Weight of money goes private

IT would be hard to pinpoint the moment when major fund management in Western Australia crossed over from the public sphere to the private realm, but it was most likely sometime during 2020.

With the pandemic counterintuitively bringing on a boom in iron ore prices, the value of several mining magnates’ holdings rose dramatically, boosting by many billions the value of money run by a growing army of professional investment managers working for family offices.

Fortescue Metals Group founder Andrew Forrest was, at that point, worth about $18 billion.

Hancock Prospecting owner Gina Rinehart’s wealth was estimated at even more.  

Although their fortunes are largely tied up in core enterprises – Mr Forrest’s being the ASX-listed FMG and Mrs Rinehart’s being her majority stake in private miner Roy Hill Holdings – both run their business empires from what are effectively family offices managed by large groups of professionals.

At the very same time, management of the $4 billion WA Super was subsumed by national group Aware Super, and the collective funds under management at the top 10 local public funds dropped below $40 billion; less than the combined Forrest and Rinehart fortunes.

As Frank Sciarrone explains, a little more than a decade ago there were about a dozen industry funds based in WA.

Now there are just two–GESB and FES Superannuation Fund–which share Mr Sciarrone as a director.

Today, the state government employee fund GESB has around $37 billion in funds under management, while the Fire & Emergency Services-based fund FES Super has about $900 million.

Depending on the iron ore price, these days Mrs Rinehart’s assets are estimated to be around $30 billion, largely held through Hancock Prospecting under the stewardship of chief executive Garry Korte.

Mr Forrest’s wealth is estimated to be similar, much of it controlled via Tattarang, run by Andrew Hagger.

Between these two distinctly different types of investment vehicles are myriad funds that cover a broad spectrum of the investment space: listed investment funds that focus on ASX equities through to far more opaque operators who invest in all manner of obscure opportunities on behalf of handfuls of high-net-worth individuals.

Family offices

The rise of the family office in WA has occurred by stealth and is not well documented.

By and large, the major fortunes made in the state are still in the hands of the founder or largely invested in the vehicle that was the primary source of that wealth.

Even second-generation wealth, such as that of the Buckeridge family, has its main wealth tied up in BGC Australia, a construction and building materials business run by a non-family member, Danny Cooper.

That is very different, for example, from the late John Roberts’ children, whose individual fortunes arose from the sale of the Multiplex construction empire their father founded.

Two of those siblings are Perth based, Tim and Denby, and both appear to run their family offices differently.

Limited public records show Ms Roberts’ DR Capital has had a long-term chief executive in Ben Bartholomaeus. Navitas founder Rod Jones is another who went down this track some time ago.

After the listing of his global education business, Mr Jones’ wealth was housed in Hoperidge Capital in Applecross, managed by Jon Biesse.

Charlie Bass, who made his fortune through Aquila Resources, has done similarly with The Bass Group, run by Brett Rowe.

And Mr Bass’s Aquila partner Tony Poli has Brad Brashaw as chief executive of his Aigle Royal Group.

The new kid on this block is Laurence Escalante, whose wealth has been estimated at $3 billion on the back of his global online gaming success, VGW Holdings.

A spokesperson for Mr Escalante confirmed he has created a distinct entity, Lance East Office (LEO), as his family office.

Lance East Office was established in 2021 to manage and grow his private investments and interests; to generate long-term returns from existing investments and new opportunities, which may range from backing other entrepreneurs and various pursuits to investing in asset classes across global markets.

“As his private investments have grown, establishing the family office is a logical next step to manage these and take advantage of opportunities going forward,” the spokesperson said.

It is understood his family office uses the services of Spitfire Family Office, which has been established in the fund management hotspot of Cottesloe (see story page 40), is a standalone multi-family office service provider that plans to offer services to other family offices. It shares some past executives.

Former ANZ state director Emilio Pagano was engaged as chief executive of Spitfire in February this year.

Public funds management

The Escalante link into funds management is also more directly into the public funds management sector via Fiftyone Capital which has established an office at 105 Forrest Street, Cottesloe, once the home of VOC Group before the passing of Michael Wright.

Industry sources have suggested that interests associated with Fiftyone Capital were early backers of Mr Escalante’s gaming venture.

Corporate records show that the Fiftyone Capital business name holder, 51 Holdings, is ultimately controlled by Scott and Jodie Williams through their company Lucky Doug, which, in turn, has its address at the Spitfire office.

It is understood that Fiftyone Capital has backed the management of Endeavor Asset Management in a management buyout that has brought the ownership of the fund manager to WA.

It is further understood the Fiftyone Capital strategy is to develop direct relationships with asset managers running the funds, as is the case with Endeavor, which manages the group’s Growth Equities fund.

Fiftyone Capital declined to comment on its operations, as did Endeavor.

