Kingfish fund covers the small fry

Philip Macalister

Sunday 29th February 2004

Fisher Funds Management boss Carmel Fisher would like people to use her new listed investment company Kingfish as a way of covering the smaller companies in the market.

She says people may own say, eight individual shares and then use Kingfish as their ninth share to cover the small and even micro-cap end of the market.

Kingfish is seeking to raise up to $75 million in an IPO ($50 million with up to $25 million on oversubscriptions). Kingfish will then contract management of the money to Fisher Funds Management.

Fisher Funds is already a successful business in the managed fund area. The company currently looks after about $200 million for investors through a series of managed funds and late last year won a mandate to manage money for the multi-billion New Zealand Superannuation Fund.

It is also one of the two fund managers (along with BT Funds Management) that advise the dual listed New Zealand Investment Trust on stock selection.

Also it has either won or been a finalist, in the New Zealand shares section of the FundSource and Morningstar fund manager of the year awards for the past couple of years.

Fisher�s speciality has been investing in companies outside the top 10 and having a focus on a growth style as opposed to a value orientated one.

�We want to make small caps our domain,� Fisher says.

The idea behind the Kingfish IPO is to offer the Fisher Funds investment style to investors who don�t want to put their money into managed funds.

In many ways it will take the same approach to investing as the managed fund, and indeed when Fisher buys a stock it is generally put into all her funds.

While Fisher currently holds some larger cap stocks (Sky City, Warehouse and Waste Management) she is moving towards smaller stocks.

Indeed the investment universe for Kingfish is companies with a market capitalisation of less than $450 million (which is essentially anything below the Top 30), and it will also invest in NZAX listed companies as well as unlisted ones.

Fisher says the listed investment company structure is well suited for investing in companies at the smaller end of the market.

�It�s nirvana for a fund manager to have a closed ended vehicle,� she says as money can be raised and invested over the long term without the issues such as providing liquidity to redeem units. This is especially useful when investing in smaller and illiquid companies.

�We can truly act like long term investors,� she says.

One thing which may surprise investors about Fisher�s approach to investing is that it is done on a long-term basis and doesn�t pay too much attention to price.

For instance if she finds a stock she really likes Fisher is prepared to pay a premium for it. Likewise, if something happens to a company which changes her view on it she will bail at a discount.

A good example of this approach is Turners and Growers. Fisher liked it and participated in the IPO and kept buying at a premium post floating. While some people were selling out in this period and doubling their money � thanks to Fisher � she was building a large long term holding in the company and benefiting from the continued share price appreciation.

The importance of this approach is crucial to how the Kingfish fund will deal with tax issues.

Under New Zealand�s tax laws if a fund or an investor is investing for the purpose of making money then their investments need to be held on revenue account and therefore subject to capital gains tax at 33%.

However if the purpose is not to actively trade stocks and make money then the investments can be held on capital account and be free of capital gains tax.

Kingfish says it can get around this tax issue because �making money is not its sole purpose.�

�Our intention is to invest and hold forever,� she says.

Fisher says the logic for all her investment decisions is documented and it is clear from the company�s history that it isn�t a trader.

Although Kingfish has no binding ruling from the Inland Revenue Department on this matter it has a tax opinion that it describes as �comprehensive and robust.�

Fisher admits this is a risk � and it is disclosed as one in the investment statement.

To help Kingfish around the tax issue it has adopted a tactic that was tried by the funds management industry a number of years ago. That is it will run two portfolios, one for trading which pays tax, and a long-term holding portfolio that is free of this impost.

Fisher says when a new stock is added it goes into the trading portfolio while the managers get comfortable with it. This, she says is like an incubator. After that it migrates to the long-term portfolio.

In vogue
Listed investment companies aren�t well understood in New Zealand, but are currently in vogue in Australia and have been big in the United Kingdom for sometime.

In fact since the middle of last year there have been a plethora of new issues in Australia.

The main LICs in New Zealand are GPG, Hellaby Holdings and Infratil - all funds that have generally been good performers for investors.

Fisher says one important element, which is shared by Kingfish and Infratil is that the both have an independent board which contracts the manager and can sack them if they fail to perform.

�They could quite easily sack Fisher Funds Management,� she says.

Two of the biggest drawbacks of the LIC structure are that often they trade on the market at a discount to NTA, and they can be more volatile than an open-ended managed fund.

Fisher says the volatility isn�t something that she can control, rather it is a function of investor sentiment to the stock.

As for the discount issue, Kingfish has put in place a number of tools to help alleviate it.

One is that free options are being offered to investors who participate in the IPO. These can be exercised at various points in time in the future. Also management will be an active buyer of shares on market post listing.

She says the experience overseas is that investors are prepared to pay a premium to get access to specialist and good fund management skills. Fisher hopes she has demonstrated those skills in New Zealand and that people will be prepared to pay for them.

Click here for details of the offer.

Fisher on her new fund

Fisher wins NZ Shares section of FundSource Awards 2003

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