Fund managers chasing growth in a strong market

WhenWestern Australian companies want to raise large sums of capital, they usually have to jump on a plane so they can pitch to fund managers in cities such as Sydney, Toronto and London.

But that’s slowly starting to change as the number of fund managers in Perth increases and they lift the amount of money they control.

WA Business News has identified a dozen fund managers and listed investment companies in Perth, which collectively have more than $2 billion invested in Australian and international shares.

Nearly all of the existing fund managers are keen to expand so they can take advantage of the strong stock market, and new groups are entering the sector.

If all goes to plan, Perth-based fund managers will raise more than $1 billion this year.

Low-profile fund manager Oceanic Asset Management, which runs the $170 million Australian Natural Resources Fund, has the most ambitious growth plans.

It aims to double the size of its current fund, will shortly be launching Australia’s first specialist uranium investment fund, and intends to establish a $500 million absolute return fund.

Investment bank Argonaut is also planning to crank up its fund management activities, helped by the spectacular returns achieved by its AFM Perseus Fund.

Tony Barton’s Australian Heritage Group, the Wyllie family’s Wyllie Group, and Euroz subsidiary Westoz Funds Management are other groups planning to expand their fund management activities.

The big appeal of fund management is the potential to earn management and performance fees on an ever-expanding pool of money.

Argonaut chief executive Eddie Rigg, for instance, sees fund management as one of the pillars of his group’s future growth.

“This is the part of the business that is most scaleable and valuable,” he told WA Business News.

The development of a fund management industry in Perth is an indication of the city’s growing size and maturity.

In broad terms, the industry already includes successful fund managers in sectors such as property (Peet, WRF Securities), agribusiness (Great Southern), biotechnology (BioTech Capital) and venture capital (Stoneridge Ventures).

In the mainstream equities sector, fund management in Perth was pioneered a decade ago by people like Willy Packer and Clive Donner.

Mr Packer, formerly with stockbroking firm Porter Western (now Macquarie Bank) established one of Australia’s first absolute return funds in 1993.

His Navigator Trust, which is closed to new investors, has grown to have $370 million invested globally across a range of sectors.

Mr Donner established the Rothschild group’s Golden Arrows funds in Perth in 1997, and subsequently bought control of the business.

In 2005, he floated LinQ Resources Fund, which has about $400 million under management.

Former Rothschild executives are surprisingly prominent in the sector.

Private equity group Resource Capital Funds was jointly established by a group of former Rothschild executives, including James McClements.

RCF, run jointly from offices in Denver and Perth, has raised $US890 million ($A1.1 billion) mainly in the US for its four funds.

It is best known in WA for two challenging investments. It recently agreed to pay $205 million for Sons of Gwalia’s advanced minerals business, while three years ago it gained control of then-struggling gold miner, St Barbara Mines.

Another Rothschild alumni is Michael Mulroney, who was recruited last year by Argonaut to lead the expansion of its fund management business.

Most of the players in Perth’s fund management industry have entered the sector in the past two to three years.

These include Russell Lester, son of property investment pioneer Dick Lester, who established his first Growth Equities fund in 2003, and Graeme Yukich, whose Entrust group launched a share market fund in 2004.

The Growth Equities and Entrust funds are unusual in Perth because they steer clear of mining companies.

Other new entrants to the fund management sector include Katana Capital, Westoz and Oceanic.

The newest player is Greg Jude’s Meme Capital, which uses trend-based technical analysis to make investment decisions.

While Perth has a relatively small fund management sector, investors have a fairly wide spectrum of choices.

There are four listed investment companies, though only two – LinQ and Katana – operate like traditional investment companies. That is, they have a large and diversified portfolio of stocks and take a small stake in each investment.

LinQ holds about 100 stocks in the resources sector. A point of difference is that LinQ also holds debt securities, usually in the form of structured convertible notes.

It had a big inflow of cash early this year when investors exercised their share options, raising $108 million.

That provided a drag on its investment returns, since LinQ had to find new investments.

The group’s gross return (after expenses) was 38.5 per cent, but Mr Donner said the return on money invested was much higher, at 113.1 per cent. 

Katana was floated by Bell Potter Securities investment advisers Romano Sala Tenna and Brad Shallard in September 2005.

It is an ‘all opportunities’ fund that is able to invest in all listed securities, from blue chip stocks through to small floats.

It currently holds about 70 stocks, including Mineral Resources, Metcash, Rio Tinto, BHP Billiton and Woodside Petroleum.

Favoured WA stocks include Automotive Holdings Group and IBT Education, which were both floated by Bell Potter, and nickel miner Jubilee Mines.

Katana achieved an impressive 49 per cent gross return (before expenses) last year.

Mr Sala Tenna cautions that investors need to look beyond the investment returns and understand the level of risk taken by fund managers.

“In the current market a lot of people are getting performance but they are doing it with a lot of risk,” he said. “This market is forgiving of a lot of sins.”

Mineral Securities, which this month completed a merger with UK company Scarborough Minerals, is a third listed investment company.

Minsec takes a hands-on approach with its investments, and takes large positions in its preferred stocks, which include Platmin and CopperCo.

It also takes direct ownership of mining projects, rather than limiting itself to listed securities.

Chief executive Keith Liddell and senior executive Mark Bolton plan to relocate to London next month to be closer to their investor base, but the company will maintain a technical team in Perth.

A fourth listed investment company is Orion Equities, which evolved from the strategy of its chairman Farooq Khan of consolidating the cash held in a series of failed technology companies.

Orion has $40 million under management and has delivered strong returns over the past three years, including regular dividend payments.

It has core holdings in listed investment companies Scarborough Equities and Bentley International, which are also chaired by Mr Khan but place their money with external fund managers.

Orion also invests in a range of small, mostly resources stocks and has interests in agribusiness.

Australian Heritage Group and Wyllie Group are planning new wholesale funds for sophisticated and professional investors.

AHG has been involved in fund management for some three years through its New Capital Fund, which is a wholesale fund closed to new investors.

The group recently recruited former DJ Carmichael research analyst Wendy Casey to help manage its new Prosperity Fund, which is aiming to raise up to $200 million.

It will invest primarily in blue chip stocks, but will also invest in emerging companies, special situations and the New Capital Fund.

Wyllie Group has established funds management arm Viburnum, which is aiming to raise $100 million for a private equity fund.

Viburnum will be chaired by Wyllie Group senior adviser Craig Coleman and managed by Marshall Allen, who previously ran ANZ Bank’s private equity arm in WA.

Prominent company director Tony Howarth and Wyllie Group managing director Melissa Karlson will also sit on the Viburnum board.