Update No. 292 – 31/03/17

We’ve reached our FY2017 capacity under the Section 708 exemption for new retail investors. As such, unfortunately for at least the foreseeable future, we will be restricted to adding only wholesale investors.

The Unit Trust will be a Wholesale only vehicle, but we are investigating whether there will be any way we can continue to accept 20 retail investors per annum because I get enormous pleasure from assisting those who ordinarily can’t access such investment options.

Without further ado, the speech that will be given at the official EGP Capital Launch Event tonight:

This speech will form the blogpost announcing our March results, so all investors have the same opportunity to hear how we plan to operate EGP Capital into the future.

EGP Capital exists for one reason:- To make excellent risk adjusted returns for the people who have entrusted their capital to us.

But the underlying motivation behind why it came to exist was to show the fund management industry that there is a better way to do things. That may sound arrogant, and it wouldn’t be the first time I’ve had that accusation levelled at me, but we think we have a better way. We consider ourselves among the most ‘Ethical’ funds in operation today. Many a fund that claims to be ethically constructed, in fact oversees an abhorrent fee structure that belies the very ethics they claim to stand behind.

The days of fund managers gathering huge pools of assets from which they can extract large swathes of fees are not yet over, but the death knell is now sounding. I intend to do everything in my power to be the Jack Kevorkian or Philip Nitschke of these misguided industry structures.

Whilst assisting in cutting the cancers of the current default structures out, I do hope to simultaneously help guide the industry to a better place.

Apart from the poisonous animus of those in the industry who would prefer that the status quo remained unchanged, there are no major risks in pushing for change in the current poor funds management industry situation. In fact there is a truly awesome pool of potential rewards for society.

The statistical fact that as a group, investors cannot beat the index is well understood.

It’s no surprise then that after extracting quite substantial fees, professionally managed funds will also underperform the indices is also well understood.

All that remains then is for those who believe they have a genuine talent for allocating capital to the best investment ideas is to get their business model right.

In my view, the model where no fee or at least the lowest practicable fee that can keep the funds doors open must eventually dominate. Any fee earned must be for performance above some benchmark agreed in advance. Anyone thinking about it objectively will soon arrive at my view that this is the correct model for fund management.

And I can absolutely assure you that there are people who have a talent for allocating capital. People who can be selected in advance and be expected to deliver results that over any reasonable period of measurement will exceed that of the broader market in which these individuals operate.

There are a number of these people in this room tonight and with only a couple of exceptions, their business models look very similar to the one adopted by EGP Capital. I do not consider this a coincidence.

If, over time, we can drive most of the high-cost fund management out of the industry, all Australians will end up wealthier as a consequence. The Australian superannuation system currently oversees around $2.2 trillion of Australian wealth and is expected to speak for approximately $10 trillion of assets within 20 years.

If we assume that about one quarter of that pool of assets is and will continue to be professionally managed by funds charging “only 1%” in management fees, then over the next 20 years, we can expect about $255 billion in management fees to evaporate from the superannuation balances of Australians as a group over this period.

That’s over a quarter of a trillion dollars of lost wealth, just in case $255 billion doesn’t sound horrific enough. Or over two hundred fifty-five thousand million dollars if you prefer. A lot.

I don’t know about you, but the idea of that happening is absolutely horrific to me. You can be assured this awful outcome will not happen without some pockets of resistance. EGP Capital and our fellow no management fee operators are the guerrilla movement of the financial industry, running our own rear-guard action.

We will not stand idly by while innocent victims have their pockets picked by the status quo. We will set an example that is a light that we hope eventually attracts enough interest that people are naturally drawn toward it. That is why we exist.

Most of the people in this room already understood that. I suspect why most of you are here is to learn about what comes next.

We have operated as a private company structure since our inception, in order to keep costs exceptionally low while the concept was proven.

As part of our rebranding to EGP Capital, we have investigated three primary alternative structures to continue to grow the business. The reason for this is that a Pty Ltd company should not have more than 50 shareholders. We have passed that this year and so the structure must change before the financial year ends.

