l1 long short fund lic report - lsf trading equities · 2018-03-06 · . the l1 long short fund is...

www.tradingequities.com.au

The L1 Long Short Fund is looking to raise a minimum of $100m (and maximum of $600m) under the offer, which will provide investors access to the Australian long short fund. The LIC will be managed by L1 Capital. Whilst the strategy has a short track record (late 2014), the strategy has delivered very strong returns and pleasingly with significant downside protection over this period. The Manager follows a bottom up investment process, with an extensive visitation program (i.e. network of company/industry contacts). Investors can use the solid performance of L1 Capital’s existing long only Australian Equities Fund as proxy for the Manager’s stock picking ability over a long period of time.

About the manager • L1 Long Short Fund (ASX: LSF) provides investors access to (1) an

actively managed Long and Short Portfolio of securities; and (2) the investment expertise of the Manager. L1 Capital is a global investment fund manager with funds under management of approximately $3.0bn as at 31 Dec-17. The firm is 100% owned by senior L1 staff.

Our Opinion… • Philosophy and fundamental investment process. At the core of

Manager’s philosophy is the ethos – markets are inefficient. TheManager’s investment process is what we would describe as the typicalinvestment process of a fundamental, bottom up fund manager.

• Stable investment team. We regard the stability of the team (i.e. nodepartures since inception) as a positive. However, we do note the teamof 4 includes two co-founders, where we would expect stability.

• Very strong performance, with downside protection. The Managerhas delivered very strong performance since 2015 (2015 +60.5%, 2016+29.4% and 2017 +30.5%). The monthly performance numbers providedby the Company indicates strong capital preservation, with the Manageroutperforming the ASX200 every market sell off since Sep-14.

• Fees. The Manager’s fee is high relative to the Australian peers,including Long/short, (with majority of the funds invested inAustralian shares) and mostly in line with global peers. The Managerearns 20% performance fee on net absolute returns (with highwatermark), which we consider is a low benchmark to achieve fees.Both Raphael and Mark are investing $5m each of their own wealth intothe fund. The management team has also committed to re-investing allperformance fees (after tax) with an escrow agreement up to 10 years.L1 Capital are also foregoing all management fees until issue costs arerecouped.

LIC RESEARCH - L1 Long Short Fund Ltd Recommended

Main Details

Investment Manager L1 Capital

ASX Code LSF

Price (NAV) A$2.00 (IPO price)

Market Capitalisation A$500m (estimated)

Inception Date 24 April 2018 (estimated shares trading date)

Management Fee 1.44% p.a. (incl. GST)

Performance Fee 20% subject to a high watermark

Portfolio Characteristics

Benchmark S&P/ASX200 Accumulation Index (including franking credits)

No. of Stocks Long: 40 – 60 positions Short: 10 – 30 positions

Style Long-short

Active position limits 10% [max. 6% for long and 4% for short]

Gross / Net exposure Maximum 300% / 150%

Net beta exposure 0.2 to 0.8 (typically)

International Equities Maximum 30%

Source: L1 Capital

6 March 2018

Phone 1300 980 849

Email [email protected]


Research – Sales & Trading

Investment Philosophy… At the core of Manager’s philosophy is the ethos – markets are inefficient. The manager is guided by three key principles:

(1) Both valuation and qualitative factors are key determinants of share price drivers.

(2) Markets are inefficient, driven by emotional, short-term and backward-lookingcharacteristics. Manager believes by remaining disciplined and adhering to theirinvestment process, they are able to avoid many of the typical behaviouralbiases that are common among investors.

(3) The Manager believes in an extensive visitation program to fully appreciate acompany’s prospects. This adds to the Manager’s bottom-up investment processand independent thought process.

Investment Process… The Manager’s investment process is what we would describe as the typical investment process of a fundamental, bottom up fund manager. The diagram below best sums up the process.

Figure 1: L1 Capital Investment Process

Source: L1 Capital

Key components of the investment process are discussed below.

Comprehensive company visitation program. The Manager believes the best way to discover opportunities is via direct meetings with industry contacts, companies,



customers, suppliers, consultants and other stakeholders. This allows the Manager to paint a more clear and comprehensive picture of the company and industry trends.

