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Questions of the Week

Answers by Paul Rickard

As a long standing shareholder in Ramsay Health Care, should I continue to hang on? How has the Australian share market performed compared to other major world share markets? Why is Xero doing a share purchase plan rather than a rights issue, which is fairer to all shareholders? What are “long/short” funds, and can you recommend any?

Question 1: I’m a long standing shareholder in Ramsay Health Care. It seems to have been doing a lot of work in the “thirties” and is now starting to move higher. Should I continue to hold?

Answer: I think I would hold. Ramsay does appear to have found a bottom in the low “thirties” and has recently started to move higher. While the major analysts are all “neutral” on the stock, a few have marginally raised their target prices citing a possible improvement in the local operating environment from higher fees paid by the local insurers and a valuation upside from an in specie distribution or divestment of Ramsay’s 52.8% stake in Ramsay Sante (a major owner and operator of hospitals in France).

According to FN Arena, the consensus target price is now $38.29, which is approximately 2.6% lower than the last ASX price of $39.31. The range of target prices is very tight, from a low of $37.10 through to a high of $40.

 

Question 2: I keep reading that Australian retail investors are very underweight international shares compared to the exposures taken by big super and other institutions. How have Australian shares performed over the last this year compared to other international markets? Answer: The Australian share market has underperformed most other major share markets.

Over the last 12 months, the S&P/ASX 200 has risen by around 9.3%. Compare this to other markets:

 

Question 3: Why is Xero having a share purchase plan rather than a rights issue? Isn’t a rights issue “fairer” to all shareholders?

Answer: Xero is following the lead of other major companies undertaking a capital raising.  It is doing an institutional placement to wholesale investors and a share purchase plan for retail investors. The main reasons to do it this way are that it is quicker, doesn’t necessarily require underwriting and a prospectus is not required.

A share purchase plan, which is capped by law to a maximum participation of $30,000 per investor, doesn’t require a prospectus to be issued. A rights issue, however, needs a prospectus.

Share purchase plans are “great” for small retail shareholders, and hugely discriminatory for “large” retail shareholders.

There is no doubt that a rights issue is fairer to all shareholders.

 

Question 4: What are “long short funds”’? Can you recommend any?

Answer: Long/short funds have both “long” and “short” positions. That is, stocks purchased because the Fund thinks they will rise, and stocks short sold because the Fund thinks they will fall in price. Usually, they will own more “long” positions than “short” positions.

The L1 Long Short Fund (ASX: LSF) claims to be “Australia’s best performing long short fund since inception in 2014”. It boasts a return of 11.0% pa over that period, 1.6% per annum higher than the S&P/ASX 200 index. In more recent times, however, it has underperformed. In the year to 30 June, it underperformed the index by 6.6%. For the 3 years, it has underperformed by 2.5% pa. The Regal Australia Long Short Equity Fund has also underperformed over the last 1 year and 3 years but outperformed over 5 years and longer periods. Investment management fees for long short funds are typically high and there are also performance fees.