Sell-down prompts warning

Investment manager Pie Funds had a large holding in ASX-listed energy services firm Titan before selling 3.6 million shares in the company as the share price dropped from A$3.70 at the end of last year to A44c on Friday.

It had previously been listed in Pie Funds’ newsletter as one of its largest holdings and its move out seemed to slash the share price.

Pie Funds is believed to have started selling Titan in March this year and fully exited when the stock was priced at A64c.

On October 2, Pie Funds issued a notice saying it had ceased to be a substantial holder of securities.

Rebecca Thomas, of Mint Asset Management, said the domestic equity market was illiquid below the top 10 stocks. “Managers that have significant positions – over 5% - in the smaller listed end of the spectrum will find it very, very difficult to get in and out on any given day.”

She said the Pie Funds’ Titan investment had been a concentration risk. “Anybody who has got a substantial shareholding will find it very, very difficult, if they’ve got a large percentage of their portfolio invested, if something goes wrong in one of the stocks.”

Thomas said retail investors were not well suited to the sort of volatility that could be caused by having such high conviction positions. “That impact was felt by Fisher Funds when they had very large holdings in Australian smaller company stocks, and New Zealand small company stocks and by Milford Asset Management with Moa when they had a profit warning that went the other way. It does demonstrate how illiquid New Zealand can be on a bad day at the smaller end of town.”

Chris Swasbrook, of Elevation Capital, said fund managers should be focused on the impermanence of capital and position themselves cautiously as a result. He said Elevation had larger than average cash balances and would typically invest in highly liquid, large cap international stocks rather than small cap domestic equities.

Comments from our readers

On 13 October 2014 at 7:53 am Pragmatic said:

Whilst I agree that preservation of capital remains the number one priority, I'm curious why NZ advisors have such high exposures to an economy representing 0.2% of the world....

On 13 October 2014 at 10:09 am Brent Sheather said:

People with long memories might recall the Prudential Smaller Companies Fund which I think was managed by Carmel Fisher. They had to suspend redemptions because it couldn’t move its illiquid positions to fund redemptions. Not saying that this is going to happen here but there is a good case for using closed end funds to invest in small companies as the discount often tends to reflect the net asset value given a distressed sale of some or all of the underlying holdings whereas an open-ended fund often uses last sale price to determine NAV allowing some people to exit at unrealistically high prices to the detriment of everyone else who stays invested. We have seen this happen many times in the last 30 years but hopefully everyone is “on to it” these days.

On 14 October 2014 at 10:14 am Craig Simpson said:

I have a gut feeling we will see more unlisted securities/private equity investments appearing more and more in KiwiSaver portfolios - watch the liquidity ratios in disclosure forms.
Brent - I was working at Pru around this time and remember the fallout.

On 16 October 2014 at 8:40 am Peter Urbani said:

You may find the following Presentation and accompanying spreadsheet of interest.

Lessons from the Credit Crisis - The Importance of Liquidity https://www.academia.edu/attachments/35143182/download_file?st=MTQxMzQwMTc0NSwxMjIuNjIuMTM0LjEwNCwxMjIxMDEy&s=work_strip

Illustrates the impact of higher moments on long range Liquidity VaR and CVaR (Expected Shortfall) using the method of Wingender.

Accompanying spreadsheet; https://www.academia.edu/attachments/35143145/download_file?st=MTQxMzQwMTc0NSwxMjIuNjIuMTM0LjEwNCwxMjIxMDEy&s=work_strip

Bold blue text cells with Grey background in the spreadsheet are user selectible inputs

Sell-down prompts warning

There’s a warning to investors – be careful of funds that hold large equity positions that could be hard to sell out of.

Monday, October 13th 2014, 6:00AM 4 Comments

Comments from our readers

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