It appears over the last month that some of the wind has been knocked out of the sails of LICs, with a notable decrease in buying support. One possible reason is LIC investors selling to invest in the current crop of new IPO’s. Its reported that VGI Partners Global Fund and Metrics Credit Partners are both in the $200-$400 million range, and the sky is the limit for the proposed new Magellan Global Fund.
One of our previously discussed LICs, and still one of our top holdings, is MFF Capital (ASX: MFF). As a reminder, Magellan was co-founded by Hamish Douglass and Chris Mackay. With all the media attention and publicity about the new Magellan LIC which will be managed by Hamish Douglass, it is often overlooked that MFF Capital uses Magellan’s research capability and is managed by Chris Mackay. MFF currently trades at an 8% discount to NTA (after allowing for the dilution from the outstanding options). Considering that Chris Mackay and associates own over $100 million of MFF, and that performance has been exceptional over a long period, we would prefer to invest in the existing MFF vehicle at a discount than invest in the new vehicle.
Below are three listed investment companies (2017) we believe are currently some of the most attractive. As at 23 August 2017, all three are significant holdings in the Affluence LIC Fund.
Thorney Opportunities Limited (ASX code: TOP)
This LIC is managed by Thorney Investment Group, a Melbourne based investment group controlled by BRW rich lister Alex Waislitz. Thorney Holdings currently own 27% of TOP, ensuring a very strong alignment of interests for investors. Thorney recapitalised this LIC in November 2013, and over this period has achieved a portfolio return of over 15% per annum.
TOP’s investment strategy is to produce absolute returns for shareholders over the medium to long-term. Their primary focus is on the careful selection of investments which enable it to be a constructive catalyst towards unlocking the value in the companies that it identifies. TOP can also invest alongside the greater Thorney Investment Group, allowing a greater scope of opportunities. The portfolio is very concentrated with only about 10 holdings, and the largest accounting for more than 20% of the portfolio. There is generally low turnover, and the portfolio is mostly small and mid-cap ASX listed stocks.
Since Thorney took over in 2013, TOP has traded at an average discount of around 5%, and over the past 3 years has traded at an average discount of around 8%. It is currently trading at a 10-12% discount to NTA. It currently has a market capitalisation of just under $120 million. This level of discount presents an excellent opportunity to invest with an outstanding manager at an attractive price.
Future Generation Limited (ASX code: FGX)
We have written about this LIC before as our “desert island stock” (if you could only invest in one stock and lived on a desert island for the next 10 years). 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. As at 31 July 2017 the portfolio was 43.3% long, 36.6% absolute return, 14.3% market neutral and 5.8% cash. The underlying managers are some of the top echelons of Australian investors, including Paradice Investment, Wilson Asset Management, L1 Capital, Cooper Investors and Bennelong Long Short Equity Management. Many of these underling 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, many of which were exercised and diluted the NTA. Given the portfolio includes long short and market neutral strategies, much like our own portfolios, we would expect performance to lag the market during strong periods. However, we expect the portfolio to be far more resilient than the market during corrections, and through a whole cycle, we expect it to produce superior risk-adjusted returns. FGX is currently trading at a 4-5% discount to NTA, which is quite attractive. The catalyst for a re-rating of that discount may well be a decent market correction when investors then realise it is an all-weather portfolio.
Australian Leaders Fund Limited (ASX code: ALF)
We like holding investments in our portfolio that have a reasonable chance of staying flat or even increasing in value, during a serious market correction. The Australian Leaders Fund is managed by Watermark Funds and is a multi-directional equities strategy. This means the portfolio allocation can swing between a net short position to a net long position depending on where the manager sees the market. Currently, the ALF portfolio is market neutral (equal long and short positions), indicating the manager is cautious of market valuations.
In simple terms, the manager invests long in quality companies they believe are reasonably valued. On the short side they do the opposite, selling inferior quality companies or those they believe are overvalued. They produce a positive return if the long book outperforms the short book. During a strong rally, these strategies can underperform as poorer quality and cyclical companies often increase faster (or as fast) as the better-quality stocks. However, during a market correction, usually the better quality and more attractively valued equities will fall less than the others. This is why these strategies can produce positive returns in falling markets. Shorting is difficult, expensive and can result in increased risks due to the greater gross exposure. Watermark is a specialist market neutral manager and is well placed to manage these risks.
The ALF portfolio has underperformed the All Ords Index over 1-3 years. It has outperformed over longer periods. This re-emphasises to us that different strategies work at different times, and it is essential to hold a diversified portfolio. Over the long term, we believe this manager can produce superior risk-adjusted returns. From mid-2013 to late 2016 this LIC traded at a large premium to NTA (at times more than a 20%), on the back of strong performance and a high dividend. In March 2017, the dividend was reduced which coincided with the lower performance. This resulted in the share price falling to below NTA. When this occurred, we took our opportunity to start purchasing. It is currently trading at a slight discount, and ALF is likely to continue to be one of our core holdings over the medium to long-term.
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.