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Regal Funds Management: bleak year as returns in key funds plunge 25pc


Falls in Regal compare to rises of more than 7 per cent for the benchmark S&P/ASX 200

Key funds’ returns

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• The Australian
• 10 January 2017

Investment heavyweight Regal Funds Management, which oversees more than $1.7 billion in assets, has recorded some of its worst returns to date across key funds, including the Tasman Market Neutral Fund, which fell by more than 25 per cent in the 11 months ending in November last year.

Regal, headed by former London hedge fund operator Philip King, also recorded a negative 8.48 per cent return for its $179 million Australian Small Companies Fund in that period, a poor performance largely buoyed by the rising share price of lithium miner Galaxy Resources.

The falls in the $250m Tasman fund and the Small Companies fund come as Regal’s largest vehicle, the Long Short Australian Equity Fund, fell 7.37 per cent in the 11 months to November.

Those figures, contained in investor reports obtained by The Australian, compare to rises of more than 7 per cent for the benchmark S&P/ASX 200 Accumulation index during that period.

Regal did not respond to requests for comment, although Mr King in October blamed the fund’s poor performance on a failure to pick last year’s commodities bounce and difficulties delivering returns from shorting stocks. “It’s very hard to be precise in valuing some companies, especially the high growth and high quality companies,” Mr King said at the time.

The Tasman Market Neutral Fund, which has operated since 2007, delivered a 33.28 per cent return in 2015, but recorded negative returns for all but three months for the calendar year ending November 2016.

It dropped 3.97 per cent in November, almost entirely because of long positions in healthcare and energy stocks.

In an update to investors, Regal said “losers for the fund were a collection of companies that have underperformed in 2016 despite being large winners for the fund in 2015 (and very profitable investments over the course of our involvement with each company)”.

“This ongoing rotation out of previous winners into more value focused laggards continues to be a strong trend within the market, and one which we believe is throwing up significant opportunities for investors in some select situation,” the fund told investors.
It is the same explanation Regal provided to investors in its Long Short Australian Equity Fund, managed by Mr King and former Lazard analyst Julian Babarczy, which recorded negative returns for five months last year including falls of more than 5 per cent in January, February and October.

Only its investments in the four major banks and a small number of resource companies pushed that fund into positive territory in November, when it returned 0.99 per cent.

“Despite the current challenging investment backdrop for bottom-up stock picking, we remain favourably disposed to companies that can display above average levels of earnings growth, which are generally smaller to mid-cap companies,” Mr King and Mr Babarczy wrote to investors.

“We believe the recent sell off in the small to mid-cap space has created numerous compelling investment opportunities and it is our expectation that solid (return) generation over the medium to longer term.”

Since inception, the Long Short Australian Equity Fund has delivered an average annual return of 12.23 per cent.

Although Regal did not detail the performance of individual company holdings, it owns a number of stocks that performed poorly over the last year, including Syrah Resources and aged care operator Estia.

Syrah, in which Regal owns $61m in equities, hit a peak of $6.52 per share last June, yesterday closing at $3.48.

Shares in another major holding, pet care operator Greencross, plunged from $7.98 in June to about $6.60 at the end of November, closing yesterday at $7.

In an earlier note, Mr King said Regal had misjudged its investment in Estia, a holding now worth about $29m, after the aged care company’s share price dropped from more than $7.15 to $2.67 at the end of November.

Regal’s Australian Small Companies Fund, which declined 10.4 per cent in November and 17.06 per cent in the preceding three months, is likely to be hit as part of broader instability within the small-caps investment sector.

The Australian reported last week that Australian Super, the country’s biggest superannuation fund, had pulled its mandate with Tribeca Investment Partners while another major fund was preparing to withdraw a significant small-cap mandate worth more than $500m and instead manage the money in-house.