Extensive travel program. A natural extensive of the above, the investment team regularly travels around Australia and overseas.

Detailed bottom-up analysis. Manager spends a significant amount of time analysing company annual reports & announcements, broker reports, industry publications and other relevant news flow.

Valuation. The Manager utilises a number of quantitative tools to assess the intrinsic value of a company, with the main valuation toolkit being discounted cash-flow (DCF) method. The Manager noted that the DCF is sensitive to a company’s long-term margin and return on capital measures. It is for this reason the Manager spends considerable time discussing and debating these long-term forecasts. The Manager cross checks the DCF valuation with other valuation methods such as – price-to-earnings (PE) multiple, enterprise value (EV), EBITDA (or the earnings from a company’ operations), price-to-book ratio (P/B) and price-to-sales (P/Sales).

Qualitative assessment. The Manager uses a qualitative scorecard on each company, using a score from 1 to 5 (with 1 being excellent and 5 being poor):

1. Management quality.2. Industry and company structure3. Business trends

Portfolio construction. Essentially the portfolio is constructed of securities (long and short positions) which make it through the Manager’s quantitative and qualitative investment process. Further, the Manager also gives due consideration to broader prevailing economic conditions.

Risk management. In addition to adhering to its investment process, the Manager also imposes various limits and other policies and controls when managing the funds.

Fund Performance… Figure 2: Fund historical performance (net of performance) to 31 December 2017

Source: L1 Capital



Fund Positioning Figure 3: Top 10 Holdings (as at 31 December 2017) (this has likely changed given the turnover the Fund exhibits)

Source: L1 Capital

L1 Capital Investment Team…

Ralphael Lamm – Joint Managing Director & Chief Investment Officer

Mr Lamm is a co-founder and since founding has jointly headed up the L1 Capital Australian Equities Fund and L1 Capital Long Short Fund. Previously, he spent more than 5 years at Cooper Investors. During that period, Raphael was a portfolio manager of the flagship Cooper Investors Australian Equities Fund. He holds a double degree in Law and Commerce from Monash University, with Honours in Law and First Class Honours in Finance.

Mark Landau – Joint Managing Director & Chief Investment Officer

Mr Landau is a co-founder and since founding has jointly headed up the L1 Capital Australian Equities Fund and L1 Capital Long Short Fund. Previously, he spent 5 years at Invesco as an Investment Analyst in the Large Cap Australian Equities team and later as an Investment Manager in the Smaller Companies Fund. Prior to this he was a Senior Strategy Consultant at Accenture, where he provided financial analysis and corporate strategy advice to a range of large Australian companies in banking, insurance, telecommunications and retail. He holds a double degree in Commerce and Economics from Monash University and a CFA Charterholder.

Lev Margolin – Portfolio Manager

Mr Margolin joined L1 Capital in 2009 and is a portfolio manager of the L1 Capital Australian Equities Fund and L1 Capital Long Short Fund. Previously, he worked in private equity and M&A at Babcock & Brown and AEP and within the Corporate Strategy



& Investment team at National Australia Bank. He holds an undergraduate degree in Commerce from the University of Melbourne (with First Class Honours) in Actuarial Studies and is a CFA Charterholder.

Martin Tavella – Investment Analyst

Mr Tavella is an investment analyst and his specific tenure at the firm was not provided. He is responsible for agriculture, aged care, information technology and small cap industrials research. Previously, he was assistant analyst at Diogenes Research where he conducted detailed financial analysis on various listed Australian and International companies. He holds a Bachelor of Business from Monash University.

In addition to the investment team, the Company is supported by:

Andrew Larke – Independent Chairman

Mr Larke has over 20 years experience in mergers, acquisitions, capital markets and senior executive leadership positions. He is a Non-Executive Director of DuluxGroup Ltd and Chairman of Sand Hill Road Hospitality. Previously, he was the Global Head of Strategy, Planning and Mergers & Acquisitions at Orica Ltd, where he was part of the Group Executive for 9 years.

