Fat Prophets make no promises

By Jenny Ruth

Thursday 3rd March 2005

The Australia-based Fat Prophets Australia Fund's prospectus doesn't make any promises about how it will perform.

"The company has no performance history as it is a new company," it says.

It does intend to largely follow the hypothetical portfolio recommended by the Fat Prophets newsletters which have been published since October 2000, but it isn't restricted to replicating this portfolio.

It can invest in other stocks as well and can also invest in derivatives such as options, warrants and futures. While it aims to beat returns provided by the S&P/ASX 300 Accumulation Index, it isn't restricted to investing in Australia either.

Co-founder of the company in 2000 with Jason McIntosh, Angus Geddes says his company wanted to avoid anybody "front-running" the fund. "If we said the fund was going to buy everything that the report recommended, potentially you could get speculators piling in ahead of the fund," Geddes says.

The Fat Prophets hypothetical portfolio does have a solid track record with its returns independently verified.

While the All Ordinaries Accumulation Index has produced a 9.6% annualised return since October 2000, Fat Prophets' has achieved a 35.3% annualised return over that period.

The Fat Prophets' investment philosophy is to buy stocks of companies in distress at significantly below fair value, banking on an improvement over time.

It has a list of ten "commandments" to follow which include never getting involved in the latest stock market fad or following the crowd.

"Every fad ends and the ALL end the same way - badly," the company says on its website. "When it comes to investment, the crowd in inevitably ALWAYS wrong," it says.

Fat Prophets doesn't always get it right. Take steel-maker Smorgon, for example. The newsletter recommended it in mid-2003 when it was trading at $A1.29. About a year later, it recommended investors sell the stock when the shares were trading at $A1.07, crystalising a 5.8% loss after taking dividends into account.

"While our support for (Smorgon) was based on a cheap valuation, we no longer held confidence in management's ability to turn the company around," the latest annual report explains, adding that there was a potential threat of increased competition from low-priced Asian steel importers.

However, the newsletter seems to get it right more often than not. It recommended investors buy pay TV company Austar at an effective 45.4 cents a share. In late 2004, it recommended they take profits at about 87 cents. An even better performer was Caltex, which rose from $A2.15 in mid-2001 when Fat Prophets first recommended it to $A8.70 in mid-2004 when it recommended investors take profits. Caltex had also paid 32 cents in dividends over the period, producing a total 320.5% return.

Geddes says the fund is being offered to New Zealand subscribers as well as Australians because about 15% of the newsletters' 7,000 subscribers are New Zealanders - he is a New Zealander too.

But the issue isn't tax efficient for New Zealand investors who won't be able to use any franking credits. To the extent that dividends aren't franked, they will be liable for 15% withholding tax in Australia, although that 15% can be claimed against tax owing in New Zealand. The actively managed fund is also subject to Australia's 30% capital gains tax.

Chief executive David Shearwood, who has about 18 years experience in funds management including with Bain & Co, now Deutsche Bank, McIntosh, now Merrill Lynch and Westpac Investment Management, says Fat Prophets will be aiming to pay fully franked dividends.

For more information on the Fat Fund visit the Sharechat IPO page - http://www.sharechat.co.nz/resources/ipos/

Comments from our readers

No comments yet