Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
L1 Capital shifts to activism in the search for value
L1 Capital has announced the launch of its new L1 Catalyst Fund in July, aimed at unlocking company value via shareholder activism. The launch comes several years after listing of the firm’s L1 Long-Short Listed Investment Company (ASX: LSF), which has delivered strong long-term returns.
Activist funds look to shake up a company’s management by making the voice of shareholders heard more loudly. According to Street of Walls, “activist investors like to make investments in companies where management lacks the proper incentives to maximise shareholder value. Without proper incentives in place, management can make excessive compensation and perks and suppress free cash flow.” Activist funds differ from normal funds by having a less-diversified portfolio.
The Catalyst Fund:
According to the company website, the L1 fund will be a high-conviction, activist fund that seeks to deliver positive catalysts that unlock major share price upside for investors. It seeks to do this via a highly concentrated portfolio of 6-8 stocks at any one time. This ensures the team has market-leading company and industry knowledge and is fully focused on providing value-adding opportunities to company boards and management teams.
Selected stocks meet the requirements of value, quality, and pathway to a literal catalyst. One of the defining points of the fund will be its focus on “delivering improved ESG outcomes at S&P/ASX 200 corporates. The fund uses shareholder activism to enhance corporate governance and protect the interests of shareholders.”
James Hawkins, who joined the team in March, will head the Catalyst fund.
The activist fund comes at an opportune time, right after many companies were driven to raise capital to shore-up their balance sheets due to the headwinds from Covid-19. Many funds are managed by passive strategies (that typically do not act to protect shareholders’ interests).
Fast-forward to today, and the headwinds caused by the pandemic weren’t as bad as first feared. Hawkins says that a lot of ASX-listed companies are under-leveraged because they had anticipated the pandemic to have caused a lot more damage in Australia. If this is the case, Hawkins says it could be that the company is able to buy back shares if the share price has lagged. It’s these sorts of opportunities that Hawkins says the fund is looking to realise.
According to the company website the Catalyst Fund is truly unique:
- Track record – One of the most respected and best performing hedge fund managers in Australia. The L1 Capital Long Short Fund has returned 23 per cent p.a. since inception (net).
- Scale – Successful activist investing generally requires the fund to have sufficient scale to build a meaningful stake, have access to management, board and other institutional shareholders and the resources to dedicate to an activist campaign. L1 Capital manages about $4 billion in its Australian equities Funds, enabling the firm to be a significant shareholder and have access to all relevant stakeholders.
- Resourcing – fully resourced investment team with deep experience, knowledge and relationships across the entire Australian market.
- Alignment – Total alignment with investors. The investment team has invested significant personal wealth into the fund alongside investors.
Activist strategies have become more popular especially in offshore markets such as the US and Europe. Since 2010, funds deployed in shareholder activism campaigns have quadrupled from US$50 billion to US$200 billion ($260 billion) today. Hawkins told the Financial Standard,” L1 Capital believes that there is a huge opportunity in Australia for investor-led stewardship in equity markets, particularly given that more corporate ownership has shifted to passive index funds.”
If the L1 Capital Long Short fund is anything to go by, returns have been stunning. The fund returned 70.1 per cent, after fees, against its benchmark’s 28.2 per cent advance, in the 12 months to the end of May. One of the core strengths of the L1 team is using its deep-value mindset to select stock ideas that have are backed by a strong catalyst. They tend to generally perform better.
L1 Catalyst will be a unit trust, opening 1 July.
