ASX 200 company banned from selling its products. Here’s why

Woman holding out her hand, symbolising a trading halt.Woman holding out her hand, symbolising a trading halt.

Retail investors have been prohibited from putting money into two funds that deal in ASX shares.

Corporate watchdog Australian Securities Investments Commission announced Friday that it has issued interim orders to stop Perpetual Limited (ASX: PPT) from offering or distributing two funds:

  • Perpetual Pure Microcap Fund
  • Perpetual Geared Australian Share Fund

The order prohibits the S&P/ASX 200 Index (ASX: XJO) company from issuing interest in the funds, providing product disclosure statements or recommending retail investors invest in those products.

So why did ASIC take such action?

Risks of funds could be inappropriate

ASIC stated it was compelled to act to “protect retail investors from potentially investing in funds that may not be suitable for their financial objectives, situation or needs”.

Perpetual has been accused of not sufficiently considering whether the risks and features of those funds are appropriate for the target markets.

The Perpetual Pure Microcap Fund exclusively invests in microcap ASX shares, which can be more volatile than larger cap stocks.

“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,” stated ASIC.

In contrast, the watchdog was worried about how the Perpetual Geared Australian Share Fund can borrow up to 60% of the fund’s total assets as leverage for ASX shares.

“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.”

Perpetual co-operating with ASIC

Perpetual confirmed to The Motley Fool that the company is “engaging with ASIC to respond to the interim stop order”.

“Perpetual takes its regulatory obligations seriously and has taken immediate steps to comply with this interim stop order,” a Perpetual spokesperson said.

“Perpetual has ceased the sale and distribution of these products effective 24 November 2022 until further notice.”

The order itself initially lasts 21 days, although this is subject to change.

The Perpetual share price was up 0.63% at the time of writing. The stock has lost 30.8% year to date, and currently pays out an 8.15% dividend yield.

The ASX 200 business has a market capitalisation of $1.47 billion.

The post ASX 200 company banned from selling its products. Here’s why appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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