ASIC has issued interim stop orders preventing Perpetual from offering or distributing the Pure Microcap and Geared Australian Share fund to retail investors because of deficiencies in its Target Market Determinations.

The orders are valid for 21 days unless revoked earlier.

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.

ASIC made the interim orders to protect retail investors from potentially investing in funds that may not be suitable for their financial objectives, situation or needs. To date, ASIC has issued 17 DDO interim stop orders, including the orders for these funds.

The Perpetual Pure Microcap Fund is 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.

The Perpetual Geared Australian Share Fund is 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.

As of 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 AUM.

ASIC said it is concerned that Perpetual has not appropriately considered 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.

Furthermore, ASIC considered that the TMDs did not meet the appropriateness requirements under DDO because they did not include any distribution conditions.

ASIC reminds financial product issuers that under DDO, they 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.

ASIC expects Perpetual to consider the concerns raised regarding the TMDs and take immediate steps to ensure compliance. ASIC will consider making a final order if the concerns are not addressed in a timely manner. Perpetual will have an opportunity to make submissions before a decision is made about a final stop order.