As markets were capitulating during the GFC, Warren Buffett made one of Wall Street’s most famous bets, offering a $1m wager that the S&P 500 would outperform any hand-picked selection of hedge funds over the following decade. Protégé Partners accepted his bet. As is often the case, Buffett came out on top and many people assumed this could be a sort of canary in the coal mine for the industry.
However, the fact that the market went through a historic period of massive returns, low volatility backed by quantitative easing and low interest rates cannot be understated. This lack of volatility and single direction of most asset prices meant hedge funds, who often perform at their best in volatile markets, were almost destined to fail.
However, with the end of quantitative easing and increasing volatility returning to markets in recent years, hedge funds are rearing their heads with some impressive returns in this low growth world.
Navigator Global Investments Limited (ASX:NGI) is a fund of funds manager with significant exposures to the US hedge fund industry. NGI is the ASX-listed parent of US-based Lighthouse Investment Partners, which manages approximately US$14.2b across global markets. Last year NGI purchased the multi-manager hedge fund division of Mesirow Financial, bolting on approximately 40% extra AUM. The company’s main clients include endowments, foundations, institutions, pension funds and large individual investors.
Navigator recently reported FY19 to June 30 results, showing some attrition of funds from its acquired business, but nothing out of the realms of normalcy for an acquired fund. The results reflected the larger amount of AUM managed by the business, with net fee revenue up 29% over the prior period.
One aspect which may have spooked some of the market, its weaker cash flow, was explained by the changing of the timing of bonus payments to staff, as the business moved to June payments from December after the Mesirow integration. The company finished the year with no debt, cash and investments of US$47m and declared a dividend of US$0.09 – a pleasing result in our books.
With management flagging a healthy pipeline of mandates, especially in Japan and Europe, given the strong demand for alternatives with low/negative yields and the potential for new business in the company’s managed accounts segment, we believe the company is well placed to grow into FY20. Its puzzling, in our eyes, recent price fall, has left Navigator with a forecast yield of 7.9% and a healthy growth runway. The company continues to rank highly in our proprietary Clime Quality Scoring model.
Share price (at time of writing): $3.06
Industry: Funds Management
Forecast FY2020 Distribution: 24.4c
Clime Group owns shares in NGI.