If 24 LICs ran the Melbourne Cup

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To win the Melbourne Cup requires a horse that is well trained, has a great jockey, and importantly hasn’t been hit too hard with a weight handicap from the stewards.

To win the Affluence LIC Cup, an LIC requires many of the same attributes. They require a great trainer (the investment manager), an opportunistic jockey (the individual portfolio manager responsible for investment decisions), and a favourable handicap (starting discount or premium to NTA).

Who would make the cut?

We have analysed the field of over 100 LICs, and the following are all in the top 25%. Here, in no particular order, are our 24 starters for the “Race that Stops the Investing Nation” – the best listed investment companies (ASX).

LICStarting HandicapForm Guide
WAM Capital (WAM)20% premiumIn a race built for stayers, this LIC can go the distance. Hugely successful in previous outings, stewards have hit it hard with a whopping 20% premium.  Will make it very hard to win.
Forager Australian Share Fund (FOR)15% premiumHas had a different training program to many others, but continues to perform well at the races. Excellent jockey. May struggle under the substantial weight handicap.
WAM Research (WAX)20% premiumMuch like its stablemate WAM above, this LIC has won many races but it has come to the attention of stewards with a heavy burden. Will give its best, but you can’t win forever.
Wealth Defender (WDE)10% discountIt appears there could be some horse trading going on behind the scenes (pun intended), with a rival stable increasing their ownership. Has been a sluggish runner of late, but a reasonable discount and the potential for some fireworks on the share register could create some chances late in the race.
Contango Microcap (CTN)10% discountThis LIC enters the race with a very late trainer and jockey change. CTN has had an eventful couple of years, and would benefit from a consistent training schedule. New very capable jockey on board, and a favourable starting handicap, this could be a contender.
Monash Capital (MA1)15% discountThis time last year they veered off track and were out in the parking lot.  However, in the last 3 months this LIC has shown some impressive speed, much more like what we expected.  The stewards have reflected the poor performance by going light on the handicap, and as a result this is a real chance to take a place.
MFF Capital Limited (MFF)10% discountComing into the race, this big American was one of the out and out favourites.  However, the stewards agreed, and have reduced the discount from 15% to under 10%.  Given the rampaging run to date, they might struggle to keep the momentum going to the finish line.
Magellan Global Fund (MGG)5% premiumWe are not sure if the stewards have any idea what they are doing, as this new entrant is starting with a 5% premium compared to its stablemate above which has an easy 10% discount. Same stable, however different jockey, the handicap seems the wrong way around, with MFF being by far the favourite on this internal race.
WAM Leaders (WLE)Slight discountThe dark horse of the WAM stable. Has performed solidly, and has been somewhat overlooked in the handicap. Should probably be starting at a 10% premium, therefore will be a real chance in the final furlong.
Australian Leaders Fund (ALF)10% discountFrom one of the favourites to back of the pack. Going into the 2015 race this LIC had to carry one of the largest handicaps around at a 20% premium, and they struggled under the weight. Going into this year, the tables have turned, and they have been given a 10% discount. If track conditions are dry and fast, they are unlikely to get up. However, if the storm clouds roll in, expect ALF to surge towards the lead while the others take a tumble.
Australian Financial Investment Co (AFI)Around NTAYou would never call this an exciting racer. It is usually there or thereabouts, but rarely takes the win. Starting off scratch, expect a solid but not spectacular result.
Amcil Limited (AMH)5% discountStablemate of AFI, however a little more up and down with form. This year its racing off a 5% discount, which will definitely make it more competitive. Deserves to be in the race but unlikely to win.
Australian Equity Performance Co (AEG)Around NTAWe are not sure what to say of this one. The trainers of this LIC have in the past had tremendous success. However, this form has not yet transferred to this LIC. Like ALF, success may depend on track conditions, but don’t count it out.
Henry Morgan Limited (HML)No ideaWe believe this LIC has been entered for the race, but it hasn’t actually been seen since June. There were rumours that the stewards and vets had been called in, so it may be a late scratching.
Future Generation (FGX) and Future Generation Global (FGG)5% discountIf ever there was an LIC designed to win this race, FGX (and stablemate FGG) are them. They can race under all track conditions, they will stay the distance, and the stewards are somehow starting them at a discount. These two thoroughbreds are race favourites without a doubt.
Bailador Technology (BTI)20% discount
Bailador Technology (BTI) 20% discount Everybody loves a roughie. Hard to predict how this LIC will race at the best of times and its recent performance has been tough. However, it comes into the race with one of the biggest discounts, so anything is possible.
8IP Emerging Companies (8EC)10% discountThis LIC has already run quite hard over the past few months, increasing from $0.86 to $1.00. Stewards have evened up the handicap as a result.
Century Australia (CYA)5% discountSame stable as the other WAM vehicles, however the different name seems to have tricked the stewards up. Good chance this LIC will be wedded to WAM Leaders in the future, which should work out well for all.
Whitefield (WHF)10% discountOldest horse in the race. Born in 1923. Certainly a stayer and will run all day, but age likely to count against it late in the race.
Benjamin Hornigold (BHD)15% discountFrom the same stable as HML. A young horse with the most expensive Jockey/Trainer (fee) combination in the race. Will start flat out and on its day could beat the field by 50 lengths. Don’t think it can keep up the pace though and expected to fade late. Rank outsider.
OzGrowth (OZG)20% discountHailing from Western Australia, well trained and conditions likely to suit. Has run well at times, but can also be erratic. In with a shot.
Sandon Capital (SNC)Around NTAWell regarded runner, talented jockey. Has been known to be feisty during the race if it doesn’t get its own way. A real chance.
Thorney Opportunities (TOP)12.5% discountHas been one of the best performing LICs over the past few years, and starting at a helpful handicap. Don’t count this one out.

