Spheria Asset Management, a specialist Aussie small-cap manager, is looking to raise up to $250 million for a listed investment company which combines the portfolio managers’ experience and skills in that space, with the liquidity of an ASX listing. It, effectively, offers a complimentary product for individual investors looking to diversify their concentrated equities portfolios.
The LIC – Spheria Emerging Companies Ltd (ASX code: SEC) – is looking to provide income as well as capital growth, a rare combination in the small-cap sector of the market. One of the aims is to provide fully franked dividends for investors.
The Spheria LIC will be run by portfolio managers Marcus Burns and Matthew Booker, who together ran the Schroders Investment Management Australian smaller companies fund prior to starting their own specialist boutique in March 2016. They re-launched the flagship Spheria Australian Smaller Companies Fund in July 2016 – taking it over from a different manager – on which the LIC’s style and process are based, as well as a micro-cap fund and a concentrated “opportunities” fund.
Spheria is a partly owned affiliate manager of Pinnacle Investment Management, which provides back-office and marketing services for the firm.
While, admittedly, a short-term performance number, the Spheria Smaller Companies Fund has outperformed its benchmark by a wide margin from July last year to August 31 this year. The one-year performance is 9.5 per cent, compared with the S&P/ASX Small Ordinaries Accumulation Index return of 3.2 per cent, while the since-inception performance is 11.6 per cent, against the index’s 4.3 per cent.
Burns said that the young firm wanted to create an investment product which was both liquid and enabled the managers to run longer-term capital, giving them more time to realise the potential from their best ideas.
Booker said that a point of differentiation that investors should note was that the LIC aimed to invest in companies with strong cashflows. Its investible universe is about 500-600 stocks (those with market capitalisations of between $100 million and $3 billion), which includes companies that are outside the Small-Ordinaries index.
The two senior managers are also offering alignment with their investors’ interests by putting their own money into the LIC. And they are also covering the expenses associated with launching the LIC, through a re-payment program. The third member of the team is another former Schroders colleague, Adam Lund, who is responsible for trading and analysis. He spent five years as an equities and derivatives trader at Schroders.
Burns describes the fundamental style of the LIC as being “conservative, offering greater returns at lower risk” than most small-cap portfolios. Booker adds: “We’re more calculated in our buying, always looking for a [market] discount from what we evaluate as a stock’s worth.”
Another feature is a relatively low turnover of about 30-50 per cent annually for the portfolio.
The bias towards free cashflow, after all of a company’s capital expenditure, means that Spheria tends not to own explorers or biotech, for example, although the managers says they try to keep an open mind with each individual piece of analysis.
Booker said: “We prefer companies with a track record that is verifiable but we will look at newer ones that have predictab,e growth… We think that we are offering good diversification for the SMSF market in a sector that many individual investors find difficult to research.”
Jonathan Trollip, the LIC’s experienced chairman, says in his letter to investors that there are limited Australian-based small-cap equity managers with available capacity that have the prerequisite skill to provide quality products. The other directors of the company are Lorraine Berends, a former chair of ASFA, the peak super industry body, and a former funds manager operating in the institutional sector, and Adrian Wittingham, who is an equity partner in Pinnacle.
The lead arranger to the issue of up to 125 million $2 shares is Wilsons. Joint lead managers are: Ord Minnett, CommSec and Taylor Collison. Co-managers are: Shaw and Partners and Craigs.
Info and prospectus download HERE.
