Key points

• Contango has a policy to pay annual dividends per share of at least 6.5% of Contango Income Generator’s NTA.
• The new LICs’ investment strategy is being modelled on Contango Asset Management’s Income Generator (Ex-30) Strategy Fund, which since inception in December 2012, has outperformed the ASX All Ordinaries Accumulation Index by 2.5% per annum.
• It is focused on stocks outside the major household names – ie the top 30 companies by market cap – and offers an interesting diversification option for portfolios that are over-weight the top market tier.

The newest listed investment company (LIC), Contango Income Generator, is offering to pay investors a dividend of at least 6.5% per annum!

To be managed by Contango Asset Management, under the leadership of the highly respected George Boubouras, Contango Income Generator Limited is seeking to raise up to $120 million from investors via an IPO process. It is due to list on the ASX under stock code CIE on 14 August.

An ex-30 income LIC

Contango Income Generator’s (the Company) objective is to provide shareholders with a sustainable income stream of dividends with some capital growth over time. To do this, it will invest in high quality stocks that sit outside the ASX top 30 by market capitalization, and that have low volatility, sound balance sheets, consistent and franked dividends and sustainable earnings growth.

The argument for ex-30 is threefold. Firstly, many retail investors, including SMSFs, tend to confine their stock selection to “top 30” names as they don’t feel comfortable investing outside this area, so this LIC potentially meets a need. Secondly, in more recent times, returns from mid-cap stocks have been higher than the broader market. For example, in the three years to 30 June, the S&P/ASX 200 returned 15.06% per annum, compared to 15.40% for the S&P/ASX MidCap 50. Finally, for an active manager, they can potentially add more value in this part of the market as it is less well researched.

While Contango can’t promise to pay a dividend of 6.5%, it says that its policy is to do so – that is, to pay annual dividends per share of at least 6.5% of the company’s NTA (net tangible asset value) as measured at the start of the year. It substantiates this claim by saying:

• Medium term returns from the mid-cap sector of the market (the S&P/ASX MidCap 50) have been 8.92% per annum over the last five years;
• The prospect of the Company achieving capital growth on its investment portfolio, which the Company may utilize to pay dividends; and
• A substantial proportion of the Company’s investments being cash or liquid securities, which will assist the Company in regard to having the required liquidity.

The Company‘s investment strategy is being modelled on an identical investment product that Contango Asset Management currently runs, the Income Generator (Ex-30) Strategy Fund. Contango says that since inception in December 2012, this fund has outperformed the ASX All Ordinaries Accumulation Index by 2.5% per annum.

Typically, the Company’s investment portfolio will have around 30 to 50 stocks, and will invest within the following asset weighting parameters:


On a sector basis, the Company says that its allocation will be similar to the following table. This weighting is, of course, quite different to the S&P/ASX 200 – for example, it has a much higher weighting in consumer discretionary and a much lower weighting to materials.

While the Company can use derivatives to hedge the portfolio, the investment manager says that it can’t see any reason to do this in the short term and the Income Generator (Ex-30) Strategy Fund has not used them. The Company will not leverage the investment portfolio.

Manager

Contango Asset Management is a specialist funds manager. Founded in 1998, it is a wholly owned subsidiary of the listed investment company, Contango MicroCap Limited (ASX Code CTN). The group has approximately $833 million in funds under management, across nine different investment products that cover micro-cap, small-cap, income focussed and core Australian equities. George Boubouras is the chief investment officer.

Contango Asset Management will be entitled to the following investment management fees (to be paid by the Company):

• 0.95% per annum (before GST) on the first $150 million; plus
• 0.90% per annum (before GST) on the portfolio above $150 million and up to $500 million; plus
• 0.85% (before GST) on the portfolio market value over $500 million

The Company will also incur other expenses, such as ASX listing fees and directors’ fees. There are no performance fees.

The offer

Up to $120 million is being raised via a non-underwritten offer of 120 million $1.00 shares. Contango MicroCap Ltd will subscribe for $30 million of shares, leaving up to $90 million for other investors.

As a sweetener to initial subscribers, they will also receive loyalty options on the basis of one option for every two shares subscribed. The loyalty options vest if the original shares are held for at least six months, otherwise they will lapse. Upon vesting, the holder will be entitled to exercise the options at any time until 30 March, 2018 by subscribing for new shares at a price of $1.00.

Loyalty options will be quoted on the ASX shortly after the vesting date (29 January 2016) under stock code CIEO.

Due to establishment costs and broker placement fees, the Net Asset Value (NAV) of the shares on subscription will be $0.978 if $100 million is raised, or $0.984 if the value of a deferred tax asset is included.

Other details are set out below:

Applications

Applications can be made with the brokers involved in the deal (Evans & Partners, Taylor Collinson, Wilson HTM, Morgans and Bell Direct), or directly here. If applying through a broker, remember that they are getting paid a selling fee of 1.5% and may in some cases, elect to share some or all of this with you.

Our view

The Contango Income Generator will suit investors looking for equity exposure to a higher, tax-advantaged income stream. Because it is focused on stocks outside the major household names, it offers an interesting diversification option for portfolios that are over-weight the top market tier.

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.