CBG Capital: Seeking Alpha With Alignment
CBG Asset Management was awarded the Sky News Business ‘Golden Calf’ Award in 2013 for best boutique Australian equities fund manager. Managing director Ronni Chalmers has 30 years’ experience in the investment markets, including a decade at BT Australia in the successful investment management department.
It’s the simple truth at the heart of active management: to beat the index, a portfolio has to be as different to the index as possible.
That is certainly the philosophy of Ronni Chalmers, managing director of CBG Capital Limited, a listed investment company (LIC) that is raising up to $50 million (with a minimum of $16 million) through an initial public offering (IPO) on the Australian Securities Exchange (ASX). CBG Capital shares are being issued at $1 each, plus one free attached option per share, exercisable at $1, on or before 30 September 2016.
The LIC, which will invest in Australian shares and listed ‘hybrid’ securities, will be managed by CBG Asset Management Limited, Chalmers’ wholly-owned funds management company. CBG Asset Management currently manages two unlisted equity funds, the CBG Australian Equities Fund (Wholesale) and the CBG Australian Equities Fund, which have been going for 12 years and eight years respectively, and which have both outperformed their benchmark since inception.
CBG Asset Management was awarded the Sky News Business ‘Golden Calf’ Award in 2013 for best boutique Australian equities fund manager. Chalmers has 30 years’ experience in the investment markets, including a decade at BT Australia in the successful investment management department. Chalmers leads a team with a combined total of more than 60 years’ worth of experience analysing companies and running share portfolios.
CBG Capital Limited will have a separately managed portfolio, but with similar investment objectives and portfolio selection attributes to the unlisted funds. CBG Capital Limited aims to achieve an attractive rate of return for shareholders over the medium to long term – that is, five to seven years – comprising both capital growth and franked dividend income, while also seeking to minimise the risk of permanent capital loss.
Chalmers says the philosophy is to outperform the S&P/ASX 200 Accumulation Index (which counts both capital growth and dividends) by 3-4% a year, through careful selection of stocks from both within and outside the index. This index historically has generated long term returns of 10% per annum.
“We have the flexibility to invest outside the S&P/ASX 200, which may provide attractive investment opportunities not available to managers with more restrictive mandates,” he says. “We research stock ideas very thoroughly before we invest, and in effect we’re leveraging our research of those companies – our intellectual property – into performance that exceeds the index.”
The reality of the Australian equities sector of the fund management industry, he says, is that many portfolios tend to look similar at the top end. But he says it is “active weights outside the largest capitalisation stocks” that can generate out-performance, or alpha (the return generated over that provided by a benchmark index.)
“If you look at our top ten holdings, we certainly have most of the stocks that you would see in the top ten of a lot of institutional Australian equity portfolios: ANZ, Westpac, Commonwealth Bank, National Australia Bank, BHP, Transurban and Suncorp. But ours would be a little different, with funds manager Henderson Group at number five, national childcare operator G8 Education at number eight and travel agency business Flight Centre at number ten. You find a lot of funds tend to crowd together within the S&P/ASX 100. The key to where we add ‘alpha’ is in our active weights in stocks from outside the S&P/ASX 100, and even outside the S&P/ASX 200.
“In the fund’s top ten, we’re 3% overweight ANZ and we’re 0.7% underweight CBA, but that’s really not going to make or break the portfolio, unless ANZ goes up 50% in the next year, which is pretty unlikely. However, Henderson Group is 0.2% of the S&P/ASX 200 – but it’s 4.1% of our portfolio. G8 Education is 0.1% of the index, but 3.5% of our portfolio. Macquarie Atlas Road, whose main asset is a French toll-road, is 0.1% of the index, but 3.1% of our portfolio. (Fund manager) BT Investment Management is not even in the index, because technically its free float is not large enough (Westpac owns 65% of the company), but it’s 2.5% of our portfolio. That’s where we add value,” says Chalmers.
Active positions currently represent 58% of the fund, and turnover runs at about 30% of the fund a year: this matches with the three-year holding period for stocks that CBG Asset Management likes to target on average. CBG Capital can have up to 25% of the fund outside the S&P/ASX 200, but this proportion stands currently at 7%, which is low by historical averages.
“When you have that flexibility to look outside the S&P/ASX 200, you are looking at stocks that are often under-researched. If you do the work and get confident in that stock, you can ‘ride’ it all the way up into the S&P/ASX 200. Sirtex Medical, Automotive Holdings, Retail Food Group, Magellan Financial Group, InvoCare and G8 Education are all good examples of that,” he says.
The portfolio, which currently comprises 43 stocks, is managed on a style-neutral basis. “We seek companies that have a high degree of certainty of earnings growth, with low downside risk – risk to the upside, if anything. We consider ourselves a low-risk fund in terms of the importance we place on safety, but we’re agnostic on style: we have stocks in our portfolio that are ‘value’ stocks and some that are ‘growth’ stocks.
“We’re more interested in the fundamentals of individual stocks than industries, but where we have the portfolio positioned today, we’re overweight financials: we’ve got the big four banks, with a similar combined weighting to the index, and we’ve got Suncorp, Henderson Group, BT Investment Management, Magellan Financial Group, IOOF and Treasury Group,” says Chalmers.
It’s the same philosophy that has seen CBG Asset Management’s elder fund, the CBG Australian Equities Fund (Wholesale), beat its benchmark by 1.8% a year (10.3% a year versus 8.6% a year) after fees, since inception (April 2002), while the CBG Australian Equities Fund is running 1.3% a year ahead of its benchmark (6.6% a year versus 5.3% a year), after fees, since inception (March 2006).
“We’ve had a lot of clients over the years saying that they wanted to have access to our philosophy in a LIC that pays a fully franked dividend every six months, and which is more transparency in its holdings,” says Chalmers. “The other thing you can’t do in an unlisted fund, which we wanted to do, is offer the free option. At the $1 strike price, that’s pretty attractive: if the market goes up over the next two years, the option could be worth a reasonable amount of money at the end of 2016.”
Alignment with shareholders’ interests is something that Chalmers has gone out of his way to demonstrate. “I am personally investing in excess of $500,000 into the offer, while my co-directors Robert Swil and James Beecher are also participating in the IPO. So our interests are closely aligned with shareholders,” says Chalmers. CBG Asset Management (that is, Chalmers) is also paying the IPO expenses of up to $271,000 pre-IPO, rather than taking the expenses from the portfolio on day one.
The IPO, which is scheduled to close on Friday 28th November, is being managed by broker Taylor Collison.
Fore more information and to obtain a copy of the prospectus visit www.cbgcapital.com.au. If you intend to apply for shares you should seek independent financial advice.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au