SQM Research Ratings Update
View this email in your browser
SQM Ratings Research Update - Monday 5th May 2014
Property Valuations
Research Reports
Discounted/Distressed Properties
Funds Research
The Count's 
Comments for the Week

Four – Four is the number of Corners that will feature tonight, Commonwealth Bank Financial Planning. Male sure you watch the show. I certainly will be.  Ah..Ah..Ah! 

Ratings Table
To see the entire table of SQM Research's fund ratings, click HERE

(Please note: In order to view individual ratings reports you must be subscribed to SQM Research Ratings research. To subscribe, click HERE)
Does Size Matter?  With Senior Investment Analyst Leanne Truong

As the managed funds industry in Australia continues to grow and compulsory super continues to rise, the issue of fund capacity has become increasingly relevant.

Australia’s Managed Funds Industry – Total Funds Under Management
Source: SQM Research, ABS 5655
Investors should consider the level of Funds Under Management (FUM) maintained by a Fund and its Strategy before making an investment decision.
Funds that are too large may be affected by two major factors:
1. Transaction cost - regardless of the competency of the trader/trading team, transaction cost will generally rise when the buying or selling of shares exceeds market liquidity.
2. Limitations to investing in less liquid/small to mid-cap stocks - Because of liquidity issues and transaction cost, most managers will apply liquidity and market cap screens, limiting certain investments. Even if they are permitted to invest in small to mid-cap stocks, the positions held will generally be small.  In markets where small to mid-cap stocks are undervalued and outperforming, funds that are excessively large may miss out on the alpha opportunity.

Unfortunately, in Australia there have been few listed equity funds that have closed their applications to new investors citing capacity issues. The revenue generated by assets managers is directly linked to their FUM and as such; this can create a misalignment of interest between an investment manager and investors. This is where the application of an appropriate and well-structured performance fee may be beneficial (in particular for a well-established larger sized fund) with asset managers also incentivised to focus on maximising long-term fund performance. This structure would only be appropriate if a reasonable discount is offered on management fees in place of the additional performance fee.
Off course there are also benefits of investing in large funds, with larger funds generally having greater access to investment resources as well as company management.
There is no universal threshold to determine when a fund has reached its capacity, with many reports from investment managers and academics stating different capacity thresholds. However, SQM Research believes investors should avoid funds that appear large and who have been unable to generate alpha for a sustained period.  SQM Research is aware of a Strategy within the Global REITs space which has been unable to generate Alpha over the last three years. This Investment Manager at 31 December 2013, was responsible for managing Global REIT portfolios worth over $23 billion.
In Other News…….
APN Property Group (APN) has announced that their Portfolio Manager Damian Diamantopoulos has resigned from his role at APN. After 11 years at the firm, Mr Diamantopoulos leaves APN to pursue another career opportunity. APN is currently in the process of searching for a replacement analyst and has accordingly reallocated stock responsibilities and funds management tasks amongst the remaining team members - Pete Morrissey, Steve Chai and Michael Doble to ensure that there no short term disruption to the Australian Real Estate Securities managed funds.
At this stage, SQM Research has left its ratings on the APN A-REIT Fund, APN Property for Income Fund 1 and APN Property for Income Fund 2 unchanged. However, SQM Research has just started its process of reviewing the funds and will release the funds’ final ratings and reports as part of its Domestic Property Securities Fund Sector Reviews. 
Copyright © 2014 SQM Research, All rights reserved.

Our mailing address is: GPO Box 3611, Sydney, NSW 2001, Australia

unsubscribe from this list    update subscription preferences