Who would fill the top 3 places?

Like the Melbourne Cup, the Affluence LIC Cup is not a sprint. It’s a stayer’s race, so we’ve thought about who will be the best performing LICs over the next couple of years. Here are our picks.

Future Generation Limited (ASX code: FGX)

FGX has consistently been one of the largest holdings in our LIC portfolio. It was established in September 2014 by Geoff Wilson with the dual purpose of an investment vehicle and providing funding to charities supporting children and youth at risk. It is a fund of funds in Australian equities, and currently invests with 20 investment managers who have all agreed to charge no fees. Instead, the LIC charges a 1% per annum annual donation which is then distributed to charities.

The portfolio construction is diversified by investment manager, strategy and style. The underlying managers are some of the top echelon of Australian investors and many of their funds are closed to new investors or have high initial investment limits, putting them out of the reach of most. By investing through this vehicle, you are paying a low total fee, with the dual benefit of knowing all fees are going to charitable causes.

Performance since listing has been solid but not spectacular. This was partly due to the options that were issued during the IPO being exercised which diluted the NTA. We expect FGX to be resilient during market corrections, and through a whole cycle to produce superior risk adjusted returns. FGX is currently trading at a 4-5% discount to NTA, which is quite attractive.

Monash Absolute Investment Company (ASX code: MA1)

This LIC is managed by Simon Shields and Shane Fitzgerald of Monash Investors. They started Monash in 2012 to target double digit annualised returns after fees, over a full market cycle.

MA1 provides shareholders with the opportunity to invest in a diversified portfolio of predominantly Australian securities (listed and some pre-IPO securities), through a long/short style of investing and a focus on capital preservation. The company listed in April 2016. At that time, the unlisted fund (similar strategy) had provided an impressive return of over 15% per annum since inception in June 2012. However, the launch of the LIC coincided with a poor period of performance. The listing price was $1.00, and by May 2017 the NTA was down to below $0.86 and the share price hit a low of $0.74.

No manager outperforms all the time, and most will go through soft patches. The NTA has increased by over 10% this financial year, through their exposure to small/medium cap companies. Even with this recent strong performance, MA1 is still trading at a 13% discount to NTA.

WAM Leaders Limited (ASX code: WLE)

Interesting time for this LIC. The options issued to investors at the IPO expire 17 November 2017, and they are currently in the money. Perhaps with this in mind, we have seen a substantial increase in buying support recently. Market cap is now well over $500 million, giving it good liquidity and scale.

Often with LICs, when the options expire the discount to NTA reduces as the potential for further NTA dilution is removed. It is currently trading at a 5% discount to NTA (2% discount if all the options were exercised). Some other WAM vehicles are currently trading at substantial premiums to NTA (WAM Capital 16% premium, WAM Research 19% premium, WAM Microcap 11% premium, WAM Active 5% premium).

WLE is now paying regular dividends, with a 2 cent fully franked dividend being paid in December 2017. We expect the manager to be able to outperform over the cycle, and from this starting position we believe the combination of market outperformance plus a good chance of trading at a premium will make this one hard to beat.

Before you invest, read this!

We encourage you to do your own research before investing in any LIC. Remember, a great LIC and a great manager is only part of the story. We also like to make sure they’re trading at the right price and that the assets they are investing in are not themselves overvalued. We explain how we do this in our LIC Guide, but in the end it’s up to you to make the investment decision that’s right for you, in conjunction with your financial advisor if you have one.

Take care and all the best with your investing.

Disclaimer: This article is prepared by Affluence Funds Management Limited ABN 68 604 406 297 AFS licence no. 475940 (Affluence) to enable investors in Affluence Funds to understand the underlying investments of the funds in more detail. It is not an investment recommendation. Prospective investors are not to construe the contents of this article as tax, legal or investment advice. Neither the information nor any opinion expressed constitutes an offer by Affluence, its subsidiaries, associates or any of their respective officers, employees, agents or advisers to buy or sell any financial products nor the provision of any financial product advice or service. The content has been prepared without considering your objectives, financial situation or needs. In deciding whether to acquire or continue to hold an investment in any financial product, you should consider the relevant disclosure documents for that product which are available from the product provider. Affluence recommends you consult your professional adviser to determine whether a financial product meets your objectives, financial situation or needs before making any decision to invest.

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