The Insider

Pirates fail the sniff test (Part 1)

Henry Morgan Pirates fail the sniff test but pull out a 240% return for investors – Arrr or is it Arrrgghh!

In light of the number of new Listed Investment Companies (LICs) that have come to market over the last year, I felt it would be beneficial to write about the analysis we did for a LIC we didn’t invest into.

The value of advice and analysis of investments we turned down can be easily overlooked. The benefit of advice is as much avoiding the disasters as it is picking the most suitable investments.

Below is some of the thought process that went into considering a new LIC, why we didn’t invest and Part 2 will cover why we still feel this remains uninvestable after another year with a 100% gain;

Arr me hearties

In late 2015, I turned my nose up at Henry Morgan, a Listed Investment Company named after a pirate, investing in a managed futures strategy.

These were the reasons to invest;

  • The track record was an impressive annualised return of 99%pa over the 3 years to date
  • The fund aimed to make money in both rising and falling markets
  • Dividend Payout Policy of distributing 50% of Net Profit After Tax
  • They had previously raised funds in an LIC listed on the National Stock Exchange of Australia (NSX), John Bridgeman Ltd (JBL.NSX)

Reasons not to invest;

  • Lack of pedigree – I have never heard of the manager
  • I doubted the investment returns of 99%pa – Why hadn’t I already heard of this manager producing 99%pa
  • Such a small raising of $14 Million meant that liquidity would be an issue for us to exit with our clients
  • Fees were high – 2%pa plus 23% performance fee
  • The company is named after a pirate. It is my view that silly names can be indicative of the company’s risk management. Ie measured individuals understand the implications of first impressions that a name produces

Nevertheless, I’m always willing to look at a manager doing something different especially one that has managed to produce 99%pa returns, so I looked a little closer to question my initial thoughts.


The team was apparently a handful of individuals with Stuart McAuliffe being the primary driver of investment returns. He had no formal experience in managing money other than running the wholesale fund quoted and was still a lecturer at Bond University in the Faculty of Society and Design.

Conclusion – Uninvestable


2%pa plus 23% performance fee is very high and in excess of established players. Winton at that time charged 1.88%pa plus 20% performance fee. They are widely considered the leaders in the market managing in excess of $30 Billion, having demonstrated their ability to provide investor returns over a prolonged period. By contrast, John Bridgeman Ltd was a startup and cannot justify the fees.

Conclusion – Unless they can explain their returns, they cannot justify charging these fees

99%pa returnsRocket Returns 99%pa

Clearly the biggest attraction is the spectacular returns, but having been round the tracks, you naturally question how much risk is being taken to achieve those returns. The investment strategy boasts a Managed Futures trading strategy yet arguably some of the biggest managed futures funds in the world managing Billions of dollars, Winton, Man Investments and Aspect struggled over the last few years. For the purpose of perspective Winton produced a return of around 10%pa over the same period.

I also called and discussed the strategy with the manager, I wanted to know how they were producing spectacular returns with a small team, were they leveraging the investment and how big was the wholesale fund they had managed (Aliom Managed Futures Fund No.1).

I finished a 15 minute conversation rubbing my head wondering what he was talking about. I have used Managed Futures strategies within client portfolios for a number of years, I know I have a fairly good grasp on how the strategies should work and behave in different market conditions, yet I was at a loss of what they were doing to produce the returns and no idea how much they were managing other than it wasn’t tens of millions.

Conclusion – Uninvestable

Brother/Sister Pirate

It would also be prudent to look at how the brother/sister pirate company has traded since listing, John Bridgeman Ltd (JBL.NSX). A cursory look at the prospectus revealed the fees generated from Aliom Managed Futures Fund No.1 which allows you to calculate the average level of funds under management over the years 12/13 and 13/14.

Retrieved from prospectus

This indicates that using 2% management fees, the total Funds Under Management (FUM) were an average of $255k in year 1 and $652k in year 2. The returns dropped considerably in year 3.

I would guesstimate that the manager started with $150k and grew that to over $1.12 Million in just under 3 years with the spectacular returns yielded over years 1 & 2.

Three years managing money is not a track record and managing $150k or even $1 Million is considerably different to managing $15 Million and the low level of FUM and income generated would suggest that this is a one/two man operation managing their own money.

Conclusion – Uninvestable


Update 25/09/17 – I should have read the prospectus more closely,  the end of year FUM is disclosed and is in line with my thinking.

Aliom Managed Futures Fund Assets

Our overall view on Henry Morgan

Overall, this exercise raised a lot more questions than it answered;

  • Why would a lecturer in an unrelated field be a good fund manager?
  • Where have the returns come from?
  • Who’s money was being invested in Aliom Managed Futures Fund No.1?
  • Why was the small FUM not disclosed as a material consideration in the Henry Morgan (HML.ASX) prospectus?
  • Are the returns fictional?
  • Are the returns a product of outsized bets and leverage?
  • If the returns are genuine, why are they trying to raise money instead of just investing their own funds? I would expect that genuine outsized returns would quickly be eroded by slippage on larger trades and the increase in fee income would be offset by the reduced returns on their own personal portfolio
  • If the returns are genuine, then why aren’t institutional investors knocking their door down to invest hundreds of millions of dollars?

As a result, we could not recommend Henry Morgan Ltd to our clients. It subsequently went on to become the darling of Listed Investment Companies with the share price hitting a high of $2.09 plus the free option trading at $1.10 post a 20c dividend.

In light of the 240% return, you could argue that this was a bad decision, but our job as advisers is not just to provide the best potential for return, but the best risk adjusted returns specific to your needs (comfort and understanding of risk and the products). In this instance, even we were unsure what we were investing into and therefore unable to measure the risk being taken to achieve the returns.

We looked at Henry Morgan again in February 2017 when Benjamin Hornigold (BHD.ASX) came to market. Part 2 discusses the reasons why we felt unable to invest again after another year of 100%pa return.

Part 3 provides a detailed analysis of Henry Morgan’s inconsistencies in late 2017

Comments | Click to comment

Perhaps they think we are all drunk with Rum

Peter, 5 October, 2017

I think they Arrrrr.

To be fair, I believe Henry Morgan was knighted, regardless, a pirate he was

Sulieman Ravell, 6 October, 2017

With all these pirates, you should invest in rum…

Peter, 9 October, 2017