Blue Sky: Glaucus claims ‘fundamentally flawed and materially misleading’

Australian GP hits back at claims from US short-seller that it has misled investors, casting doubt on Glaucus’ research methods and findings.

Australian fund manager Blue Sky Alternative Investments has said that it “categorically rejects” the allegations made by US short-seller Glaucus in a scathing 67-page report published last week.

Blue Sky issued a detailed rebuttal of Glaucus’s allegations in an announcement to the ASX on Tuesday evening, prior to the resumption of trading in its stock on Wednesday morning. The company had requested a further suspension in trading of its stock on Tuesday morning until its response to Glaucus could be published, following its initial suspension on Thursday afternoon.

Blue Sky denied claims made by Glaucus that its fee-earning assets under management were “at most” A$1.5 billion ($1.16 billion; £820.85 million), standing by its previous statements to the ASX that its fee-earning AUM stood at A$3.9 billion as of 31 December 2017 and exceeded A$4 billion on 9 March 2018.

In a conference call with investors and media on Wednesday morning, Blue Sky managing director Robert Shand described Glaucus’s research as “fundamentally flawed and materially misleading” and said what had happened to Blue Sky was “appalling”. “These allegations are false and easy to discredit with the facts,” he said.

Glaucus did not contact Blue Sky at any time before publishing its research, according to a Blue Sky source. There was frustration within the company, too, that Glaucus, unregulated in the Australian market, was able to publish its research in the middle of trading without offering Blue Sky a chance to respond.

Responding to the allegations, Blue Sky said in a statement to the ASX that Glaucus’ “bottom-up” calculation of its fee-earning AUM was based on a series of “incomplete and inaccurate assumptions”.

Agri Investor contacted Glaucus, but it had not responded to a request for comment at the time of publication.

‘Incomplete and inaccurate information’

Glaucus had questioned the value of AUM in each of Blue Sky’s agriculture funds – Agriculture Fund I, II and III, the Blue Sky Premium Beef Development Fund, and the Strategic Australian Agriculture Fund (StratAg).

Blue Sky responded to this by standing by its own calculations of fee-earning AUM, saying that fiduciary obligations to its fund investors meant it could not disclose all of the individual assets in which it invests, the value of individual investments and the returns they generate – and that, rather, it disclosed fee-earning AUM in aggregate and only disclosed investment returns by asset class. Therefore, Blue Sky argued, Glaucus had constructed its analysis by “relying on incomplete and inaccurate information”.

Glaucus’s analysis only attributed A$81 million of commitments to the StratAg fund despite the fund reaching its first close in June 2017, raising around A$180 million of its A$300 million target, as reported by Agri Investor last year and confirmed again by Shand this morning. A Blue Sky source indicated that much of this capital has been deployed and the fund has continued to attract strong interest, with a final close expected around June.

Blue Sky also criticised Glaucus for not considering its significant institutional mandates, with six Australian and 14 offshore institutions investing with Blue Sky through its funds and mandates across all four of the company’s asset classes.

Glaucus alleged that Blue Sky wrongly included advisory mandates as management mandates in its calculation of fee-earning AUM, but Blue Sky denied this, saying that each of its mandates, even if described as ‘advisory mandates’, are in fact a mandate to manage assets from which Blue Sky earns fees on an ongoing basis. This includes the real assets mandate from First State Super, which Glaucus specifically highlighted in its research.

‘’For all 20 of these institutions, we are mandated to manage their capital and they pay us fees. The capital they have already invested with us, and from which we earn these fees, is included in our fee-earning AUM,’’ Shand said. ‘’The capital which they have committed to us, but which is not yet deployed, and is not yet fee earning, is not included in our fee-earning AUM. It is as simple as that.’’

Shand did concede on the call this morning that not all of its investments were performing as hoped, but stressed that this was no different from any other investment portfolio.

“We are proud of our investment track record, which stands at 15 percent net of fees, since inception. We’re also the first to admit that our track record is not perfect,’’ he said. ‘’We manage 80 funds, and there are a small number of assets in that portfolio where the performance is not as good as we would hope. For investors in those funds, rest assured our team is working hard to improve the performance of those assets. But this is obviously no different from investing in a portfolio of 80 stocks.

‘’It is simply not possible for all of those stocks to perform well all of the time. That is the reality of investing. Indeed, if you were to look at this short-seller’s own track record over the last few years, they have got many of their investments wrong.’’

Fee controversy

On Glaucus’s accusation that Blue Sky was “gouging” Australian investors through its management fees, Shand responded by saying that its fees are “consistent with market practice in Australia” and “absolutely fair”. Blue Sky’s ASX statement described Glaucus’s analysis of its fee structure as “misleading” and denied that annual management fees are paid to Blue Sky in advance as Glaucus claimed.

Glaucus claimed that increases in asset values led to increased fees for Blue Sky’s investors, but the GP said that this was only true for open-ended funds, certain institutional mandates and one wholesale closed-ended fund, all of which account for less than a quarter of Blue Sky’s fee-earning AUM. Otherwise, Blue Sky said, the claim is incorrect.

Shand also addressed Glaucus’s allegations about the sale of shares by former managing director Mark Sowerby, who sold 3.365 million of his 8.365 million shares prior to retiring. Shand said that Sowerby made the sale after announcing his retirement and allowing sufficient time after the announcement for the market to price in the news.

Shand said that Blue Sky has referred Glaucus to the Australian Securities and Investments Commission for investigation into whether the hedge fund had misled investors and manipulated the market. He also invited Glaucus to visit Blue Sky’s office in person to “clear up any further misunderstandings they might have”.

Blue Sky’s share price opened at A$8.40 on resumption of trading on Wednesday, down from A$10.40 at the previous close, and closed at A$8.47 after a fall to a low of A$7.51 during morning trading.

In its most recent half-year results for H1 2018, Blue Sky reported total fee-earning AUM of A$3.9 billion, revenue of A$51.4 million and EBITDA of A$22.3 million, as at 31 December 2017, all increasing by more than 40 percent year on year.