Key points
- The new Platinum Asia Investments Limited is expected to be closely correlated to the existing Platinum Asia Fund, which has consistently outperformed the benchmark – since inception in March 2003 to 30 June 2015 by 5.9% per annum.
- The AMP Capital China Growth Fund has returned over 100% during the last 12 months and 19.4% per annum over the five years to 30 June 2015. It is trading at 26% discount to NTA.
- In financial year 2015, the PM Capital Asian Opportunities Fund Limited returned 15.5%. It is trading at an 8% discount to NTA.
The launch this week of Platinum Asia Investments Limited, the latest listed investment company (LIC) from Kerr Neilson and the team at Platinum, has galvanized attention on two of the ‘”hottest” investment themes – investing offshore and listed investment companies.
However, before you rush into this LIC, you might want to compare it to two existing Asian focused LICs, both of which are trading at a discount to their net tangible asset value. These discounts highlight one of the real problems (some would argue opportunities) with the listed investment company structure.
And while investing in the Asian markets might not be quite your cup of tea for investing offshore – it is still only a relatively small part of the global market at 15%, of which Japan is half – let’s assume it is at least on the radar because it is so hard to argue with the demographic forces at play (read Tony Featherstone’s article [1] on the growing power of the Asian middle class) . Timing is everything, but over the long term, it is more likely to be a case of “time in the market”.
Here are three LICs to consider. Let’s start with the new IPO from Platinum.
1) Platinum Asia Investments Limited
The Platinum team is modelling this LIC on the highly successful Platinum Asia Fund, which has attracted more than $5.5 billion in funds. Through an IPO, subscriptions of up to $600 million are being sort.
Platinum Asia Investments will invest primarily in undervalued listed securities of companies in the Asia region, excluding Japan. It aims to provide capital growth over the long term, targeting net returns over a five-year plus investment horizon that are in excess of the MSCI All Country Asia ex Japan Index (as measured in Australian dollars).
A bottom up approach to stock selection will be applied, using both qualitative and quantitative analyses. Typically, the portfolio will comprise 75 to 150 securities, with the ability to leverage through derivatives up to 150% maximum net exposure, or through cash and short selling, to minimize the net exposure to 50% of the portfolio value. The currency exposure will be actively managed.
While there may be some differences in the short term, it is expected that over the medium term, the LIC’s performance will be closely correlated to the existing Platinum Asia Fund. As the following diagram demonstrates, the latter fund has consistently outperformed the benchmark – since inception in March 2003 to 30 June 2015, a staggering 5.9% pa (17.0% pa cw 11.1% pa).
[2]Platinum Investment Management Limited (ASX Code PTM) will manage the investments. It will charge a management fee of 1.1% plus GST, and be entitled to a performance fee of 15% of the amount by which the company’s investment portfolio return exceeds the benchmark. The company will also be required to meet certain other expenses.
Shares in Platinum Asia Investments Limited will be listed on the ASX under stock code PAI. Initial subscribers will also be given one “free” option for every share subscribed (minimum 2,000 shares or $2,000). The options allow investors to subscribe for another share at $1.00, and can be exercised at any time up until 15 May 2017. The options will be separately listed under code PAIO.
The offer opens today (Monday) and is due to close on 7 September, with listing expected on 21 September. Many leading brokers (CommSec, Bell Potter, JB Were etc) are involved in the IPO – and are being paid placement fees on subscriptions lodged through them. Due mainly to these placement fees, each $1.00 unit will be “worth” approximately $0.982 on listing – the company’s net tangible asset value (NTA) per share.
2) AMP Capital China Growth Fund (ASX Code: AGF) – 26% discount to NTA
The AMP Capital China Growth Fund aims to achieve long-term capital growth by investing in China A shares, which are shares in companies listed on China’s Shanghai or Shenzhen stock exchanges. Management fees are 1.65% pa.
Despite the recent stock exchange turmoil in China, the company has returned over 100% during the last 12 months. Over the five years to 30 June 2015, it is a much less impressive 19.4% per annum, marginally ahead of its benchmark, and since inception in 2007, it is only 13.1% per annum, below its benchmark of 14.0% per annum.
The turmoil led the Chinese Government to suspend a number of stocks from trading, which impacted part of AGF’s portfolio. In some nervous trading, AGF’s unit price on the ASX got hit hard, leading to a blow out in its discount to NTA.
While AGF has consistently traded at a discount to NTA, leading to a number of suggestions about how it could be closed, and a Singaporean hedge fund building up a stake of more than 11% in AGF, the discount currently sits at around 26%. According to its last filing, AGF’s NTA on 3 August was $1.77, compared to a closing price on the ASX on that day of $1.31.
3) PM Capital Asian Opportunities Fund Limited (ASX Code: PAF) – 8% discount to NTA
Managed by the highly respected Paul Moore, this listed investment company started trading on the ASX in May last year. Similar to Platinum Asia, it invests in Asia excluding Japan. Its aim is to provide long-term capital growth by investing in a concentrated portfolio of predominantly undervalued listed Asian equities and other investment securities in the Asian region (ex-Japan).
The portfolio is typically 15 to 35 securities, with the maximum net equity exposure kept to 100%. On the other hand, the portfolio could potentially go to 100% cash. Currency exposures are actively managed.
Management fees are 1.0%, plus a performance fee of 15% of any excess return.
In financial year 2015, the company returned 15.5% (the Platinum Asia fund returned 29.9% over this period).
At its last filing on 31 July, the company’s NTA had increased to $1.117. The share price on that day closed at $0.975. There are also options (PAFO) that can be exercised at $1.00 anytime until May 2016. If all the options were exercised at $1.00, then an adjusted NAV is $1.056. Effectively, PAV is trading at an 8% discount.
Bottom line
If you are interested in investing in China alone, then the AMP Capital China Growth Fund is priced to sell – a 26% discount provides some level of protection. If you want broader exposure to Asia, then on track record, it is hard to go past Platinum Asia.
The experience of initial subscribing shareholders in PM Capital Asian Opportunities Fund Limited does highlight a potential problem with the LIC structure – perennial discounts.
These subscribers paid $1.00 for their shares and “free” options. Fifteen months later, the shares are trading on market at $0.98, and the options $0.03 – a 1c or 1.0% return on market value, compared to an underlying improvement in the investment portfolio of 15%. While this is not a disaster, it does serve as a reminder that there are no bargains with LIC IPOs – you can sometimes, but not always, buy more cheaply in the secondary market.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.