More good work by Elizabeth Knight at The Age. Here she interviews Chad Slater from Morphic Asset Management on red flags at fund manager Blue Sky Alternative Investments (BLA).
“It doesn’t actually come as surprise to me that Blue Sky (BLA) has been singled out as a short. I have been contacted on a number of occasions over the last two years as to my thoughts on BLA’s business model from a short-sellers’ perspective. Many of the issues raised by Glaucus were raised in those phone calls as a concern previously.”
These include, firstly, “a business with internally valued assets”.
“Businesses with assets that are ‘marked to market’ by company paid affiliates (auditors etc) are vulnerable to manipulation as the incentives are there for management in bonus payments, to hire someone to tell them what they want to hear. Now clearly not all companies will do this, but it is a murky area. Definitely a flag.”
Flag number two, he says, is when the CEO and founder suddenly leaves and cashes out a large portion of his wealth.
Another thing Slater says to watch for is “a very young senior team that has a background in management consulting rather than industry”.
Lastly a company that has grown very rapidly from a small base is another flag, he says.
While the last point is not necessarily a red flag, the first three are clear warning signs. Especially “a very young senior team that has a background in management consulting rather than industry.” I have witnessed the dangers of that first hand. Academic brilliance is no substitute for experience.