Cadence Capital

Cadence Capital Limited: An Excellent Example of Australian Corporate Governance

Damien Laker CIPM, CompoundingHappens.com

12th September 2008 (Revised 22nd September 2008)

In the year ending 30th June 2008, the manager of Cadence Capital Limited wiped-out more than five million dollars of the $35 million that the shareholders owned at the start of the year. In the Managing Director's own words, it was "a year of poor performance"[1]. Despite this poor performance, the manager received almost eight hundred thousand dollars in management fees during the same period [2]. No wonder he wrote that he "... would like to thank our investors for their continued support." [3]

Cadence Capital Limited is an interesting case study on several aspects of the Australian investment management business and its regulation. Cadence is listed on the Australian Securities Exchange (ASX), and subject to all the regulatory scrutiny that public companies in Australia receive.

Despite that, Cadence Capital Limited does not have a majority of independent directors, nor an independent chairman. It sometimes goes for weeks at a time without any shares trading. When the shares do trade, they normally pass hands at a 25% discount to NTA (Net Tangible Assets per share). The board of directors has not announced any plan to improve this situation. The company has a swingeing fee structure, which enables the manager to earn high base fees plus even higher performance fees just for investing the portfolio in cash during a market downturn. The company states on its home page that its number one investment objective is "[t]o ensure it manages money on an absolute return basis", yet its net-of-fee returns have a correlation of 0.79 with the ASX Small Ordinaries Index, and in the twelve months to 31st May 2008, the company's investments underperformed the applicable cash benchmark by more than 20%.

This all seems perfectly acceptable under Australia's system of corporate regulation and investment protection. In that sense, Cadence Capital Limited truly is an excellent example of Australian corporate governance and investor protection.

Detailed Report

The following report examines some questions about Cadence Capital Limited:

Cadence Capital Limited: Some Troubling Questions

Shareholder Democracy (?)

In theory, if shareholders are not happy with the way Cadence Capital Limited is being run, they can exercise their democratic rights at a meeting of shareholders. In practice, it will be interesting to see whether this leads to any particular outcome. We will try to update this page in the future with a report on the 2008 Shareholder Meeting.

The formula for calculating performance fees for Cadence Capital Limited is an absolute travesty, because it gives the manager an each-way bet to receive generous performance fees either by:

exceeding the All Ordinaries index when that index has a positive return; or
by producing a return that exceeds zero (rather than cash, which should be the applicable benchmark for an "absolute return" portfolio).

At a very bare minimum, the success of shareholder democracy could be judged by whether this ridiculous formula is scrapped at the next annual Shareholder Meeting.

A slightly higher threshold of success would be whether the meeting is able to elect an independent director. At the moment, the Chairman of the company also serves the roles of Managing Director, Company Secretary, 50% of the Audit Committee, and he also provides 100% of the investment management services that the company purchases under its generous fee arrangements. No, this paragraph is not an attempt at comedy: it is the reality of corporate governance in Australia in 2008.

Corporate Governance Concerns at Cadence Capital Limited

In the past, there have been very serious concerns about the conflict of interest involved when public company directors provide services to the companies they direct. This is known as "related party dealings". For example, there was huge public outcry (see this report from ABC Radio National) because two directors of Coles Myer (Lyndsay Fox and Solomon Lew) provided a small percentage of the products and services used by Coles Myer. However, in the case of Cadence Capital Limited, the individual who is Chairman (and Company Secretary, etc. ...) of the company provides 100% of the services consumed by the company. As we have seen, the fee arrangements for the provision of these services are extremely generous by any standards. If this does not create concerns about a perceived conflict of interest, what possibly could?

Corporate Governance Campaigner

In conclusion, we need to mention Stephen Mayne, who has nominated for election to the ASX board, on a platform of reform. We wish him well. There is a lot of reform that needs to be achieved in Australian corporate governance.

Other Web Sites

Cadence Capital web site: www.cadencecapital.com.au

Australian Securities Exchange web site: www.asx.com.au

Encyclopaedic Article Rescued from Vandals

This encyclopaedic article on Cadence Capital Limited was vandalized out of existence on an encyclopaedia web site during November 2008. We have rescued if from the archives, because we believe it raises issues that intelligent investors will want to understand. We also support freedom of speech, and we think that vandalizing web pages is as undesirable as burning books.

References

1. Cadence Capital Limited Annual Report 2008, p. 2.

2. It is important to note that the fees comprise management fees and performance fees. There are timing differences between when the fees accrue, and when they are paid.

3. Cadence Capital Limited Annual Report 2008, p. 2.

Update (4th October 2008)

The fate of Ellerston GEMS, a fund that was similar to Cadence in several ways, has now been decided. In the Sydney Morning Herald, Vanda Carson's report "Packer fund drops $56m and Agrees to go off market" tells how the Ellerston GEMS fund started in 2007 with $600 million. The fund is now only worth $544 million. The investment managers have been paid $18 million for their services (!!) At a meeting, 96% of unit-holders agreed that the fund should be de-listed, and that unit-holders should have the option of receiving 95% of the cash value for their units, in a series of staggered payments over the next year.