Last week we looked at some of the newer exchange-traded funds (ETFs) [1] that have arrived in the Australian marketplace, offering investors the ability to tap into quite precise investment exposures to complement their core strategy, at relatively low cost. ETFs have proven very popular with self-managed super funds (SMSFs) because they are listed stocks, direct investments themselves, allowing investors to invest – or redeem – any amount of money at any time.
The same listed nature and direct liquidity is also a feature of the older listed investment company (LIC) structure – and this vehicle has also seen a flurry of new products, some specifically aimed at SMSFs.
One of the main differences between LICs and ETFs is that the former category is more likely to represent an actively-managed portfolio. LIC product development reflects this, with stocks offering highly specific strategies. The central problem with this is that just as an actively managed LIC offers the potential for outperformance. It is not guaranteed, and if management gets it wrong, the LIC can underperform.
Exacerbating this problem is the double-edged sword of market liquidity. The price of a LIC depends on buyers and sellers: thus LICs can – and do trade – at a premium or discount to underlying pre-tax net tangible assets (NTA) value. Even if the portfolio is performing well, the market may not recognise that.
This means that there are two components to a LIC’s performance: the first is the performance of the underlying portfolio, and the second is whether the portfolio trades at a premium or discount to NTA. This can work to the advantage of an investor, who can buy the portfolio for less than its value – but the downside is that a LIC discount can take a long time to close.
Where the LIC sector for many years was characterised by long-established portfolios of mid- to large-capitalisation stocks offering long-term capital growth and rising dividend streams, many of the newer LICs are much more specific in the market segments or investment strategy they target. As such, these could be used as a “satellite” investment around a broad-based investment portfolio, looking to add alpha (outperformance).
Here are four of the newer LICs that could be candidates for this task.
Thorney Technologies Limited (TEK, 23.5 cents)
Market capitalisation: $45.4 million
Thorney Group, the investment firm of noted stock picker Alex Waislitz, listed its second LIC, Thorney Technologies Limited, earlier this month. Under Waislitz, Thorney has become well-known for its success in small and mid-cap stocks: TEK was established to focus on technology investments and “other disruptive business models.” These investments can be ASX-listed or unlisted.
The initial TEK portfolio features listed stocks Adacel Technologies, OneVue Holdings, Webjet, NextDC, Hub24, iSelect, Updater and Anatara Lifesciences. The float was supported by a star-studded list of investment and business names, including Perth engineering magnate John Rubino, Melbourne retail billionaires the Besen family, Mesoblast CEO Silviu Itescu, renowned small-cap fund managers Geoff Wilson and David Paradice, noted technology entrepreneur Silvio Salom, fruit and vegetable giant Frank Costa and Fantastic Holdings chairman Julian Tertini.
So far so good – but Thorney Technologies raised $42.5 million, below the maximum intended raising of $50 million (and even further under the over-subscriptions limit of $125 million.) Thorney Holdings Proprietary Limited’s retains a 22.5% stake in TEK, which should give investors a lot of comfort.
Ongoing fees will include a management fee of 1.5% a year (plus GST), plus a performance fee of 20% of the increase in net value of the company, plus a fee for general LIC expenses. There is no ‘high water mark,’ which ensures that the manager has to make up any prior underperformance before any performance fees becomes payable – absence of this feature could put off some investors, but others will appreciate the chance to back the Thorney investment philosophy and expertise. The fund will be required to cover the base fee of 1.5% before garnering any performance fees.
Thorney is a highly active manager – being very engaged with company management to drive investment performance, and very patient. The firm’s other LIC, Thorney Opportunities Limited (TOP), has outperformed the S&P/ASX 200 since inception in early 2014.
Earlier this month (January 18), TEK made a solid debut on the ASX, with the shares closing their first day of trading at 23.8 cents, an 8.2% premium to their issue price of 22 cents. TEK closed last week at 23.5 cents. TEK has not updated its pre-tax NTA since listing, but it is likely to be about 21 cents, after absorbing the issue costs. So the market is already keen to buy the Thorney Technologies story.
Forager Australian Share Fund (FOR, $1.91)
Market capitalisation: $167.9 million
Often a new LIC is a listed version of an existing unlisted portfolio, but the Forager Australian Share Fund, which listed in December, is the unlisted portfolio in its entirety: the fund’s unit holders voted last year to list it on the ASX, becoming a listed investment trust (LIT).
The difference between a LIT and a LIC is that whereas a LIC is a company structure, meaning earnings are taxed at the company tax rate, and franking credits are generally passed back to investors, the LIT is a trust like a managed fund or ETF, meaning all earnings are passed back to investors. Forager Australian Share Fund must pay out all earnings as distributions – the distributions it pays will be lumpy, depending on how the fund performs each year.
Forager wanted to do this because it is a long-term investor, with most of the fund’s returns coming from long-term capital gains. While companies are not entitled to capital gains tax concessions, within the LIT structure tax-paying investors will be entitled to the CGT discounts for holding stocks for longer than 12 months.
The management fee is 1% a year, plus 10% of returns over 8%, subject to a high watermark.
