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International Fund Update: Barramundi

 

Barramundi has long history of appearing in portfolios for retail investors looking for Australian exposure and a very attractive dividend yield. Barramundi is a well-diversified fund made-up of small to medium sized Australian companies, trading on the NZ share market, offering high growth potential to NZ investors. On the surface, the fund represents a favourable opportunity for NZ investors to achieve high dividend returns and diversification outside of NZ.

 

Look below the surface and one question remains, is the dividend sustainable? 

The first issue worth addressing is the level of income the fund is required to generate to provide the dividend.

For the six months ended 31 December 2016, Barramundi enjoyed fair value gains on their portfolio of $1.37m, while cash income was only $1.44m. Barramundi spent $2.53m on dividends, which means the fund paid out 1.75 times its cash income to shareholders. Hence, why we are asking whether the dividend is sustainable.

 

How did Barramundi fund the dividends?

Barramundi sold $37.8m of investments for the 6 months ended 31 December 2016, of which $29m was used in purchasing additional investments, the remaining $8.8m was used to boost cash & cash equivalents by $5.5m, operating expenses of $1.9m, and contribute $1.3m to the dividend.

The $1.3m added to the dividend was not sufficient to erode capital, as Barramundi enjoyed changes in fair value on Australian equity investments of $1.37m. However, the margin is negligible. If the Australian equity investments were to drop back 0.08%, this margin would cease to exist.

 

What about capital appreciation?

Barramundi’s net asset value (NAV) has dropped a cumulative -19.75% since 2012, and the share price has dropped -4.4% over this same period. The drop in NAV equates to an average annual return of -5.35%. If you view the negative capital return in partnership with the relatively high dividend yield, you will likely find the overall return to be quite disappointing for a fund that is focussed on high growth companies.

 

The 2016 half year has been relatively smooth for Barramundi, so how do the financials compare on a historical basis?

In the 2013 half year, Barramundi experienced a year of significant underperformance, gross performance of 0.4% and underperformance of -5% relative to the Benchmark Index.

In that same year, Barramundi experienced fair value gains on the Australian equity portfolio of $814k, so when you combine the fair value gains with cash income received of $1.39m, the balance of total comprehensive income received totals $2.2m, of which they paid-out $2.3m in dividends + share buybacks and warrant costs of $1.2m = $3.5m. The dividend coverage margin on total comprehensive income in 2013 was -$1.3m, so they paid-out capital.

 

What about fees?

Barramundi have a relatively fixed management fee of 1.25% p.a and a performance fee of 15%. The management fee can be reduced by 0.1% for every 1% of underperformance relative to changes in the 90 Day Bank Bill Index.

 

Is the dividend Barramundi is paying to investors sustainable?

Yes and No.

The very small margin between income available for dividends and the dividend paid exposes Barramundi to significant market risk, especially the sustainable nature of the dividend. For the half year ended 31 December 2016, Barramundi paid out slightly less than their total comprehensive income, but it’s only a matter of time before the dividend is cut on a poor performing year.

 

Let 2013 be a lesson to investors that Barramundi does not always generate a sufficient return to meet the dividend payments, and will on occasion pay out capital to meet investor demand for income.

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