Spheria launches small cap LIC

25-Oct-2017

By Sarah Kendell

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Small cap manager Spheria Asset Management will launch a spin-off listed investment company (LIC) following the success of its Australian Smaller Companies Fund, as it looks to cater for increasing investor and adviser demand for direct investing options.

Addressing media at a launch event in Sydney yesterday, Spheria co-portfolio manager Marcus Burns said the new LIC, Spheria Emerging Companies Limited, was unique in the market due to its focus on small companies with high cash flows and low gearing levels.

“We want businesses to generate good cash flows because they are something real that can repay you over time, and they are defensive in that if we go into tough market environments businesses that don’t have cash flow will struggle to survive,” he said.

“We secondly look for balance sheets that are not overgeared because in a downturn that can come back to bite you aggressively.

“Many of our peers encourage companies to gear up to get that sugar hit from a deal, but we find that adds a lot of risk to a company because you are often buying a business you don’t know very well so you are potentially adding more risk to what you are doing.”

Burns said the LIC, which had received a highly recommended rating from Lonsec prior to launch, would typically hold between 35 and 45 stocks at any one time.

However, it would not be an exact copy of the Australia Smaller Companies Fund portfolio due to the way markets had moved since that fund’s inception.

“The [Smaller Companies] fund has things like Platinum and Blackmores that have performed really well and we think they are now getting fully priced so we wouldn’t necessarily go out and buy those same shares,” he said.

“We will look at the market today and work out if we had a dollar to deploy from scratch what is the best way to allocate that money. Over time the small cap fund will adjust and they will be almost identical in 12-18 months’ time.”

The general offer for the LIC launch will close on 24 November, with 125 million shares available for purchase at a subscription price of $2.00 a share.

No oversubscriptions would be offered as capacity in the fund was limited, the fund manager said.

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