Boosting returns through activism

Having worked at a stockbroking firm for nearly six years, Fiftyone Capital's Scott Williams says he has always thought the industry wrangled with some "fairly heavy conflicts of interest". This is because brokers are being paid to push corporate products, he notes, while individual investors take on all the risk.

With this experience in mind, Fiftyone Capital's Progressive Growth Fund was born, a long/short global fund domiciled in Cottesloe, Perth. 

Its most unique strategy on offer? Positive activism* - with the fund actively engaging with smaller companies where it believes it can unlock substantial value and then sharing this research with investors and other funds. 

Fiftyone is then remunerated for these activities (typically in the form of shares or options), which it then returns to its investors to help accelerate returns. 

In the wire below, Williams takes you through this strategy, how he has built up the fund for long-term success, as well as three asymmetrical investment ideas that have currently caught his eye.

The interview below is part of our Fresh Fundies series, focusing on newly launched funds (and their portfolio managers) with a less than three-year track record.

Over the next few weeks, we will be profiling:

• Emanuel Datt, Datt Capital
• Heath Behncke, Holon Global Investments
• Omkar Joshi, Opal Capital Management
• Jesse Moors and Nicholas Quinn, Spatium Capital
• Ben Rundle, Hayborough Investment Partners 
• Michael Frazis, Frazis Capital

Fund at a glance: Progressive global fund
Fund Manager: Scott Williams 

• Asset class: Australian equities
• Objective: The fund seeks to generate absolute returns for our investors in excess of 10% p.a. irrespective of broader market cycles.
• Minimum investment: $100,000
• Investment outlook: 3-5 years
• Suitable for: Wholesale
• Launch date: April 2018
• Performance since inception: 21.5% p.a.
• Management fee: 1.5% p.a.
• Performance fee: 20% above highwater mark.

Take us through how you built your fund from scratch to set it up for long-term success?

The fund (as a business) and the portfolio need to be considered separately. On the investment portfolio, when setting the fund up we wanted to be able to offer clients the ability to co-invest alongside us in a global long/short strategy (with some unique twists). As one of the largest investors in the fund, it was important to have the flexibility to be able to continue investing in the way that has been successful for us to date. 

This primarily meant focusing our attention and capital on the most asymmetric investment opportunities we could find – meaning a lot of upside return relative to the downside risks. 

We typically do this in a top-down fashion, focusing on trends and sectors with favourable tailwinds, and then narrowing it down to our best individual company picks after reviewing company fundamentals and valuations. 

The fund is now three years since inception and has annualised a net performance of over 20% p.a. and avoided significant drawdowns. 

On the business side, we have continued to invest in our people, systems and processes. In fact, last year we even employed a business coach to further assist with managing the direction of the business, team and structures/processes we have in place – it’s been a very experience good for our entire team and one we would recommend.

What are the strategies and techniques that set you apart from other fund managers?

Probably the major point of difference is our positive activism strategy. 

Coming from a stockbroking background, I always thought the industry had some fairly heavy conflicts of interest where the broker selling a corporate product (capital raising in particular) is getting paid to do so. The investors then take the risk while the broker gets paid regardless.

Likewise, in the small end of the market (businesses with market caps less than $500m), there is also inefficiency and potential risks. 

As a fund manager, we only get paid when we make our investors money. However, if we find an asymmetric investment opportunity in a small company, but that company is maybe underperforming, we might say to them we think they could benefit from our in-depth fund research and assist in getting the message out to more investors by then sharing this research. We could share that research with the public in return for compensation in the form of options. These options we return into our fund so all our investors benefit from them should our investment thesis prove correct. 

So far we have done this with only two companies* as our brand reputation is important to make sure these small companies turn into big companies and we make our investors money. These options then can turn into substantial profits that all our investors benefit from. This is the most unique strategy we offer and I don’t know of many other fund managers who share their highest conviction ideas along with the detailed research with investors, the public or other funds. So far it has been a very profitable strategy for our investors.  

Where are you seeing opportunities right now?

Right now we are becoming more cautious on the equity markets in general after what has been an extremely strong period of performance. So we are starting to de-risk and put on more hedges. However, I think three small-cap companies that are asymmetric investment ideas are Paradigm Biopharma (ASX:PAR)* – this one we have written about extensively and firmly believe this will become the front line treatment for osteoarthritis and could have very significant returns from here. The second is Invex Therapeutics (ASX:IXC)* which is another biotech stock trading at a very low EV. From here it seems the risk is firmly skewed to the upside. 

Another that we recently participated in was Pentanet (ASX:5GG). While this one has run a lot since the IPO, they have excellent management and a great product (of which we use). In terms of telcos, we think this one dominates and probably will eventually be taken over by a bigger player.

*Paradigm Biopharma and Invex Therapeutics are the two companies that Fiftyone Capital used its activism research strategy for. Research notes attached at the bottom of this article.