Wattle Watch – Franklin Global Growth Fund

Franklin Templeton is the Australian division of Franklin Resources, one of the largest asset management groups in the world, with close to AUD$1 trillion under management and operations spanning 170 countries. The business was first established in Australia in 1987 and has operations spanning all asset classes including Equity, Fixed Income, Alternatives and Multi-Asset. Franklin’s investment philosophy is embedded with ESG or Environmental, Social and Governance considerations and they are signatories of the UN Principles for Responsible Investment initiative.

Why Franklin Templeton? Franklin is a leader in the active management of global equities and this fund has been selected due to the experience of the Lead Portfolio Managers, John Remmert and Don Huber, both New York-based and with 32- and 37-years’ experience respectively. Franklin’s long-term performance stands out, delivering on average 3.7% per annum above its benchmark since 2008, however, it is the investment philosophy driving these returns that we believe warrants an investment. The managers have identified an arbitrage opportunity resulting from the exponential growth of passive and index investing. The trend has seen investor capital flow into the largest businesses by market cap, leaving medium and smaller sized companies trading at substantially more attractive levels. They have successfully focused on the medium sized company sector in the US and around the world, which includes business ranging from $3.5 to $30bn and falling just outside the S&P 500. Management focus their due diligence on identifying companies with strong free cash flow, superior management teams and those able to growth their profits off a lower base without excessive leverage.

Why Value Bucket: The Franklin Global Growth Fund meets the objective of the Value Bucket as the managers seek to generate a return exceeding sharemarket benchmarks with the majority delivered via capital growth rather than income. Importantly, the purpose of the Value Bucket is twofold, being to identify undervalued companies but also to identify those companies with growth opportunities that aren’t fully reflected in current prices.

Performance & Top Holdings: The fund’s performance in 2019 was exceptional, leading global equity managers with a return of 37.25% for the calendar year, exceeding the benchmark by a further 10%. Of more value has been the funds performance in 2020, where it delivered a negative return of 1.8% in February, compared to the benchmark of -4.9% and has thus far outperformed the benchmark in March. This has been delivered via their strategy to build a high conviction portfolio of 35-40 companies with limited correlation between their revenue and profit sources. They manage risk by ensuring an even distribution of holdings, with weightings between 1.5% and 4.0%. The portfolio is well diversified, with its largest weighting to IT business (24% vs. 17% for the benchmark) albeit via the likes of Visa and ZScaler, rather than Facebook or Microsoft. Consumer Discretionary (18% vs. 10%) and Industrials (14% vs. 11%) make up the other key sectors. Some of the major investments include: Asset manager Partners Group, TAL Education in China, Costar Group and Danaher Corp in the US and Regeneron Pharmaceuticals.

This fund appears to be an excellent one for those seeking greater global diversification, at a reasonable cost and with exposure to those part of the global economy most leveraged to a post-COVID 19 improvement.

Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest.

We met with the team at Yarra Capital this month, who are in the process of marketing their Absolute Credit Strategy. The fixed income and credit sector has seen a great deal of change in recent months with many junk bond managers launching listed investment companies and paying the much discussed  ‘stamping  fees’.  Yarra  Capital  is  the opposite, offering a traditional managed fund structure from an experienced credit manager.

You can be forgiven if you are finding it difficult to understand what is what in the new world of listed credit products, junk bonds, high yield and direct lending; we are finding it difficult ourselves. The most important factor to keep in mind is that every investment can be appropriate at a given level of return, however, it’s important to have a real understanding of the risk involved.

The Absolute Credit Strategy has not yet been opened to investors, rather the manager, Phil Strano from VFMC, has been managing a pool of employee capital to gain a track record for over 12 months. On first blush, it appears to be a high- quality strategy, not unlike that implemented for solid results by the likes of Australian Super and the Future Fund. It is well researched and benefits from Yarra Capital’s existing capabilities in both debt and equity markets. The group has around $2bn in fixed income assets under management and $6bn in equities, meaning they have strong fundamental understanding of the companies that are investing into.

