now at Mana Partners) for what he does, because what they do is absolutely impossible for the average investor to replicate and they have outstanding records. What VGI Partners do is very simple for many retail investors to replicate. 

Here are all of VGI Partners US holdings as at 30 June 2017 – think you can replicate that portfolio?

Of course you can, and at vastly lower cost than what VGI charges.

The VGI Partners Master Fund also holds short positions (as can the LIC), but the Master Fund has rarely been much more than 25% short, which means that over time it has definitely had a long bias in a very concentrated portfolio. This, in my opinion, means that there is very limited downside protection in a market crash.

The VGI Partners Master Fund is also a unit trust, so it pays no income tax and as such, its reported returns are pre-tax. If you factor in the tax that is paid to investors on distributions from that fund, the returns do not look anywhere near as good in comparison to the MSCI World Net Total Return Index.

So in summary, I’m giving this IPO a miss. The fees are way too high and not at all justifiable for an outfit that only has nine years of performance history.

Note: None of the above constitutes investment advice, it represents the opinions of the author only. You should seek appropriate professional or financial advice regarding the appropriateness of investing in any securities.

TPG Telecom’s big gamble

TPG’s announcement on 12 April that it plans to build a mobile network to compete with Telstra, Optus and Vodafone should be more than a little worrying for TPG shareholders.

The salient points were:

•  TPG paid an extremely high price ($1.26 billion) for 2x10 MHz (for just under 11 years) in the government’s 700 MHz spectrum auction (twice what Telstra had paid in a 2013 auction);

•  TPG’s forecast maintenance spend of $600 million over three years (for a mobile network with a supposed 80% reach of the Australian population) was widely viewed as ridiculously low by many commentators; and

• To part fund the spectrum purchase, TPG is conducting a non-renounceable pro-rata entitlement offer to existing shareholders at $5.25(!) per share, a 20% discount to the closing price on 11 April and a price the shares have not traded at since July 2014.

It should also be noted that TPG (TPM.AX) is attempting to become the 4^th mobile player in the Singapore market at the same time as its adventure into the Australian mobile market. 

When TPG announced its foray into the Singaporean market, I asked a friend who knows a great deal about the telecommunications market in Singapore (and happens to be a Singaporean national) what he thought of TPG’s ambitions in Singapore. He recounted all the past failures of those who tried to compete against the incumbent players in that market and concluded by stating that there was no reason to believe that TPG would have any different experience.

What TPG is essentially doing is taking on very high levels of debt, vastly increasing its interest and amortisation expenses and therefore, significantly reducing its return on equity for what is at best a marginally profitable exercise. It also assumes that the established players will simply allow TPG to just walk away with their mobile customers! It’s a classic case of growth for growth’s sake.

It is completely illogical for anyone to think that a company that has paid twice as much for its spectrum licence than its competitors and does not have an existing (complete) network in place can price its products to achieve sound profits against incumbent players.

After initially being very successful, TPG has struggled in recent times. The share price peaked at $12.93 in July 2016 and will have declined by 59% once it comes out of its current trading halt.

At the $5.25 capital raising price, major TPG shareholder Washington H. Soul Pattinson (SOL.AX) will have seen it’s shareholding in TPG decline by approximately $1.6 billion since that peak in July 2016. And yes, Soul Pattinson did purchase that shareholding at a mere pittance of what it’s now worth, but to sit on your hands while $1.6 billion evaporates isn’t the best management in my book.

The market price of TPG’s shares indicates that there is little confidence in the company’s strategies. I have to say that on this occasion, I agree with the market.

Fat Prophets Global Contrarian Fund

Like a number of stock market newsletter writers, Fat Prophets has been very keen to leverage their brand into active money management. 

As we well know, the high fees from money management in this country can turn mediocre investors into multi-millionaires in no time at all and as such, it’s a very lucrative field.

Regular readers of this blog will be very well aware of my utter disdain for newsletter writers.

As I’ve said time and time again, no one (and I mean no one) who has a genuine talent for picking stocks is going to sell them to you in a newsletter. This patently obvious fact is lost on many people.

Writing newsletters is a highly profitable business, it requires very little capital investment, very few staff and very little in the way of genuine ability. What is does require is good marketing and most of them are masters of that.

People who subscribe to stock market newsletters are (by default) poor investors. Good investors don’t have any use for “tip sheets”. 

It therefore follows that if the newsletter writer wishes to get involved in money management, they have a captive audience of (not particularly knowledgeable) subscribers to tap for funds.

According to the Sydney Morning Herald of 30 April 2011:

Fat Prophets was pulled up by the regulator in 2002 after using potentially misleading performance figures in its advertising and was required to engage an independent expert to devise a methodology for measuring performance.

You should note that many newsletter writers show theoretical returns based on their past recommendations (that have not been achieved in reality). This in itself is highly misleading.

Do you want to invest with people who do that and then get in trouble with the regulator? 

May be you do, but before you do, you may want to read some of the very poor reviews that customers of Fat Prophets have written here:
http://www.productreview.com.au/p/fat-prophets.html

Which brings us to the new Fat Prophets Global Contrarian fund. According to the Australian Financial Review:

Fat Prophets Global Contrarian fund charges investors a 1.25 per cent management fee and 20 per cent of any positive performance per quarter, subject to a high-water mark.

The above figures are actually exclusive of GST, so the investor will actually be paying a 1.375% management fee and 22% for “positive performance”.

Now just pause for a minute to digest that and then read this excerpt from the same Australian Financial Review article:

The listed investment company shares little with a previous listed venture from Fat Prophets that focused on Australian equities. After a period of under-performance the fund was taken over by Merricks Capital and was later bought by Investsmart Group, the owner of Eureka Report and Intelligent Investor.

In other words, Fat Prophets has had a go at this listed investment company caper before and failed. So they weren’t “prophets” after all!

Never mind, come back with a different vehicle charging high fees and see if anyone bites. And bite they did! One thing you can say about the Australian market is that there is never any shortage of people willing to “believe”.

In my opinion, the fees are very high for the management you are getting in this fund. 

And I couldn’t care less if Angus Geddes has put $1m of his own money in – so what? He can put every cent he has into the fund, that doesn’t mean for one second that the fund is going to perform well. In fact, the fee structure of the fund almost guarantees that an investor will (ultimately) get a sub-par return in comparison with the major indices.

In his recent letter to Berkshire Hathaway shareholders, Warren Buffett explained beautifully why the funds management industry cannot mathematically outperform a low-cost index fund over any reasonable period of time. And yet we have scores of mindless people putting their faith in highly paid money managers to do exactly that.

The increase in equity markets since Donald Trump’s election has seen a plethora of these types of vehicles listing on the ASX. I have been contacted to invest in many of them and to all of them I have said a very quick “no thanks”. And that’s because none of the vendors have any particular insights or skills – they just want to make a profit from me through management fees. I’d rather give the money to a low-cost index fund manager any day of the week.

 Caveat emptor.