From the highly successful microcap funds manager Acorn Capital comes a new listed investment company (LIC), aiming to give investors a unique exposure to the companies at the smaller end of the stock market – some of which can grow very large indeed.
The $100 million Acorn Capital Investment Fund Limited, which has been given the Australian Securities Exchange (ASX) code ACQ, will invest in a diversified portfolio of “microcap” companies, which Acorn Capital defines as anything outside the Top 250 listed ASX companies by market capitalisation – which means companies valued at $450 million or less.
But what makes the Acorn Capital Investment Fund unique is that it has a “hybrid” strategy of also investing in unlisted small companies.
Where the company’s universe of listed micro-caps comprises about 1,600 companies, it is also able to invest in 13,000 proprietary companies that are not on the stock market.
Acorn Capital, is the largest – and longest-running – specialist microcap manager in Australia. Established in 1998, it has a very sound long-term track record of managing microcap stock portfolios for institutional investors, and has $1.1 billion in funds under management. Acorn is a ‘substantial shareholder’ – meaning that it owns 5% or more of the capital – in 53 companies.
Acorn has run a number of institutional portfolios since 2009 that use the same “hybrid” strategy as the Acorn Capital Investment Fund: the strategy has returned 25% a year (before fees and taxes) since inception.
Acorn’s familiarity with microcaps is a big plus: the nether regions of the stock market are not for the faint-hearted. Microcap stocks are generally not covered by research analysts, which is a risk, but also a big opportunity. Because most investors know little about microcaps, someone that spends the time getting to know them can arbitrage that information gap into a large capital gain.
If a microcap investor gets it wrong, they might not get out of the stock. But such investors live on the rule that while their losses are limited to 100%, their gains are not.
Ten years ago 30% of the current S&P/ASX 250 constituents were either listed microcap companies, or unlisted companies that subsequently listed as microcaps. Examples of listed microcaps that graduated to the S&P/ASX 250 are Aurora Oil & Gas, which has generated total shareholder return (capital gain plus dividends) of 44% a year over that time; Monadelphous, which has returned 40% a year; and Sphere Minerals, which is up 30% a year.
Examples of private companies that have listed as microcaps and kicked on are Reject Shop (30% a year since June 2004), Domino’s Pizza (30% a year since May 2005) and G8 Education (26% a year since December 2007).
As an LIC, Acorn Capital Investment Fund is a closed-end investment vehicles: after the initial capital raising, investors have to buy the existing shares: the shares trade at a price set by the market. (In an “open-end” fund, like an unlisted equity fund, investors can buy new units at any time.)
This means that unlike equity trusts, an LIC’s shares can trade at less than its net tangible assets (NTA) figure, which tells you the dollar amount of the portfolio’s value that ‘stands behind’ each share. This enables an investor to buy the LIC portfolio for less than its theoretical cost of establishment at the time: but the reverse also applies, and an LIC’s share price can exceed the prevailing NTA.
Exposure to unlisted microcap companies is expected to range from 0% during the initial construction phase up to approximately 50% of the portfolio’s market value. But ACQ will only invest in an unlisted company when Acorn considers it a better relative opportunity than what is available in the listed market. No single investment will exceed 7.5% of the portfolio at the time of investment.
Each $1 ordinary share in ACQ comes with an 18-month exchange-traded option, which can be exercised early.
The base fee is 95 basis points (0.95%) a year, with a performance fee of 20% of any outperformance of the S&P/ASX Small Ordinaries Accumulation Index. The performance features a high watermark – for Acorn to receive the performance fee, the ACQ share price must exceed its previous peak.