Under chief investment officer Steve Johnson, Forager has earned a lot of respect as a “deep value” or contrarian-style investor, which means it buys stakes in unloved companies and sectors and holds them for the long term. As at 31 December, the Forager Australian Shares Fund had delivered investors 16.1% growth over the previous 12 months, and 13.9% a year since inception (October 2009). The fund’s comparative benchmark, the S&P/ASX All Ordinaries Accumulation Index, had earned 11.7% for the 12 months, and 7.5% a year since the Forager Fund’s inception date.
FOR listed with an indicative pre-tax net tangible asset (NTA) value per unit of $1.58. The fund floated with an issue price of $1.57, opened at $1.81 and closed at $1.71.
At 25 January, the pre-tax NTA had risen to $1.70. The shares have moved to $1.92, showing a strong reception for the Forager philosophy.
Watermark Global Leaders Fund Limited (WGF)
Market capitalisation: $86.5 million
Absolute-return investment firm, Watermark Funds Management, listed its latest LIC, Watermark Global Leaders Fund Limited, which is focused on global shares, in November. Watermark is known for using the ‘market-neutral’ strategy, in which 50% long (buying) and short (selling) positions cancel out, meaning the fund has no net exposure to the share market. As a result, performance results purely from the manager’s stock picks, rather than the rises and falls of the broader market. Watermark says this approach allows investors to profit from mispricing of stocks, while limiting exposure to market risk.
The approach has done well with the two other ASX-listed LICs that Watermark runs, the Australian Leaders Fund Limited (ALF) and the Watermark Market Neutral Fund Limited (WMK). ALF – which was listed in 2004 – has earned its investors a total return of 16% a year over the last five years. WMK, listed in July 2013, has generated a total return of 7.4% a year over the last three years.
The new fund invests in a portfolio of global stocks, but the market-neutral strategy offers a different tweak on global exposure in the LIC space. WGF charges a management fee of 1.2% a year plus a performance fee of 20% of the margin by which the portfolio’s return exceeds the Reserve Bank of Australia (RBA) cash rate over the 12-month period, subject to recoupment of prior under-performance.
This arrangement is used by other market neutral funds, but it is fair to say that not all investors like the cash rate being used as a benchmark for performance fees, and would prefer a stock market-based benchmark – especially when the cash rate is at record lows, and likely to stay relatively low for some time.
Market-neutral funds use cash rates as the benchmark because it requires manager skill to generate returns above that level in a market-neutral fund – and that using a market index such as the S&P/ASX 200 only applies to a long-only fund, where any excess return above that of the index reflects value added by the manager.
Issued at $1.10, WGF has traded down to $1.045, a discount to its latest (13 January) pre-tax NTA figure of $1.076 a share. While that implies that the market is not as enthusiastic about WGF as say Forager or Thorney Opportunities, it does offer patient investors a bargain entry to the portfolio.
Antipodes Global Investment Company (APL)
Market capitalisation: $310.5 million
Funds manager Antipodes Partners – founded by ex-Platinum Asset Management deputy chief investment officer, Jacob Mitchell – launched its first LIC in October, offering investors access to a long-short global securities investment portfolio with currency overlay, based on the strategy used by the firm’s popular unlisted fund, the Antipodes Global Fund.
Antipodes Global Investment Company identifies both long and short opportunities, but it is not market-neutral like Watermark Global Leaders Fund – it will show a long bias, meaning that broad market movements will likely influence its returns more than the Watermark LIC.
The fund focuses on capital preservation and will hold 20-60 stocks, with a net equity position of 50% –100%, aiming to outperform the MSCI All Country World Net Index, in Australian dollars. The portfolio’s entire market position is capped at 150%, which implies it can short up to 50% of its total exposure The management fee is 1.1% a year, plus a performance fee of 15% of net return above the benchmark.
The top 10 holdings at present are Hyundai Motor Company (Korea), Samsung Electronics (Korea), Baidu (China/Hong Kong), Gilead Sciences (USA), KB Financial Group (Korea), Cisco Systems (USA), ING (Netherlands), Telecom Italia (Italy), Mediobanca (Italy) and Office Depot (USA).
The Antipodes fund was the third largest LIC listing in ASX history, with just over $300 million raised prior to listing. The LIC gives retail investors access to one of Australia’s top global equities strategies: the three unlisted managed funds that Antipodes currently offer have all strongly outperformed their respective benchmarks, but it should be stressed that this is over a relatively short timeframe – while the Antipodes Global Fund was established in June 1999, the Antipodes Asia Fund in March 2001 and the Antipodes Global Fund – Long Only in January 2006; the current investment strategy was adopted in July 2015, and that is what the manager considers to be “inception date.”
The inception date for the APL portfolio was 11 October 2016. At the end of December, APL had earned a 7.5% return, beating the benchmark, on 6.6%.
The unlisted version of the fund has returned 14.4% a year since July 2015, compared to the index returns of 5.8% a year.
Trading in APL opened at $1.11 in October: the shares currently trade at $1.09, a discount to the latest pre-tax NTA figure of $1.147 a share. Again, that discount offers cheap entry to the portfolio.
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