The strategy is based around investing into high quality, albeit low rated, listed and unlisted bonds issued by corporates, not governments. The opportunity set is $1.5 trillion in Australia and it targets a return of cash plus 3% by investing into fixed bonds, floating bonds, hybrids, deriviatives and asset backed securities.

The opportunitity lies in the fact that the spread on corporate debt particularly lower than BBB is around historical averages, compared to Government debt which is at multi decade highs. Yarra suggests that the threat of inflation is the biggest risk to bond yields and returns, whenever

that may occur, but that credit is much better protected due to its wider spread in traditional comparisons. They also look to insure against spread widening by buying Credit Default Swaps of the businesses they own, as these move in the opposite direction.

The fund carries an average rating of BB+, offers a 4.85% yield, -0.13 year durartion and its current top holdings include preference shares CBAPD, NABHA and most importantly MBLHB which was redeemed at a substantial profit unexpectedly during January. They have an internal credit rating and legal team to understand the terms of each bond, which is incredibly important, comparing their ratings to S&P. The 1 year return of 7.96% and 7.15% since inception has been unexpected by exceptional.

The fund will be opening to investors in the coming months.

Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest. 

 

It was the day before Christmas and we had arranged to meet with a relatively unknown group to us, called GQG Partners. After hesitantly accepting the meeting we were happily surprised by the quality of the manager and wondered how it had passed us by thus far.

GQG stands for Global Quality Growth and that is exactly what they appear to have been delivering. The group was founded by Rajiv Jain, who has 26 years’ experience in funds management, having run the emerging markets and global equity strategies at the renowned Vontobel Asset Management. As is the case with most of the world’s top equity managers, Rajiv started the company because he wanted to be able to invest his own capital in the strategy but also have ownership of the business itself, both gains and losses.

GQG has been operating since 2016 but already has over $42bn under manageemnt across global equities ($18bn), emerging market equity ($12bn) and international, specific equity strategies ($12bn). As is generally the case, the fund is well backed by institutional and pension fund investors, including a number of Australian super funds, but has had little penetration into the direct investor and adviser market. The domestic managed funds on offer have $158m (global equity) and $100m (emerging markets) respectively under management. This is despite delivering benchmark leading returns of 20% (compared to 16%) and 28% (versus 15%) for both strategies over the last 12 months.

The firm has a number of unique traits that appear to have driven the outperformance, which begin with their approach to identifying ‘forward looking quality’. This is opposed to the traditional approach of using backward looking financial results to determine forward looking value, rather they put in place conservative assumptions of business performance to understand risks and cyclicaly in the next five to ten years.

The other key differentiating point is the Rajiv’s inclusion of a number of Investigative Journalists on his investment review team. It is the role of these people to question every aspect of a thesis on a company being prepared for addition to the portfolio, asking questions of suppliers, customers and travelling heavily to understand supply chains.

The portfolios are low turnover, diversifed across 40 to 60 holdings and span both value and growth investments, ensuring there is little commonality with the benchmark.

As advisers, one of the most difficult investment opportunities to find are high quality exposures to emerging markets, GQG seems to have an extremely competitive offering and we will provide more information in future issues.

Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest. 

This month, we accepted a meeting with Federation Asset Management, not to be confused with the Federation Shopping Centre’s business. The company was founded by a number of ex-Macquarie bankers their track record shows some clear skill in identifying and moving transactions to realisation for investors.

The group is launching a priavet equity, real assets funds with a slight difference. It is available to retail investors, provides daily liquidity and has a minimum investment of $20,000. Now, we generally meeting ex-Macquarie bankers with some trepidation, but were intrigued by the opportunity. The team are specialising in renewables, private equity and real estate investments as they seek to raise around $300m before the end of January 2020.

Thus far they have delivered an average return of 23% on every investment, with an average holding period of five years. Importantly, they have shown adeptness at undertaking due diligence and gaining access to opportunities with some 300 sourced since 2011 and only 30 approved for investment. The CEO Cameron Brownjohn was clear that they were having no problem in identifying opportunities.

