Is the Fat Prophets Global Contrarian Fund Ltd a buying opportunity?

Want fat profits, try Fat Prophets? The Fat Prophets Global Contrarian Fund Ltd (ASX: FPC) is a relatively recent Listed Investment Company (LIC) that listed on the ASX just under 12 months ago.

This LIC invests globally in securities (e.g. shares) and also trades commodities, currencies, and derivatives including futures and options. These are complex financial products that many investors may not understand or may not be able to use personally – which could mean that the Contrarian fund may have something to contribute to a diversified portfolio.

Fat Prophets says that its fund has been fully invested since June 2017, and it delivered 13% in positive performance (pre tax) in the half. Net tangible assets per share were $1.23 (pre tax) compared to the share price of $1.06.

Currently, the Fund is invested heavily in Japan (40% of its assets) and also has interests in Macau gaming companies, Disney, Praemium Ltd (ASX:PPS), several large oil companies, and Chinese internet giant Baidu.

Would Fat Prophets be suitable for investors?

Potentially yes, as many investors could benefit from additional international diversification. The Fund’s ability to use options and futures may also add some diversification, but it also adds significant risk, which is why the qualifications and the track record of management is paramount.

However, one thing I really don’t like about this fund is the fees. There’s a 1.25% per annum management fee (which is acceptable), and a 20% performance fee with no minimum benchmark. That means that, of any performance generated, 20% gets paid to the manager.

Many other LICs and managed funds have a minimum benchmark where performance fees are only charged on returns in excess of a certain benchmark, usually the S&PASX/200 Total Return Index (ASX: XNT) (INDEXASX: XNT). So for example if other funds return 12% and the benchmark returns 10%, investors only pay performance fee on the 2% excess that was generated.

If I understand correctly, with the Global Contrarian Fund it appears that investors would pay performance fees on the entire 12% return, which would consume a lot of the benefits. The Fund does appear to have a high water mark, which prevents performance fees being charged if assets fall below their previous high point.

Still, all else being equal I would expect this fee arrangement to result in lower returns to shareholders. As a result I think investors should watch and wait to see if the Global Contrarian Fund is able to consistently achieve performance that justifies the fees before investing.

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Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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