A few fund managers were reluctant to comment on the past year, expressing reservations for a range of reasons.

June’s dreadful performance, which dragged several funds into the red for the year, may have been in the back of some minds, even though most outperformed the market.

Katana Asset Management portfolio manager Romano Sala Tenna was disappointed that the last weeks of the 2021-22 year had stopped the group’s Australian Equity Fund cracking the $100 million mark for funds under management, having been poised close to that figure in May.

Mr Sala Tenna said investor focus during June transitioned from an inflation theme to a focus on recession, a subtle change that adversely affected the materials sector in which Katana’s fund has significant holdings.

But he points to the success of his team’s approach, which meant the fund was almost square for the year when the market was down substantially.

Over longer periods the fund manager had been recognised for significant outperformance.

“We have consistency, which shows we have a sustainable process,” Mr Sala Tenna said.

Scaling up

Signalling that cracking the $100 million mark was important to the group as it sought to grow, Mr Sala Tenna added that Katana had stress tested its methodology and believed it could manage up to $800 million without negatively affecting performance.

While he said it was hard to attract the attention of eastern states money managers, the firm had found the confidence of local investors, including about 10 family offices and, most recently, a major private school foundation.

In considering the past year, Precision Funds Management director Tony Kenny centred his attention on the actions of the US Federal Reserve.

He believed the belated reaction to fight inflation had raised the threat of recession but, like others, remained confident that natural resources would outperform the overall market.

“As the cycle matured, we chose to increase our cash to plus 20 per cent and improve our overall liquidity by investing in production orientated and even top 100 companies,” Mr Kenny told Business News.

“Overall, our primary focus remains on the resources sector, as we believe the commodities cycle and associated service providers still has solid fundamentals despite the recent falls.”

Mr Kenny also found support from family offices among Precision’s investors and said he was targeting funds under management of between $100 million and $150 million.

By contrast, Viburnum, a fund manager that was founded by the Wyllie family but is now management owned, has almost all its investment from the US.

Viburnum runs two funds: a $600 million equities markets fund and a $400 million private equity fund.

Both rarely seek attention but have been in the news this year due to the corporate activity surrounding some of their investments.

Best performer among the local managers that released numbers was Argonaut Funds Management, a business that is the new kid on the block and sits among the smallest.

Argonaut executive director David Franklyn said that the fund management division kicked off in 2020, although the Perseus Fund existed from a previous era and had largely been dormant.

Argonaut has been focused on proving its methodology, which is focused on positioning for energy transition and exploiting geopolitical risk. As it happens the volatility in the market due to Russia’s invasion of the Ukraine, has played thematically into the fund manager’s hands in some respects, although even Argonaut’s annual performance is well down on where it sat at the end of March.

While the funds have been established under the umbrella of stockbroker Argonaut, Mr Franklyn said the new business operated independently.

“We are separated from the rest of the business and investment decisions are made primarily by me and supported by an investment committee,” Mr Franklyn said.

At $1.9 billion, Packer & Co’s Investigator Trust is a giant among the WA fund managers that accept funds from the public. Managing director Willy Packer has been known to be global and contrarian in his search for returns and asset protection.

As he discussed in his June newsletter, the market volatility caused by the conflict in Ukraine has been particularly challenging due the effect of sanctions on the liquidity of his Russian energy stocks. It is rare for equities investors to have to provide an independent valuation on their assets, but the Investigator Trust did just that because, as a foreign owner, he can’t sell stocks listed in Russia. Nevertheless, the trust’s position on June 30 was an improvement from February and March when the war began.

Strong positions

It can be very much like comparing apples with oranges when it comes to funds managed in WA, even before accounting for those that prefer to keep their performance to themselves or their investors. The spectrum from public funds focused on equities, to property development groups, private equity investors, big funds held to match business risk such as insurance and those held by institutions means objectives differ as much as results.

An example is that of health insurer HBF which has one of the state’s biggest investment portfolios, almost $1.5 billion at the end of the last financial year, representing the vast bulk of member premiums which must be available to pay out the cost of medical procedures.

HBF investment committee chair Mark Barnaba, who also sits on the board of the Reserve Bank of Australia, said that the goal was stable returns over time, not a gyration between losses and outperformance which was risky for the institution and not welcomed by members.

“What you are trying to do is, quite frankly, have a far more defensive strategy than you would normally have,” Mr Barnaba said.

For example, HBF went to a 50 per cent cash position at the end of 2019 calendar year on the basis global economic uncertainty. That was a good position to be in when the market crashed as the pandemic impacted global commerce, an event that could never have been anticipated.

“With my own money I am happy with the ups and downs, I embrace volatility,” Mr Barnaba said.

“But HBF strategy has to be different.”