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If you were offered $100,000 worth of CSL shares at 80% of their current market price, what would you do? Buy them, of course, and make an instant $20,000. Easy.
What if you could buy CSL at the same discounted price but not sell the shares for at least three years? Most people would probably still do the deal, as a 20% discount on CSL would be hard to resist. Just look at the billions being placed in the discount Share Purchase Plans offered at the moment by dozens of companies. All are heavily oversubscribed to take advantage of the discount.
Now, what if instead of CSL, the 80% offer was on a diversified portfolio of quality shares selected by a leading, prominent fund manager? Pay 80 cents for $1 of their favoured selections. Arguably, it’s better than the CSL shares because the portfolio is diversified and backed by an expert team’s opinion. Still hard to resist?
Welcome to the world of Listed Investment Companies (LICs) and Listed Investment Trusts (LITs), a sector of the market valued at over $40 billion in 111 listed vehicles.
You can do the 80% deal any day of the week on the Australian stock exchange. There are so many LICs and LITs managed by well-known names trading at a pre-tax discount to the Net Tangible Asset (NTA) value of over 20% that it’s hard to know where to start.
Bell Potter’s chart below from its Quarterly Report shows trading levels relative to NTA for LICs and LITs according to size. All categories have weakened recently and the average discount of those issues with a market value of less than $200 million was close to 20% at the end of March 2020.
The Quarterly Report included the following LICs and LITs trading at discounts greater than 20% in the three sectors of Australian equities, global equities and alternatives.
LICs and LITs trading at discounts of greater than 20% as at 30 March 2020
These are extraordinary lists, and in case some of the names are unfamiliar, consider some famous fund managers who missed the 20% cut off but their discounts were still over 10%:
Let’s face it, it’s a disaster for retail investors unable to sell at the value of the underlying shares. These are some of the highest-profile, most-respected fund managers in the country. We listen to their videos and read their articles like they are market oracles. Yet for many reasons, investors do not support their listed instruments in sufficient numbers to sustain a respectable share price.
No doubt this says more about the weakness of the LIC and LIT structure than the fund manager, as the only liquidity comes from finding a buyer on the market. There’s no way to gloss over it. Billions of dollars invested in the best names in Australian funds management, every investment originally at the NTA issue price (or worse if fees were involved), and now their paper cannot even trade close to the issue price.
Let’s select five high-profile managers with ‘cheap’ LICs, defined as trading at a discount to NTA of over 20% as at 22 May 2020 according to NTA calculations by Bell Potter. None of these are recommendations, but clearly, if anyone likes the fund manager and believes the NTA discount will narrow, it could be a good entry point.
(Investors should check the latest price relative to NTA as changes occur every day).
1. Australian Leaders Fund (ALF), price $0.86, NTA $1.14, discount 24.6%
ALF is managed by Justin Braitling and a large team at Watermark Asset Management. ALF is not one of the new breed of funds jumping on the LIC bandwagon, having been established in 2003. ALF is differentiated by its absolute return strategy and long/short positioning, and although this protected the NTA during the March 2020 coronavirus sell off, the share price did not respond. After some early success, ALF has struggled to attract support for many years and remains at a wide discount.
2. Thorney Opportunities (TOP), price $0.45, NTA $0.58, discount 22.4%
The Portfolio Manager and Chairman of Thorney is Alex Waislitz, regularly featured in the media as a ‘billionaire investor’, and in the 2018 Financial Review Rich List, he was estimated to be worth $1.39 billion. In the same year, the Thorney Investments Group celebrated its 25th anniversary. All the ingredients for success sound right for a small fund to find market gems, but the retail investor following and share market performance are disappointing.
3. PM Capital Asian Opportunities (PAF), price $0.70, NTA $0.88 discount 20.5%
Paul Moore is the Founder and Chief Investment Officer of PM Capital. Moore had a long career at the famous investment powerhouse of its time, BT, before establishing his own business in 1998. PM Capital also has a large team of experienced managers, but Moore’s investment approach is as a value manager, a style generally out-of-favour versus growth in recent years. Moore is better known as a global manager rather than Asian specific, but even the global fund (ASX:PGF) is at a 16.8% discount.
4. Cadence Capital (CDM), price $0.59, NTA $0.76, discount 23%
Karl Siegling established Cadence in 2003 and listed CDM in 2006. Over nearly 15 years, the fund is ahead of its benchmark but recent years have been tough, underperforming the All Ords Index by 7% over the last five years. Cadence makes a feature of the fund that the management team are the largest shareholders so at least they are suffering alongside retail investors.
5. Spheria Emerging Companies (SEC), price $1.25, NTA $1.67, discount 25.6%
For variety, let’s consider a younger boutique that is part of the large Pinnacle Group. Spheria’s investment team includes three fund managers with over 40 years of experience in the small cap market. SEC is a listed version of its unlisted Smaller Companies Fund, so why would anyone invest at NTA in the unlisted fund when the listed vehicle is offered at a 25% discount? SEC came to market in November 2017 at $2 and reached its minimum target of $100 million in only two weeks, based on previously outperforming its index by 6.5% in the year before launch. Since launch, the loss from $2 to $1.33 mainly comes from the discount to NTA, but the fund has also underperformed its index.
All of these managers need to find a catalyst for the market to believe in their skills and styles and the merits of the LIC structure, or it might be better to turn their fund into an unlisted vehicle which trades at NTA.
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