John Marfarlane – Independent Director

Mr Marfarlane has previously served as CEO of Bankers Trust New Zealand, Chief Country Officer (Japan) and President of Deutsche Securities Japan, Executive Chairman of Deutsche Bank Australia and New Zealand and Chairman & CEO of Deutsche Bank Australia.

Harry Kingsley – Independent Director

Mr Kingsley is a partner at Holding Redlich. He is senior corporate and commercial lawyer specializing in strategic advice and negotiated transactions. He was formerly the Senior Legal Counsel, Asciano Limited and Chief Legal Counsel, Pacific National, Executive Director, Austock Group and a senior associate at Minter Ellison.

Wayne Murray – Investment Specialist

Lubos Polakovic – Head of Dealing

Joel Arber – Chief Operating Officer

David Goss – Head of Fund Operations & Compliance

Jeffery Lau – Operations Manager



Fee Structure… Base fees. The Manager will be paid a Management Fee of 1.44% (inclusive of GST) per annum of the value of the Company’s investments.

Under the Investment Management Agreement, the Company will not pay any Management Fees that would otherwise have been payable to the Manager, until such time as the Company has recouped the Offer Costs in full.

Performance fees with a high watermark. The Manager will be paid a performance fee of 20% of the funds outperformance (if any) over each 6-month period subject to a high watermark. The performance fee for a performance calculation period is subject to the recoupment of prior underperformance.

Key Risks… Whilst not an exhaustive list, below are some of the risks associated with this LIC:

• Asset Allocation. Given the LIC can invest up to 30% in International shares,investors do need to be mindful when using this LIC in their portfolios.

• Investment Strategy Risk. Ability of the manager to pick securities whichoutperform its own benchmark.

• Manager Risk. Key personnel changes which could potentially lead to the loss ofIP or investment ability.

• Market Risk. Fluctuations in the market or increased/decreased correlationsbetween asset classes/securities could lead to underperformance.

• Derivative Risk. The Manager can invest in exchanged traded derivatives andover-the-counter derivatives. This increases the risk profile of the Fund.

• Short Selling Risk. This involves borrowing stock, with the view of buying back thestock at a lower price. If the prices move against the short positions, this Managercould be caught in a short squeeze.

• Currency Risk. The Manager can invest up to 30% of the portfolio in internationalshares.

• Liquidity Risk. The liquidity of the LIC is separate to the underlying Fund’ssecurities.

• Leverage Risk.



Investors should read the PDS for further details.

APPENDIX – Ratings Guide

• RECOMMENDED – We are recommending this managed fund for new oradditional funds.

• NEUTRAL – We regard the fund as investment grade however do notrecommend the Fund for additional new funds.

• NOT RECOMMENDED - We are recommending investors withhold frominvesting or redeem their existing holding.

Disclaimer

This document is provided by Trading Equities Pty Ltd (ABN 55 605 460 81). Trading Equities is a corporate authorised representative of Vested Equities (ABN 54 601 621 390) AFSL (478987) (“Vested”).

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Vested nor its associates make any recommendation or warranty concerning theaccuracy, or reliability or completeness of the information or the performance of thecompanies referred to in this document. Past performance is not indicative of futureperformance. Any opinions and or recommendations expressed in this material are subjectto change without notice and Vested is not under any obligation to update or keep currentthe information contained herein. References made to third parties are based oninformation believed to be reliable but are not guaranteed as being accurate.Vested and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Vested does, and seeks to do, business withcompanies that are the subject of its research reports. The analyst(s) hereby certify that allthe views expressed in this report accurately reflect their personal views about the subjectinvestment theme and/or company securities.Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Vested, its associates, officers, directors, employees and agents. Except for any liability which cannot be excluded, Vested, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Vested is not liable to recipients in any matters whatsoever otherwise recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Vested does not guaranteereliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.The securities of any company(ies) mentioned in this document may not be eligible for sale

Address Trading Equities Pty Ltd

Level 11, 50 Cavill Ave Surfers Paradise

QLD 4217

Email [email protected]

Phone 1300 980 849

l1 long short fund lic report - lsf trading equities · 2018-03-06 · . the l1 long short fund is...

Documents