Forward looking strategy builds on Ellerston’s past
While Ellerston Capital has been managing money for nearly 15 years, many advisers are unlikely to have heard of it, but as Jason Spits writes, a shift in focus has already resulted in approval from research houses, platforms and advisers.
It is a well-established axiom among fund managers that to get onto a platform and in front of financial planners, a research house rating is essential.
However, Ellerston Capital has found that many planners want more and has spent many hours over the past 18 months being re-examined by advisers who take portfolio construction and their approved product list very seriously.
Ellerston's director of distribution, Adam Coughlan, said he has found boutique and non-aligned financial planning groups asking questions about the manager's performance and capabilities that are on par with the major funds management research houses.
"We have found groups have read and prepared for meetings with us and it is eye-opening the amount of work they have done. When advisers are running their own licence, they are pretty thorough and there is a different dynamic when they front the client and have to give reasons for picking us as a manager," Coughlan said.
Coughlan understands the concerns of the advisers, because while Ellerston Capital has been around since 2002, it spent the first few years of its existence as the investment manager for Consolidated Press Holdings. In 2004 it opened to institutional funds and in 2011 went through a management buy-out to emerge as a stand-alone business.
Yet it was only 18 months ago that it began to focus on the retail side of the market, opening its Ellerston Australian Market Neutral Fund (MNF) to advisers and retail investors after receiving its first research house rating — a Recommended from Zenith — which in turn opened the tap to new inflows.
While retail funds under management are still modest — currently at $100 million — Ellerston is receiving more attention with the market neutral fund winning the Equities (Long Short) category at the Money Management/Lonsec Fund Manager of the Year Awards.
Coughlan, an industry veteran having worked with three large funds management groups before joining Ellerston in 2013, recognises the funds and inflow numbers are part of an evolution in the manager's development.
"We were initially created to manage family money and moved to become a successful hedge fund manager but after the global financial crisis looked at expanding our wholesale capabilities and then our retail capabilities after 2013," Coughlan said.
"The first rating in April of last year opened the gates as it demonstrated we had a quality offering and funds flow has followed but it has taken another six months to get on the major platforms and in front of advisers."
Despite having two Australian equities funds, a global equities fund and global equities listed investment company, the first product pushed out to the retail market was the MNF.
Portfolio manager, Paul Drzewucki, said most advisers in Australia who have a good understanding of the mechanics of the local market understand the reason for a market neutral fund and the value it can provide within a portfolio.
He said the concentration of the Australian equities market, the relatively low level of short interest in that same market, and a mature funds management industry have created inefficiencies and mispricing opportunities that Ellerston aims to exploit by investing in situations where the relative value of two securities trade at unsustainable levels.
Drzewucki said Ellerston is leading with the MNF as many larger managers are concentrating on exchange traded vehicles or ASX 20 style funds and these strategies were so common that there was a need to look at investment approaches that can't easily be replicated.
"With the concentration of the Australian index we have found the top 20 stocks are very efficiently priced while those outside are less efficiently priced. The MNF is not an ex-ASX20 fund but the way we value stocks leads us to hold that position," Drzewucki said.
As a long-short fund, Coughlan said it creates only about a third of the volatility present in the market and is negatively correlated while working off a cash benchmark, with the intention to retain capital and produce performance at five per cent above the cash rate through the market cycle.
"This is an objective we can meet and we know many funds do not do that and financial advisers have become cynical about performance objectives. We are also aware that the world we are in now will not be the same at the back-end of the cycle," Coughlan said.
While Ellerston is keen to find a greater presence in retail and increase the funds under management in the MNF, which currently has around $100 million, Drzewucki said it would keep an eye on how much comes into the fund and what it could do to the long-term goals.
"We have capped the strategy at $750 million as we want to be sure we can maintain the performance objective. We want to provide downside protection in an Australian equities portfolio and true skill that cannot be replicated, but we are not an asset gathering shop."
Ellerston Capital
Year manager was founded: 2004
Number of Employees: 34
Key Personnel
- Managing Director/ Chief Executive Officer: Brian O’Sullivan
- Chairman & Chief Investment Officer: Ashok Jacob
- Head of Equities: Chris Kourtis
Investment styles used: contrarian, high conviction, benchmark independent investment management
Asset Classes covered: Equity strategies, global, global long/short, Australian & Asian equities large and small cap, market neutral.
Leading Fund: Ellerston Australian Market Neutral Fund
- Minimum investment amount: $25k or via platforms
- Fees/MER: 1.2 per cent + 20 per cent performance fee over cash
- Last 12 months performance of fund: 14.2 per cent
- Research house ratings for fund: Lonsec Recommended; Zenith Recommended.
- Major platforms through which fund is available: BT, Asgard, Macquarie, Hub 24, Mason Stevens, Linear, managedaccounts.com.au
Total Retail FUM: $100million
Total Wholesale FUM: $30 million
Total FUM: $130 million
AUTHOR
Jason Spits
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