ASIC orders Perpetual to temporarily stop offering two funds holding over AU$500 million

Rick Steves

As at 30 September 2022, the Perpetual Pure Microcap Fund held $114.43 million in assets under management and the Perpetual Geared Australian Share Fund held $399.65 million in assets under management.

The Australian Securities and Investment Commission has issued interim stop orders preventing Perpetual Investment Management Limited (Perpetual) from offering or distributing two funds to retail investors.

The regulator claims there are deficiencies in the products’ target market determinations (TMDs) and the interim orders are meant to protect retail investors from potentially investing in funds that may not be suitable for their financial objectives, situation, or needs.

Perpetual funds too risky for retail investors

The orders are valid for 21 days unless revoked earlier. The funds are the following:

  • Perpetual Pure Microcap Fund – invested solely in a portfolio of Australian microcap equities. Microcap equities carry a significant level of risk due to high price volatility, shallower market depth (with few traders and turnover in share transactions) and the limited operational history of microcap companies.
  • Perpetual Geared Australian Share Fund – invested solely in a portfolio of Australian shares and employs leverage, with the fund being able to take on debts valued at up to 60% of the fund’s total assets. The fund’s investment strategy comes with elevated risks, including the potential for a high level of price volatility and the use of leverage, which increases the chances of investors incurring large losses.

The interim orders stop Perpetual from issuing interests in, giving a product disclosure statement for, or providing general advice to retail clients recommending investment in the Funds.

According to ASIC, Perpetual may have failed to appropriately consider these features and risks in determining the wide target markets for the funds. The TMDs for both funds include investors:

  • with a capital preservation investment objective;
  • intending to use the product as a core component (25-75%) or satellite component (up to 25%) of their investment portfolio;
  • with a potentially low, medium or high risk and return profile;
  • with a ’Medium’ investment timeframe (under 2 years and up to 8 years); and
  • with a need to withdraw their money on a daily and weekly basis.

Lack of distribution conditions

The government agency also found the target market determinations to be non-compliant with DDO requirements because they did not include any distribution conditions.

Under DDO, Perpetual must define target markets for their products appropriately, having regard to the risks and features of their products. Issuers also need to consider how their product will reach the target market and have appropriate distribution conditions in place to ensure the product is directed towards the target market.

If Perpetual does not take immediate steps to ensure compliance, ASIC will consider making a final stop order, but the firm may still make submissions before a decision is made.

As at 30 September 2022, the Perpetual Pure Microcap Fund held $114.43 million in assets under management and the Perpetual Geared Australian Share Fund held $399.65 million in assets under management.

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