We asked about the companies ESG focus and they noted they were seeking to ensure each investment didn’t contribute negatively, and that quality of management was of the highest priority in this space. In terms of the underlying investments, the diverse spread was a point of difference to many technology or venture capital focused funds and included:

  • Sendle – A fast growing logistics company servicing small businesses and just recently expanded into the huge US market;
  • Synergis Fund – A property investment building disbility housing managed in a joint venture with the respected Social Ventures Australia and delivering an average yield of 10%.
  • Windlab – Developer and operator of quality wind farms with specialist resource assessment technology.

All in all, the meeting and detail provided was impressive, once our due diligence is completed we will provide more detailed information.

Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest. 

This month, we met with Foresight, a UK-based renewable energy specialist investor focused on the providing debt to a diverse range of assets.

Foresight is one of the world’s leading renewable energy investors with 34 years of experience and $7.1bn in assets under management across Europe and Australia. They are owners, operators and financiers of key strategic energy projects.

Why Foresight?

Foresight offers a unique opportunity to gain an exposure to the renewable energy sector from the position as a debtholder, rather than an equity investor. The majority of renewable energy investments are focused on equity investment, meaning you are exposed to some operational, production and legislative risks. This Fund sits at the opposite end of the capital structure and offers investors a consistent income stream secured by both the operational businesses and physical assets. Importantly, management demand strong financial covenants and have the expertise to foreclose and operate any assets as required. Foresight has an extensive track record in Europe, where it is the second largest owner and manager of solar assets and the largest owner of grid connected batteries. Their experience including managing the construction, operation and exit phases of any asset sets the business apart from many domestic competitors.

Why Income Bucket? 

The fund meets the requirements of the Income Bucket as it is targets an annual return of 4.0 to 4.5% over the RBA Cash Rate during the five year term of investment. As a debt holder, this income will be paid quarterly from establishment, representing the payment of interest and repayment of capital and has limited reliance on the success of the underlying assets into which it will invest. The fund will originate 10 to 20 senior secured loans each year to smaller scale renewable energy projects in Australia, all of which will be amortised over the life of the loan. The fund will benefit not only from loan repayments but also arrangement and commitment fees paid by the individual projects for the establishment of each loan.

Performance & Top Holdings: Foresight is the first of its kind in Australia and will be extending loans following its first close, hence performance and transparency into the underlying assets is limited. That being said, since 2009 Foresight has deployed $3bn of capital into 192 infrastructure assets, 32 construction and 160 operational, delivering an IRR of 10%. The fund already has several assets under management, including Oakey 1 (30MW) & 2 (70MW) in Queensland and Bannerton (110MW) in Adelaide. The fund will be diversified across various renewable energy sources including solar, wind, bio energy, energy efficiency and storage, and currently has a pipeline of over $450m in potential loans ready for deployment.

Reasoning: Private infrastructure debt investments are generally restricted to institutional and sovereign wealth investors but offer some of the most consistent, risk-adjusted returns in an increasingly volatile market. Whilst debt investing into renewable energy projects is common overseas, as with most similar strategies, it has yet to become established in Australia outside of the pension fund industry. The fund offers a unique opportunity to access this lower risk sector which Moody’s estimate exhibits substantially lower default rates than non-financial corporate issuers. An investment allows you to benefit from both the illiquidity premium of these smaller solar assets, in the form of higher yields, and the complexity premium associated with undertaking due diligence on said assets; which Foresight has a proven track record of delivering on. Importantly, the private debt sector has shown little correlation with equity markets (0.3), negative correlation with government bonds (-0.1) and no correlation with corporate bonds, meaning it offers excellent diversification opportunities. The fund will have a five year term, with the option for a further two years, and will consider opportunities to exit via the sale of the loan book to larger pension funds, a securitisation or IPO. The target size of the fund is $150m, with a management fee of 0.85% and a performance fee upon exit of 17.5% of outperformance over an IRR of 6%.

The Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest.  

This month we met with met with Barwon Investment partners about their Healthcare Property Fund but were surprised to learn about their Listed Private Equity capabilities.