The first option was to become an unlisted public company; we would issue a prospectus, updated annually and permanently have a buyback in place at NTA. A prospectus is a complicated document and there would be considerable cost at least initially in having that produced. However, once in place, this would be the lowest cost structure, because we would not need a trustee, custodian and external registry provider.

The second option investigated was our conversion to a Listed Investment Company (LIC). The idea of an LIC is often very good for the Fund Manager; it provides permanent capital, so it removes the risk of your investors heading for the exit as if somebody screamed fire in a theatre when the market collapses (as it sometimes does). But it also presents the risk – which was unpalatable to me – that our partners would be exchanging their stock at prices which was not a fair reflection of the underlying assets. LIC’s, particularly small, young LIC’s often trade at a discount to their Net Assets and that, along with my own view that LIC’s shouldn’t exist with less than $50m of assets led us to the option we are now pursuing.

Option three involves converting our Proprietary Limited Company to a unit trust. A Unit Trust is a more tax-effective vehicle, Capital Gains-Discounted returns can be streamed, which we can’t presently do. Given our tendency to hold assets for very long periods, this will prove valuable. A Unit Trust is also the most common structure for a fund like ours, so from a selling point of view, it will be helpful to look more like other products, with the obvious exception of a properly aligned fee structure.

Our goal is to grow the fund to its soft-close goal of $50m of Funds under Management as soon as possible. I would dearly love to get that done by the end of calendar year 2018 if at all possible. This goal of rapid growth is important because there is a second phase to the operation of EGP which will commence once the hard-close goal of $100m is reached, hopefully by the end of 2020.

Once we reach $100m of assets, only the management company will be able to add to the fund. $100m was selected because it is a large enough figure that over the next 30 or 40 years we will be able to make meaningful sums of money for a large group of people we really like, but it’s not so large it will impede our prospects of generating truly top-tier returns for decades.

We passionately believe in the zero management fee models. Given that we will be closing at such a small size; it is my intention to use the skills developed getting EGP Capital to where it is today to expand the model throughout the industry.

Once we’ve reached $100m of FUM, I will be looking for hungry young fund managers with strong track records. We will use the experience we’ve gained operating this fund to try to bring more zero-fee managers to market. It is my hope that despite EGP being a very small fund that we can fundamentally change the fund management market by bringing more industry capacity to the model. So if you’re a young fund manager hoping to have your own fund one day, make sure you’re keeping auditable records of your results because I will want some basis for why I should put my faith in you when the time comes.

In finishing up, I’d like to thank all the investors over the first six years who put their trust into an idiosyncratic individual and a previously untried investment concept. As I said in the EGP Capital launch email, you are the Vanguard of a new age of funds management. I’d like to thank Chris Cuffe who was the catalyst for the rebranding that began the phase of the journey we are now on. I’d like to thank Kate Mitchelhill who helped me with the mechanics of the rebranding and my brother, Adam, who keeps the IT aspects of EGP operating at exceptionally low cost and high efficiency.

I’d also like to thank my family, especially my children. They know me and they love me anyway. Mostly I’d like to thank my Wife, Sue. She is the incandescent light that guides me to all that I have done that’s good in my life. The mistakes were all mine and the victories were all borne of Sue’s guidance.

The below table will be updated either later this evening or over the weekend – Tony Hansen 31/03/2017

Apr 1st2011 Jun 30th2016 Current Price Since July 1st 2016 Since Inception Annualised
EGP Fund No. 1 1.00000 1.70130 2.0883*1 22.75%*1 157.99%*2 17.11%*2
Benchmark 37333.23 52006.69  61238.51 17.75% 64.03% 8.60%

*1 after a 31 May 2013 dividend of 2.333 cents per share (cps) plus 1.000 cps Franking Credit, a 31 May 2014 Dividend of 7.000 cps plus 3.000 cps Franking Credit and a 31 May 2015 Dividend of 8.6667 cps plus 3.7143 cps Franking Credit and a 31 May 2016 Dividend of 6.0000 cps plus a 2.5714 cps Franking Credit

*2 calculated based on dividends reinvested

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