Fund manager takes it on the chin

Auscap Asset Management co-founder Tim Carleton. Picture: Chris Pavlich

Fund managers at the coal face of the COVID-19 carnage, including Auscap Asset Management, are pulling out all the stops to soften the investor blow.

Auscap had a horror March with performance of its long-short Australian equities fund down 47.3 per cent in March and 46.8 per cent fiscal year-to-date.

Some of its largest holdings include ANZ, Westpac, Nine Entertainment and Unibail-Rodamco-Westfield.

This column understands the value-focused group held a webinar for investors on Thursday as it sought to explain the hefty decline and offer some solace.

That included a large cut to its base management fee of 1.537 per cent and a waiver of any performance fees until the fund traverses out of the red.

Other fund managers are said to be introducing notable pay cuts for staff for the remainder of the financial year as they seek to weather the storm, while some are trimming headcount to reflect the market-led reduction in funds under management.

The steep sharemarket correction, which has been unwound somewhat recently, has compounded the pressures already facing the fund management community. Those include a big shift to passive-style cheaper products and the ongoing compression of fees.

Some have already succumbed to the challenges with managers such as Discovery Asset Management, Adam Smith Asset Management and Concise Asset Management shutting their doors in recent years. London-based Janus Henderson early last year shut several Australian equities funds amounting to about $490m under management.

Many local fund managers are now also figuring out how to navigate the wild swings on the sharemarkets.

Auscap — which was established in 2012 by former Goldman Sachs executive directors Tim Carleton and Matthew Parker — has only posted one fiscal year of negative performance since its inception. That was in fiscal 2019 when it posted a negative 9.2 per cent.

Part of the issue has been that growth-style investing had a long-stint of outperforming the value managers.

On Thursday, the fund is said to have slashed its base fee by a third until it restores positive returns.

Performance fees will be waived and the fund has added a second benchmark that needs to be exceeded for it to be eligible for that.

Investors canvassed by this column said Auscap gave a frank assessment of its horror March performance and also assured them there wasn’t a lot of leverage in the portfolio.

While the pandemic’s swift hit to the stock exchange can be blamed for some of the decline, the fund was obviously also caught wrong-footed.

In February, the fund had on average 30 long positions and eight short positions. Its biggest stock exposures at month end were spread across the financials, real estate, materials, consumer discretionary and communication services sectors.

Auscap has to be commended for throwing open the lines of communication with investors and taking decisive action to lessen the blow.

But the clock starts ticking again now as Australia gets a tighter grip on the COVID-19 pandemic and the investment community think through what the other side of business hibernation looks like.

Athena’s pain

Digital banks and new lenders are in the thick of the COVID-19 pain, with the Macquarie Group and AustralianSuper-backed non-bank lender Athena among those.

The company officially launched in February 2019, spearheaded by former National Australia Bank managers Nathan Walsh and Michael Starke.

It is warning potential borrowers that applications to refinance home loans are taking “much longer” to process.

The lender is also going one step further and freezing all home loan applications for buying property, telling borrowers to sign up for a “waitlist” when the tap gets turned back on.

Athena is backed by firms including AirTree Ventures, Apex Capital, Hostplus, RESIMAC Group, Rice Warner, Square Peg and Sunsuper.

Other non-bank lenders have chosen to revise their lending policies in light of the more challenging economic environment, which has seen many industries put into hibernation and dramatically increased numbers of those that are temporarily out of work.

Pepper Australia, Bluestone and La Trobe Financial are among those that have revised their credit assessment criteria, with several also tinkering with pricing.

The big banks are also clamping down and more closely screening mortgages from those in sectors most impacted by COVID-19.

ANZ has alerted mortgage brokers that they have an additional set of questions to address for business and self-employed home loan applications.

It’s a COVID-19 checklist that is now overlaying the mortgage approval process.

Applicants must answer how their business has been impacted by the pandemic and whether they have tapped into any of the federal government’s support measures for cash flow assistance or employee wages support.

There are also questions around the business’s expected cash flow needs for the next three-to-six months outside of any government support and funding requirements.

Perhaps the key questions centre on whether the applicant believes their business will return to normal trade following COVID-19, or whether they anticipate any “exceptional circumstances” that may impact that trajectory.

What is clear over the past five weeks is the lending environment has markedly changed for most borrowers.

This is despite the Reserve Bank and the Australian Office of Financial Management providing more than $100bn in cheap funding for business loans.