Why one of the market’s savviest investors put his money in a rival’s fund
Cheap money has led to surging market valuations over the past few years, with so-called “value” investors left behind if they are unwilling to invest in the latest market fad.
But that hasn’t stopped some long-term value investors achieving stellar returns.
Knight of the realm Sir Ron Brierley’s latest corporate vehicle Mercantile Investments has outperformed the flagship fund of popular investor Geoff Wilson’s WAM Capital.
A comparison of the share price performance of WAM Capital (ASX:WAM) with Mercantile Investments (ASX:MVT) puts the Brierley-managed listed investment company well ahead.
See share price graph below.
Sir Ron took control of Mercantile Investments five year back.
Since then, Mercantile shareholders have enjoyed about a 75 per cent gain, which has well and truly eclipsed the 40 per cent rise of shares in WAM over the same time frame.
Like most listed investment companies, Sir Ron’s Mercantile vehicle trades at a discount to the investments it holds (around 15 per cent at the moment) — a headwind when it comes to comparing with shares in companies like WAM, which trade at a premium.
Also buoying WAM is the handy yield it pays at a time of low interest rates.
Many brokers claim that if interest rates return to former levels, this will wipe out much of the premium WAM shares enjoy.
By comparison, Mercantile doesn’t pay a dividend, although its investors were able to subscribe to notes it issued a few years back which carry an 8 per cent coupon.
Mercantile has invested in an eclectic mix of businesses, from the biggest stake in retirement village and caravan park outfit Ingenia, to a run-off insurance book of Tower Insurance in NZ, to a UK investment fund Worsley.
It is even the biggest shareholder in a UK hotel, the Hydro Hotel at Eastbourne.
“Sir Ron is the major shareholder, driver and captain,” as one figure close to the company put it of the octogenarian’s role at the company.
Sir Ron’s surprising backer
But while Mercantile Equities may be overlooked by a lot of the smart money in the market, it does boast Wilson as a backer.
He has 9.5 per cent of the shares, making him the second largest investor.
“Mercantile was originally a listed investment company called India Equities,” Mr Wilson told Stockhead.
“It was in run-down mode and I personally bought 20 per cent of the shares, then called a shareholder meeting and rolled the board.
“Around the same time, Sir Ron was leaving [his investment vehicle] GPG and looking for a new vehicle.
“The NTA was 6c a share with a market value of $7 million.”
(NTA or net tangible asset backing is the underlying value of the securities which underpins the share price).
“Sir Ron said ‘I’m happy to put in $7 million at 8c a share or a 33 per cent premium to NTA’.
“I said ‘that’s a great idea’.
“So my 20 per cent got reduced to 10 per cent. Sir Ron got control and he’s now turned 7c a share NTA into 20.51c a share. So everyone should be very, very happy. “