what to market wants to hear, page-18

Looking over recent threads, there appears to be a lack of understanding over the management of Hunter Hall's holding. As an ex-fund manager, I thought it may be useful for some of the posters to get an insight into how a large institution will manage its holding in a small cap stock from someone who has been on the inside doing just that in the past (albeit in Japanese stocks).

First, when an institution buys into a small cap it adopts a huge amount of liquidity risk. HH's latest reported holding in BLK is 35 million shares. The company roughly trades around 2 millions shares a day. As a rule of thumb, an institution never wants to be above 20-30% of daily volume. You don't want to move the price of the stock every time you build or sell down a position in the market. So in BLK's case we are talking about roughly 500k a day. So to move 35 million shares would take 70 days.

However, it is slightly worse than that since if you are a relentless seller every single day, the market soon realises this and bids dry up. Who wants to buy today when you know you can buy cheaper tomorrow. As a result, your in-house dealer executing the trade will play cat and mouse trying to mask the long term sell. On some days, the dealer won't participate at all in order to try and draw bids back into the market. So, in reality, to unwind a 35 million share position in the market would take well in excess of 100 days. True you can deal off market and ask a broker to hawk a block of stocks around. But by definition the buyer will be another institution and they will figure out who the seller is and look for a steep discount. If they think you are a distressed seller in particular, they will rip your throat out. So that is not an easy exit either.

One hundred days to exit a position is a horrendous liquidity risk. As a result, HH would only have bought into BLK as a strategic long-term holding. The investment thesis would not have been quarterly based. Unless some news flow comes out to refute the long-term strategic buy investment thesis, short term news flow will be viewed as irrelevant. So teething problems over the mill or missing a quarterly production target due to flooding won't be catalysts for a trade decision. Basically, HH, by going in the first place in such size, gave up the opportunity to tactically trade the stock.

Next up is to note that neither the ASX change in substantial holdings notice dated 20 March and 6 March relate to any actual sale or purchase of BLK stock. Under ASX rules, if Company A takes a substantial stake in Company B that has a substantial holding in Company C, then A has a substantial stake in Company C and most report it. Peter Hall did own 40% of Hunter Hall via his various investment vehicles, but he has now sold out. So HH didn't actually cease to become a substantial holder of BLK at that date.

The last actual real change in HH's holding in BLK was notified on 17 February and showed that 1.3 million shares had been sold between 4 Jan and 15 Feb. That's a run rate of roughly 50k shares a day, which just shows how much time it takes to unwind a position. Since then, we have had no new announcements.

The next question is: will the departure of Peter Hall have any impact on HH's stance to BLK. When a charismatic fund manager leaves, the firm employing him is invariably hit by redemptions. BLK will have been held across multiple funds at HH, and likely different funds would have different redemption requirements, some monthly and some possibly quarterly. You also have to give advance notice to allow a fund manager to raise cash to meet redemptions. So it is possible that the current fund manager has been selling BLK to raise money to meet end-March redemption requests but the ASX notice hasn't come out yet. Again, however, this selling will have nothing to do will BLK's actually performance.

We can, however, get an idea of HH's stance toward gold stocks from their March 17 presentation on the takeover:

http://www.hunterhall.com.au/pdf/Announcements_ASX/2017_03_21_ASX_HHL_HHV_Shareholder_Update.pdf

In this presentation, we learn that HH has a one-year performance of minus 12.6% against MSCI plus 12.7%. Peter Hall's frustration over a 25% underperformance is likely the main reason he walked. The underperformance came from 2 of their key holding blowing up - Sirtex and Votex - and a Peter's huge bet on gold which went wrong post Trump. The new team has unwound the gold trade, with gold miners going from 17% as of 1 September 2016 of the portfolio to 3% now. The question then is whether they kept the BLK position purely because of liquidity related issues or because they like the holding and wanted to keep a residual, high-leveraged position in gold.

We may get a little hint over their thoughts given the non-action around the placement. We know BLK was able to get away 51 million shares at 68 cents in a heavily oversubscribed issue. If HH had really wanted to dump a slug of BLK due to either redemption considerations or due to their newly found hatred of gold stocks, they could have had their broker approach institutions who hadn't filled their subscription and offered BLK at a discount to the 68 cents. They don't appear to have done that.

In conclusion, unless we see a new ASX announcement of an HH reduction in their BLK position in the next few days as we get to month and quarter end, I think it likely HH is sitting tight in their BLK position. And regardless of that, HH definitely would not be selling BLK due to BLK coming up a couple of thousand oz short for the March quarter.