Australia’s most prominent small-cap investor has returned more than $800 million of clients’ money because he feels his fund has become too big to beat the market.
In what may be the largest refund to investors by an Australian equities funds manager, David Paradice said he has spent three months selling shares and in some cases has transferred stakes to other funds for his clients.
The founder of Paradice Investment Management has reduced the holdings in his $1.8 billion Australian small caps fund to less than $1 billion. The cash is being refunded to eight superannuation funds and about 20 wealthy individuals and families who invested in him through institutional investment mandates and trusts.
“There’s no one who has done this type of thing of this size in Australian equities,” he said.
There have been whispers within the investment community that the 55-year-old has lost mandates or possibly that he is trying to cash in and abandon investing all together.
Until now, the only hint of his big selloff were little-noticed substantial holdings notices filed with the Australian Securities Exchange in the 70 companies in his small-cap fund.
Mr Paradice said he was selling so the fund could continue to outperform the broader sharemarket.
The Paradice Australian Small Caps fund returned 15.9 per cent annually from March 2000 to the end of May compared with 4.22 per cent by the Small Ordinaries Accumulation Index.
A few hedge funds and private equity managers have given money back to clients when conditions shifted before it could invest. But those occasions are infrequent and much smaller.
Size hampers a fund’s ability to transact in the stocks it needs to hold to generate returns, particularly at the smaller end of the market.
Funds like to take stakes in companies representing 2 per cent to 3 per cent in order to make a meaningful contribution to performance.
A 3 per cent allocation for a $2 billion fund is $60 million, which would be a 10 per cent stake in a company with a $600 million capitalisation, far too big for a manager move in and out efficiently.
“We are supportive of managers doing it, even though it’s a tough decision to make, because it reduces revenue and can ruffle the feathers of clients who have money with the manager,” said Frontier Advisors senior consultant Fraser Murray.
“Despite the difficulties it presents to the business . . . it is in the best interest of performance.”
Mr Murray said he had never heard of a return this big.
BACK TO RAISING MONEY
The process involved coming to a dollar value for each client’s refund based on time spent in the fund and then liquidating a slice of the portfolio equating to that collective value.
Mr Paradice worked with asset consultants and equities transition managers hired by superannuation funds. In cases when clients asked the firm to handle the sell-down in positions, Mr Paradice engaged an equities transition specialist at Macquarie Group.
“The biggest risk was other investors seeing what we were doing and front-running us or shorting stocks we were selling, but that didn’t happen,” he said.
The process of “socialising” the idea with clients started just before Christmas last year. The selloff and return of funds was completed in June.
Adam Harvey and Rishi Khilnani, the two portfolio managers who have been responsible for managing the boutique firm’s Australian equities small cap fund for the past four years have been coming to Mr Paradice more regularly in recent years telling him that performance is getting harder and harder to achieve with a fund of its size.
The $1.8 billion the fund grew to is approaching 2 per cent of the approximately $120 billion small caps total market capitalisation.
Now Mr Paradice says he’s back to raising money for the firm’s new global small caps fund and chipping ideas into his Australian small caps and the micro cap fund he helps to manage.
Paradice manages $4 billion in its Australian large caps fund which has been closed for new investments since June 2009.
The global small caps fund started in August 2010 and is open for investment; he says he expects to close the fund when it reaches $1.5 billion.
The privately owned boutique investment group manages a total of $7.8 billion, mainly on behalf of Australian superannuation funds.