The inevitable drive for superannuation funds to get bigger, backed by Government policies, are in favour of passive investments which has some active managers worried about their future, but the good news is that fear of their demise is overdone and premature.
Listed investment vehicle Future Generation Australia (ASX: FGX) trades at around $1.45 as compared to the pre-tax NTA of $1.53, a share performance which is helped by regular half yearly dividends and a recent bonus issue.
The stock invests in funds driven by 18 boutique managers including Raphael Lamm from L1, Eley Griffiths’ Ben Griffiths, Phil King from Regal, Peter Cooper from Cooper Investors, Morry Waked from Vinva, Troy Angus from Paradice Investments, Gabriel Radzyminski from Sandon and Tony Waters at QVG, among other high profile managers.
The international arm, Future Generation Global (ASX: FGG) includes funds like Magellan, Caledonia, Nikko, VGI and Ellerston.
Granted, it’s easy for fund managers to look good in a market where year to date returns for the S&P/ASX 200 Accumulation Index are up 11.9 per cent.
Global markets including Australia dipped in September but have not fallen by more than 10 per cent since March last year, when Covid-19 hit and stock prices plunged 37 per cent into the abyss to 4,546 points.
The re-emergence of inflation, global supply chain chaos and uncertainty in China are more than enough to fill the void for any stock market bear even after the S&P/ASX 200 Accumulation Index has climbed some 63 per cent from the lows to around the 7,400 point mark.
The level of the rise is of course itself a cause for concern by some.
It’s Future Generation Australia’s long term outperformance which has impressed, with returns of 12.3 per cent over three years against the index at 10.4 per cent and 11.8 per cent against 10.8 per cent over five years as at 30 September 2021.
Even more so when you consider there are 533 stocks in the $584 million Australian listed investment company, comprised of 18 fund managers with different styles of investing.
It is a testament to the strength of diversity.
The Future Generation companies direct one per cent of assets each year to a range of youth charities based on the contributing managers forgoing fees totalling $21.8 million last year and $95.4 million since inception.
This is an era where Government policy is biased too much in favour of no-risk, passive investment styles.
The penalty for walking a different line is to potentially be effectively regulated out of the market.
The contrast to overwhelming passively-led risk aversion, to a stock like Future Generation Australia, is striking.
Government rules dictate that funds which lag over 50 basis points behind their benchmark index over a cumulative eight year period are forced to firstly shout about the underperformance, and if it lasts for a second year in a row, are banned from taking on new money.
Some in the game said the end result would be the death of active institutional funds management as we knew it, but there is hope.
Investment mandates are getting bigger, so a manager with around $50 billion under management will typically get mandates for somewhere between $800 million and $2 billion in Australian equities.
This is a fair chunk of new money.
The emphasis on size comes at a time when institutional management fees are more like 25 basis points compared to a multiple of that a decade ago.
Retail mandates by way of reference are around 1.25 per cent.
Future Generation Australia is underweight big stocks by some 32.7 per cent and 8.3 per cent overweight stocks in the 201 to 300 company range.
It still owns some big stocks, just at much less than their index weight would normally demand, with one stock by example 4.2 per cent of the Future Generation Australia fund and 6.1 per cent of the index.
Likewise, another stock is 6.8 per cent of the index and 3.2 per cent of the FGX fund. CBA is some 7.7 per cent of the index with less than a third of the FGX company.
The fund has a large overweight in small cap stocks and consumer cyclical stocks and a big underweight position in the banks, REITS and large cap stocks in general.
The performance figures to date show daring to be different can also lead to outperformance which in a world where everything is measured on a relative basis is what it’s all about.
Wilson Asset Management founder Geoff Wilson AO is also the Founder and Director of Future Generation Australia which he started in 2014.
The fund was based on a similar concept in London where fund managers agree to forgo management fees so one per cent of profits can be given to charity.
The UK fund which caught Wilson’s eye was devoted to cancer research whereas Future Generation Australia’s is directed to organisations focused on children at risk.
Wilson is also a Director of the Hearts and Minds fund which provides funding for the Victor Chang Foundation.
The style of the funds is different, with Hearts and Minds based on single stock tips from a range of managers, whereas Future Generation’s investors sit alongside the manager getting the full portfolio benefits.
This brings more diversification in stocks as well as investment styles which gives investors the best of all worlds.
Wilson says the success of the model comes down to the generosity of the fund managers, who “all want to give back.”
Future Generation Australia and Future Generation Global investment committee member and JANA executive director, John Coombe, noted the rally in stocks in the past 12 months has been unusual in that both value and growth managers have benefited which has helped the company. “These boutiques manage their funds they have under management so that they can remain dynamic and nimble, with the ability to respond to any event driven or macro event in real time as compared to passively managed investments. It makes them great partners for Future Generation’s pursuit of profit with purpose for their shareholders.” The FGX fund is overweight consumer discretionary stocks somewhat like Kogan, JB Hi Fi and Harvey Norman and underweight the big banks.
Wilson says another reason for its success is the concept of investing with boutique funds, where you are investing with the person who owns the shop.
Try getting through the front door of David Jones on closing time. A small shopfront store will let you in so you can spend some money.
The rally in stocks has clearly been driven by cheap money, massive fiscal stimulus and sentiment swings like the run in the market since vaccines became a reality.
Many in the market still fear an imminent correction driven by inflation, COVID-19 or geopolitical issues around China.
The good news according to Eley Griffiths’ Ben Griffiths is there “are no great stresses or strains in system so that makes me quite upbeat about equities.”
His numbers show the equity risk premium up at 8.3 per cent compared to 5.6 per cent for fixed income which says there is large protective buffer.
The bottom line is strength in diversity.