With estimates of some $1.2tn in capital committed to private equity funds around the world, there is some concern the market is becoming flooded. In just the last few months a number of Australian equity managers, including Pengana, have launched listed private equity funds that invest into illiquid, unlisted companies. As part of our meeting with Barwon regarding their Healthcare Property Fund, we were surprised to hear about their innovative solution to benefitting from the private equity boom.

What is the fund?

To put it simply, the Barwon Listed Private Equity Fund seeks to invest in listed companies involved in the Private Equity sector. This includes buyout firms, who acquire and then sell companies, private debt providers, who lend to these companies and sometimes take ownership stakes, alternative asset managers, who manage the underlying funds and derive performance fees and finally, private equity backed listed companies. The opportunity set around the world is much larger than we expected, at 950 companies and over $1.7tn in market capitalisation combined across the likes of TPG, KKR, Oaktree, Blackstone and Berkshire.

Barwon have been running this strategy for over 11 years and have accumulated $350m from sophisticated investors and family offices. The fund has delivered a return of 19.8% per annum over the last 10 years and 14.4% per annum over the last three.

Whilst it can be difficult to understand why an Australian fund manager has a competitive advantage in this sector, it seems they are one of very few around the world who have chosen to focus on this area of the market. The fund will invest into just 20 individual companies, based on bottom up stock selection, will not use leverage and offers daily liquidity. They seek to generate a return of 3% over the public markets return and provide full transparency into the underlying portfolio.

The fund is highly diversified, with the largest allocation (36%) to buy out firms or those offering growth capital like 3i Group and Onex. This is followed by private debt provides (20%) like Oaktree capital and Blackrock’s specialist lending company. Next is alternative asset managers (27%) including Blackstone and KKR, providing exposure to the many funds raised and managed by these companies in the last decade. 16% of the fund is then allocated to companies currently backed by PE firms, including Australia’s Cardno and Gentrack Group.

In an environment that is becoming more difficult to generate positive returns every day, we continue to seek out opportunities and specialists who can add value in their areas of interest. It is these groups and people who have built a competitive advantage that are best placed to deliver better than average returns at substantially less risk than listed markets and which warrant further consideration.

The Wattle Watch

In any given month, Wattle Partners meets with many different professionals offering a new investment product, idea or scheme. Most are a pass from us, but now and again some pique our interest.  This month we met with Warrakirri Asset Management, who are launching a Diversified Agriculture Fund.

Whilst agricultural property has a tainted record in Australia, due primarily to the tax-driven Great Southern and Timbercorp schemes of the 2000’s, there is an increasing supply of investable opportunities run by professional operators in the industry. Warrakirri is a well-known name in the agricultural space with over 20 years’ experience directly operating farming properties and running discrete mandates exceeding $1bn for industry and other sovereign wealth funds.

In 2018, the group has decided to open their capabilities up to the wider market.

The company plans to launch the Warrakirri Diversified Agricultural Fund in 2019 and raise up to $100m in capital as part of the first raising. The capital will be used to buy, develop and own a diversified portfolio of high quality agricultural properties leased to the best operators in the industry. The targeted properties will be valued at between $10m and $30m and the fund will target a return of between 7 to 11% per annum over the 7 year investment period of the fund.

The management team intend to diversify the portfolio across all of Australia and include all aspects of the production cycle including water entitlements, livestock, vineyards, fruit and nut trees as well as processing and infrastructure assets like greenhouses. Importantly, the fund will have gearing capped at 25% and will be managed on a capital calls basis, with 25% of committed capital due on application and the remaining expected to be called within 12 months.

We will cover the investment in greater detail in a later issue, however, as many readers know some of the best performing investments in recent years have been agricultural property trusts like Arrow and Rural Funds Group. It is yet to be seen whether Warrakirri can deliver a similar return profile, however, given the heightened volatility in markets we see an increasing need for less volatile, non-market linked assets.

The fund requires a minimum investment of $100,000 and is restricted to wholesale investors only.