VGI to Launch a New Global LIC

VGI Partners, a Sydney and New York based global equity manager, has flagged its intention to create a new listed investment company. VGI Partners Global Investments could potentially raise between A$100m to A$300m, plus up to A$100m in oversubscriptions, to invest in a portfolio of global equities. VGI currently manages money primarily for high net worth individuals, family offices and endowment funds. It has over US$800m in funds under management and has a stated target of closing its funds to new investment when it reaches US$1,250m. VGI believes a LIC would help it achieve its fund target earlier, which would then allow the team to focus on managing the portfolio rather than chasing new money. The LIC would also provide the opportunity for retail investors to access VGI’s global investing strategies. The current minimum investment in its funds is $1m.

VGI’s investment philosophy focuses on capital preservation and achieving superior long-term growth by investing in high quality businesses. It is often contrarian and will move to cash when a sufficient margin of safety does not exist. It invests in a concentrated portfolio of 10-15 core stocks. Whilst we have not seen any published data, we understand VGI has outperformed the MSCI World Index by close to 4% p.a. since its inception in 2008.

A key feature of the initial public offer is that VGI will pay all the offer expenses so the LIC will start day one with a net asset value equivalent to the offer price. This will favourably differentiate it from most LIC IPOs where the investors wear the up-front costs. This means there will not be the need for attaching options. A prospectus is expected to be available in late July with the shares listing in October 2017. We will be undertaking research on VGI Partners Global Investments and will publish a report in due course.

New Listed Fund to Focus on Disruption

Specialist global fund manager, Walsh & Company, has issued a product disclosure statement for a new fund that will focus on the disruption theme. The Evans & Partners Global Disruption Fund (proposed ASX code: EGD) will be a listed investment trust that invests in a concentrated portfolio of largely listed international shares. As well as investing in companies that have proven abilities to disrupt, and the potential to continue to disrupt, the fund will invest in a selection of smaller innovators who have the potential to successfully disrupt existing industries and companies. It is our expectation that the portfolio may have something of a core-satellite characteristic, representing a mix of larger, established companies (Alphabet, Apple, for example) and smaller less established companies. Evans and Partners Investment Management will be the investment manager for the fund and Walsh & Company will be the responsible entity. The investment committee will comprise a number of leading industry figures with experience in technology, innovation and disruptive enterprises.

The offer, expected to close on 18 July 2017, is for 62.5m units at $1.60 to raise $100m, with the ability to raise an additional $50m through oversubscriptions. We have published a full research report on EGD and our rating for the fund is Recommended.

HHV Announces Strategic Initiatives

On 6 June the Board of HHV announced a number of new strategic initiatives aimed at delivering shareholder value. These initiatives include changes to the Board, lower directors’ fees, a reduced base investment fee, changes to the investment mandate and tweaking of the dividend policy. Frank Gooch, currently Managing Director of Milton Corporation (ASX: MLT) has joined the Board and will become Chairman of HHV after the next AGM. Frank has considerable experience in the investment industry and has been CEO of MLT since 1999. Russel Pillemer, CEO of Pengana Capital also joins the HHV Board whilst interim Director, Rob Millner leaves the Board.

The HHV mandate will be changed to replicate the Pengana strategy which has a focus on investing in a well-constructed portfolio of growing businesses at reasonable valuations. The portfolio is typically segmented into core, cyclical and opportunistic components with core stocks providing stability with a weighting between 60-80%. HHV will retain its ethical focus with Pengana applying ethical screens across the portfolio. The HHV portfolio will be managed by the merged investment team which is led by Pengana Chief Investment Officer & Portfolio Manager, Jordan Cvetanovski and Steven Glass, Head of Research & Portfolio Manager. Former Hunter Hall CIO, James McDonald is also a member of the investment team.

The dividend policy has been revised slightly with the words “consistent and regular” replaced with “regular and growing”, the emphasis being on “growing”. The Board anticipates it will pay a 3.5 cents per share final 2017 dividend but said it will confirm this in July. This is consistent with previous comments and would take the FY2017 dividend to 7cps, up from 6cps in FY2016. This represents a yield of 6.4% on the current share price of $1.10.

