Australian Equities – Absolute Return
MM&E's investment philosophy uses a limited number of event-driven strategies to generate consistent returns. The generation of these returns relies on both the discipline and experience of the investment team, as well as the regular occurrence of appropriate and profitable situations on the ASX.
All of the absolute return funds managed by MM&E employ the following strategies in a near identical manner:
Primary short to medium-term event driven strategies
- Takeover and Demerger Arbitrage
Takeover arbitrage, in which members of the investment team have many years experience, usually involves the purchasing of securities in target companies and sometimes the short-selling of securities in acquiror companies after a takeover deal has been announced. Profits are made because target shares often trade at a discount in both scrip and cash bids. In addition, bidding companies are often forced by target directors to increase their initial bids, and rival bids for target companies also sometimes emerge.
With regard to demergers, shares are purchased in the company proposing to demerge, while short-dated out-of-the-money call options are often written against the underlying long share position.
The time frame for this category of investment is usually three to six months.
- Convertible Security Arbitrage
This involves buying a company's convertible preference shares and short-selling its ordinary securities in the appropriate ratio within three to six months of the conversion date. Profits are made because such convertible securities often trade at a discount as high yield funds (which either cannot or do not want to own ordinary securities) often decide to sell their convertible share holdings during the six months prior to conversion. This category of investment requires both thorough knowledge of the convertible securities' original issuing document (i.e. their prospectus) such that all the relevant terms and conditions of conversion are fully understood, as well as the ability to short sell ordinary shares in the appropriate ratio.
- IPOs, Placements, Sell Downs and Rights Issues (Collectively "Capital Raisings")
This strategy involves buying securities (sometimes offered exclusively to professional investors) at a discount to market because some form of capital raising or sell down is taking place. This category of investment usually takes one to three months, and is generally profitable because the securities involved are often issued at a discount in order to complete the capital raising or sell down in a short period of time. Short-selling techniques are frequently employed to enhance returns here.
Secondary investment strategies (used when there are insufficient primary investments available) are as follows:
- Listed Income Securities
Surplus cash is used to purchase listed income securities that have a S&P BB credit rating or better, and pay a floating rate of interest on a quarterly basis.
- Buy and Write
Top 50 stocks are purchased (usually near the time they go ex-dividend) and SFE and/or ASX-listed call options are 'written', or sold, against these stock holdings in an effort to generate low risk income (in addition to the dividends required).
- Cash
A certain proportion of the portfolio will always be held in cash to facilitate the participation in any primary investment opportunities which appear. Cash is always held on deposit by the Prime Broker and earns a market rate of interest that is calculated daily and paid monthly.
In general, all secondary investment categories are designed to be liquid (able to be exited in one to three days) in the event that primary investment opportunites become available.
