The IPO market is usually a good judge of what’s hot. Almost on cue, companies raise capital and list when their business or sector is in favour, or as hype builds. That is true of listed investment companies, with three current LIC floats and a raft of others expected to follow this year.
The line up
The biggest is the PM Capital Asian Opportunities Fund. It wants to raise $50-$200 million for a fund that will invest in Asian equities (ex-Japan). Its previous IPO, the PM Capital Global Opportunities Fund, raised $173 million and listed late last year. It was the largest LIC IPO since the 2006 Magellan Flagship Fund.
Blue Sky Alternative Investments is seeking up to $100 million to invest in private equity, venture capital, private real estate and hedge funds. It will be the market’s first LIC focusing on alternative investments.
Acorn Capital Investment Fund sought $50-$100 million for an LIC that invests in micro-cap stocks and listed in late April. Its $1 issued shares are 92.5 cents.
Expect more LIC floats this year. Rising demand for LICs, which are essentially listed managed funds that trade on the ASX, has seen many LICs trade at a premium to their pre-tax net tangible assets (NTA). Investors have been willing to pay more for some popular LICs than their assets are worth.
The combined value of LICs has increased from $16 billion in March 2012 to almost $24 billion in March 2014, according to ASX data. The sector traded at an average almost 2% premium to its pre-tax NTA in March, weighted for market capitalisation, Morningstar data shows. That compares with an average 9% discount in March 2012.
A re-rating
Simply put, the LIC sector has been re-rated in the past 12 months. There is talk that self-managed superannuation funds (SMSFs) are starting to embrace listed managed funds because their closed-end structure means less performance volatility and fewer capital gains tax surprises than with unit trusts.
This re-rating is timely for investors in LIC floats, although Acorn’s early price weakness is a reminder of the challenges of IPO investing, where you are investing typically at a 2% to 3% premium over the NTA due to the IPO costs. Also, the LIC sector has had many false starts and disappointed investors over the years.
The PM Capital Asian Opportunities Fund is the best of the recent LIC IPOs. Acorn has a good record, but LICs with micro-cap exposure can trade at a discount to NTA due to lower liquidity in the assets in which they invest. And this is a tough market for micro-cap investments.
The Blue Sky LIC has merit, given the role of alternative investments to reduce portfolio correlations – that is, having investments that do not all move up or down at the same time. But it may take more time for the market to assess the Blue Sky LIC, get its head around listed private equity, and give a premium valuation.
PM Capital, led by Paul Moore, one of Australia’s doyens of international equities investing, has a strong performance record.
The PM Capital Asian Fund has returned 21.6% annually since inception in July 2008, while the MSCI Asia (ex-Japan) equity benchmark has only returned 3%. The PM Capital Asian Opportunities LIC will be constructed along the same lines as PM’s top-ranked unlisted Asian fund.
PM’s earlier IPO, the PM Capital Global Opportunities Fund, already trades at a 5% premium to NTA, which is unusual for a new LIC. Typically, investors need to see a longer track record before paying more for the LICs than its assets are worth, because they are confident in the manager’s performance prospects.
Raising $173 million – near the top of the range – was another good sign. Clearly, there was good demand for the PM Capital Global Opportunities Fund among advisers and brokers, and I expect the same for the PM Capital Asian Opportunities Fund when it lists on May 22.
International exposure
The other attraction is the asset class. Self-managed funds have low international equities exposure – less than 1% of their assets, according to the Australian Taxation Office. That makes no sense for diversification and it has been lost opportunity, given the strong performance of US, Japanese and some European equity markets in the past 12 months.
I favour the idea of long-term investors increasing their exposure to Asian assets. Middle-class consumers in Asia-Pacific (households that have daily spending of US$10-US$100), are estimated to grow from about half a billion in 2009 to 3.2 billion in 2030, according to research cited in the former Federal Government’s Australia in the Asian Century white paper.
Apart from the ageing population, it is hard to think of a more powerful investment trend in the coming decade. Plenty of unlisted managed funds offer specialised exposure to Asia, but there are few listed options (although the ASX mFunds may change that). Among LICs, only the AMP China Capital Growth Fund, which trades at a discount to NTA, and the Asian Masters Fund provide Asia-centric exposure.
The LIC’s issue price is $1 and the IPO comes with a free attaching option that expires in about two years, and should be worth a few extra cents. SMSFs could do worse than have listed exposure to one of the market’s top-rated investors in Asian equities, via an LIC float, as the LIC sector is re-rated.
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at 11 May 2014.
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.
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