We have commenced a detailed review of HHV and will publish a report and revised investment rating in the coming weeks.

New Listings - Contango Global Growth & WAM Microcap

Contango Global Growth (ASX: CQG) shares listed in June after the company raised $100m through the issue of 90.9m shares at $1.10. An equivalent number of attaching options were also issued. CQG joins the ranks of LICs focused on international equities with the company planning to invest in a concentrated portfolio of quality global growth equities. Our rating for CQG is Recommended Plus.

WAM Microcap (ASX: WMI) successfully raised $154m through an initial public offer and the shares commenced trading on 28 June. The offer was oversubscribed and, whilst existing investors in Wilson Asset Management LICs received their full allocations under the priority offer, other applicants were scaled back. WMI will invest the proceeds of the offer in a portfolio of undervalued ASX listed companies with a market cap less than $300m at the time of investing. The Manager, Wilson Asset Management, will use its proven research-driven and market-driven processes to select stocks for the portfolio. IIR has not undertaken any research on WMI and we make no recommendation in relation to the LIC.

Initiating Coverage of Switzer Dividend Growth Fund

IIR has initiated coverage of Switzer Dividend Growth Fund (ASX: SWTZ) an Active ETF that listed in February 2017. SWTZ seeks to provide investors exposure to a portfolio of actively managed large cap stocks with a focus on providing an attractive income stream with the benefits of high levels of franking. Given this objective, we would expect the trust to provide an above market dividend yield over the long-term. The trust will also be seeking to provide capital growth over the long-term through active management of the portfolio. Switzer Asset Management is the Investment Manager for SWTZ and Contango Asset Management (ASX: CGA) has been appointed Investment Adviser. IIR has assigned SWTZ a Recommended rating. For further details see our full initiation report.

Upgrading AFIC to Highly Recommended

IIR has upgraded its rating for Australian Foundation Investment Company (ASX: AFI) from Recommended Plus to Highly Recommended. This recognises its sound investment processes, highly experienced investment team and Board, transparency, exceptionally low costs and the benefits of a lengthy track-record. Investors can gain confidence from a long track-record in which the Manager has achieved its investment objectives over the long-term, particularly in delivering a stable, growing, fully-franked dividend. Refer to our full research report for details of the upgrade.

Discounts and Premiums

In this month’s LMI Update we look at premiums and discounts to NTA and profile five LICs trading at large discounts to pre-tax NTA.

In our view, there are four key factors that contribute to the extent of a LIC/LIT trading at a discount or premium to net tangible assets (NTA). These are: (1) Dividend consistency - LICs/LITs that provide a consistent and growing dividend stream tend to trade at narrower discounts or even premiums while LICs/ LITs with volatile or declining dividend payments tend to trade at heightened discounts; (2) Portfolio performance - performance of the portfolio will contribute to the discount/ premium with LICs/LITs achieving their objectives generally trading at narrower discounts (or even premiums) than those that are not achieving the stated objectives; (3) Shareholder engagement - those LIC/LITs that engage regularly with shareholders and grow the shareholder base tend not to experience the extreme discounts; and (4) Market Liquidity – LICs/LITs with a low market cap or where market liquidity is thin are more likely to trade at discounts.

As the pricing tables on the following pages show, the Australian large cap share focused LICs are mostly trading at discounts to pre-tax NTA. We see this as a reasonable entry point for long-term investors. Amongst the mid/small-cap focused LICs/LITs, there are more entities trading at discounts than premiums. However, most of the larger, better performing LICs/LITs such as WAM Capital (ASX: WAM), WAM Research (ASX: WAX), Mirrabooka Investments (ASX: MIR) and Forager Australian Shares Fund (ASX: FOR) are trading at significant premiums. We discussed this in our last monthly and noted that mid-cap focused LIC, Contango Income Generator (ASX: CIE - trading at a 7% discount at the end of May), presented an opportunity for investors looking for exposure outside the large caps.

