Capital raisings result in a win for retail investors

Steadfast small investors are riding a market rebound turbo-charged by capital raising profits.

March capital raisings has brought profits for retail investors staying the course in the stockmarket. Picture: AAP

Call it Mum and Dad’s big break: the sharemarket is on a remarkable recovery and investors who held the course and never surrendered in the darkest days two months ago are being rewarded.

But the rebound towards 6000 points on the ASX 200 is only half the story — the cream on the cake has been the bonanza in capital raisings launched at the bottom of the market cycle that are now paying handsome profits for retail shareholders.

In mid-March during the grimmest days of this pandemic, listed companies rushed to raise money.

Some, such as travel agent Flight Centre, needed it to survive. Some, such as data warehouse champion NextDC, needed it to move fast and dominate their industries.

But the one thing every company had in common was that the money was raised at prices that at the time were more than 30 per cent down from the top of the market weeks earlier.

At its best, this torrent of capital raising has fortified the market, but better still it has turbocharged the recovery for small investors — typified by more than a million Australians with self-managed super funds.

As we said right here in April: “Moving out of the markets is not the answer now.”

At it’s best where companies raised capital in the most perilous situations, the money made has been significant — anyone who took up shares in the Webjet offer at $1.70 is now looking at a stock worth $4.13. For shareholders in opportunity takers such as NextDC, the typical profit is closer to 20 per cent.

Crucially, a new way of raising money — the so-called share purchase plans — allow any shareholder, however small, to make a significant investment in a capital raising. In general, they can apply for up to $30,000 worth of shares even if they only hold a tiny amount of shares.

The system is far from perfect. Retail investors are not getting as good a deal as institutions and any capital raising leads to a dilution of ownership, which can be a key issue in small caps.

But there have been about 40 capital raisings since the crash and virtually every one of them is now in the money. For every shareholder who went into any capital raising, the move is going to improve total returns — whatever comes next.

1 2 3 4 5

Until this week the good luck stories were high in the headlines but the impact in reality was marginal since the raisings were often among smaller companies with shareholder lists that ran to 10,000 or 20,000 people.

But now the phenomena has gone mainstream with NAB’s share purchase plan, which was offered at $14.15 — this weekend the NAB share price is $17.86. That’s a 27 per cent profit for the 155,000 shareholders in NAB who signed up for the offer (and it’s a long time since NAB shareholders had much to smile about).

This is remarkable — the ­market is rewarding the faithful. Others might suggest it is rewarding the innocents.

Either way, some of the market’s best-known investors missed this rapid turnaround.

The founders of Flight Centre — Graham Turner, Geoff Harris and Bill James — for example did not take up their full entitlement in the Flight Centre raising set at $7.20. The stock is now almost double the raising price, leaving tens of millions “on the table” by those founders.

Earlier this week Marcus Blackmore, the biggest holder in diversified vitamins group Blackmores, did not participate at all in that company’s raising at $72.50 a share. The uplift across the market means the shares are now worth $81.95, a small fortune sidestepped by Mr Blackmore.

In painting this picture of good fortune for the smaller players and lapses by bigger players, we skip over details — the raisings were more accessible to institutional shareholders, who picked up roughly $8 out of every $9 raised in recent months.

Nonetheless, it is an unprecedented period for retail investors. For long-term investors, the way to look at it is that we are still under par on our sharemarket investments, though far from shattered. The ASX 200 is now down by less than 10 per cent compared to the same period a year ago.

Needless to say we don’t know where this market will go from here, except to say on traditional metrics such as price-earnings ­ratios it is overpriced.

But perhaps the best way to look at this unique period on the local market is to review your investment position now. For many investors, the rebound may well show them getting square — total returns boosted by capital raisings and dividends may ultimately haul many portfolios back into the comfort zone.

The issue now is to review again with the benefit of hindsight. Are you diversified? Is there cash to spare for any more opportunities or capital raisings that come your way?

The drama is far from over.

Wealth Editor James Kirby presents Your Portfolio, a series of Facebook live Q&A sessions each Wednesday at 7.30pm.