The above table highlights LICs under our coverage that are trading at the largest discounts and premiums to pre-tax NTA. Investors need to be careful when buying LICs at a discount to NTA as many trade at significant discounts for a prolonged period and there is no guarantee the discounts will be eliminated. We provide a few comments below on the five largest discounts to NTA and look at potential catalysts that might see the discount correct.

Bailador Technology Investments (ASX: BTI)

Technology focused LIC Bailador has traded at an average discount of 14.1% since its listing in late 2014. So a 25% discount at 31 May 2017 seems excessive. The underlying portfolio of investments in expansion stage technology businesses has performed reasonably well since inception, delivering an underlying portfolio return of 14.3% p.a. to 31 December 2016, after all fees. However, pre-tax NTA per share has grown at a slower 5.1% p.a. to 31 May due to the dilutive impact of options exercised in March 2016. Over the past 12 months pre-tax NTA per share has fallen by 3.4% and this could help explain the discount. Potential catalysts for a re-rating include strong valuation uplifts of its portfolio investments and realisation of these gains over time. In a presentation earlier this year, BTI said it expects a material valuation and cash realisation over the next 24 months. We think the market will wait to see some evidence of this before undertaking a significant re-rating of the stock. In May, BTI’s investment in Lendi, an online home loan provider, saw a 42.3% uplift in valuation on the back of third-party investments. The nature of BTI’s investment portfolio means that returns are likely to be lumpy and of a capital nature, so an investment in BTI is more suited to long-term investors. Our rating for BTI is Recommended Plus.

Barrack St Investments (ASX: BST)

BST is a relatively new LIC having listed in August 2014. It invests in a portfolio of predominantly mid-to-small-cap Australian shares. The portfolio performed well in its first 18 months following inception, but performance over the past year and options dilution has significantly dragged down returns, with a portfolio return (pre-tax NTA plus dividends) of minus 10.0% over the past 12 months. Since inception the shares have traded at an average discount to pre-tax NTA of 14.5%. The key catalyst for a narrowing of the discount is likely to be evidence of improved performance. With a market cap of just $15.7m, BST is a relatively small LIC which is likely to restrict market liquidity in the shares. Our rating for BST is Recommended.

Flagship Investments (ASX: FSI)

FSI is managed by the same investment manager as BST, EC Pohl & Co, but it has a longer track record and stronger performance. The portfolio is concentrated and invested across the market, but has a heavy weighting (around 70%) to ASX 100 stocks. Whilst it has significantly underperformed over the past 12 months, performance over three and five years is more in line with the market. Over the past 12 months performance has been hurt by falls in a number of small cap exposures and underweight positions in resources and energy. The current discount to pre-tax NTA is broadly in line with the three-year average. Likely catalysts for a narrowing of the discount include a return to stronger performance and improved investor communication. Dividends have been flat over the past two years so higher dividends would likely lead to improved share price performance. Our rating for FSI is Recommended.

Hunter Hall Global Value (ASX: HHV)

The HHV discount of 13.4% at the end of May compares with an average discount over the past three years of 9.7%, although in the latter months of 2016 the discount was much lower. We believe the current discount reflects the recent instability surrounding the Investment Manager, the Board and poor portfolio performance over the past 12 months. With a return to stability following Hunter Hall International’s merger with Pengaga Capital, Board renewal and the announcement of new strategic initiatives, we see the potential for the discount to start narrowing. Our HHV rating remains suspended whilst we undertake a detailed review of the LIC and its manager.

Contango MicroCap (ASX: CTN)

CTN has also suffered a degree of instability following attempts to split the portfolio management amongst two managers and the subsequent Board instability. With the LIC returning to a one manger entity and a refreshed Board, stability seems to have returned to the company. The 31 May discount of 9.9% is close to the three-year average of 10.9% and, while the instability over the past six months no doubt plays a part, the portfolio has also underperformed over the past 12 months dragging down the longer-term performance numbers. Dividends have also fallen over the past two years. Whilst stability seems to have returned to the company, the market is likely to want to see an improvement in performance before the discount starts to narrow. Our rating for CTN remains suspended while we undertake a detailed review of the LIC.

For pricing and recommendations and performance data, click here.

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.