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Five famous investors with cheap listed funds

If you were offered $100,000 worth of CSL shares at 80% of their current market price, what would you do? Easy. Buy them and make an instant $20,000. 

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. 

Now, what if instead of CSL, the 80% offer was on a diversified portfolio of quality shares selected by a prominent fund manager? Pay 80 cents for $1 of their favoured selections. In theory, it’s better than the CSL shares because the portfolio is diversified and backed by an expert team’s opinion. Still hard to resist, even with no requirement to hold for a set period?

Every day of every week

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 every day of the week. There are so many LICs and LITs managed by well-known names regularly trading at significant discounts to their Net Tangible Assets (NTA) value that it’s hard to know where to start. But unlike the CSL example, there is a risk the discount will go even wider.

Bell Potter’s chart below from its latest Quarterly Report shows trading levels relative to NTA for LICs and LITs according to size. 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, and many remain around this level in June.

The Quarterly Report included the following listed vehicles trading at discounts greater than 20% in the three sectors of Australian equities, global equities and alternatives as at 30 March 2020. For a check on more recent prices, see our Education Centre.

Australian equities

Global equities

Alternatives strategies

In case some of the above names are unfamiliar, consider other famous fund managers who missed the 20% cut-off but their discounts were still over 10%:

  • QV Equities (Investors Mutual) (QVE), -14.4%
  • Ophir High Conviction (OPH), -13.5%
  • Magellan Global (MGG), -10.2%
  • Platinum Capital (PMC), -11.2%
  • Templeton Global (TGG), -17.1%
  • Antipodes (APL), -17.1%
  • Perpetual Credit (PCI), -14.5%.

Let’s face it, it’s unacceptable that retail investors cannot sell near the value of the underlying shares, especially during a critical time such as the need for money during the pandemic. The discounts are in addition to the falls in the value of the assets. These are among the highest-profile, most-respected fund managers in the country. Yet for many reasons, investors do not support their listed vehicles in sufficient numbers to sustain a share price near NTA (examples are pre-tax NTAs, and in most cases, post-tax NTA comparisons are worse).

In investing, where there are thousands of competing funds all looking for a marginal edge, 10% to 20% is a big deal. If a fund manager were able to deliver a consistent 1% per annum above a broad market index over the long term, and tell a good story, the investing world would beat a path to his or her door. Most active managers do not beat the index after fees, and would happily settle for 1% outperformance. Yet here we have significant discounts to the market value of the underlying assets, forcing investors to hang around in hope or sell at a big relative loss.

Five famous fundies with heavily-discounted LICs

Let’s select five high-profile managers with ‘cheap’ LICs, defined as trading at a discount to NTA of about 20% as at the latest NTA disclosure (generally, 5 June 2020). 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 in absolute and relative terms occur every day).

1. Australian Leaders Fund (ALF), price $0.90, NTA $1.14, discount 21%

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.


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2. Thorney Opportunities (TOP), price $0.50, NTA $0.62, discount 19%

The portfolio manager and chairman of Thorney is Alex Waislitz, regularly featured in the media as a ‘billionaire investor’ (see below from the front page of The Australian Financial Review on Tuesday this week). In the 2018 Rich List, he was estimated to be worth $1.39 billion and in the same year, the Thorney Investments Group celebrated its 25th anniversary. All the ingredients for success sound right to find market gems (he was early into Afterpay and Zip) but the retail investor support is disappointing.

3. PM Capital Asian Opportunities (PAF), price $0.73, NTA $0.92, discount 21%

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 an 18% discount.

4. Cadence Capital (CDM), price $0.65, NTA $0.87, discount 25%

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 $1.41, NTA $1.85, discount 24%

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 20+% 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 IPO. Since launch, the loss from $2 to $1.41 mainly comes from the discount to NTA and market falls 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.

A weakness of structure as well

No doubt the discounts in the sector say as much about the weakness of some LIC and LIT structures as the fund itself, as the only liquidity comes from finding a buyer on the market. It should also be acknowledged that some LICs trade at a premium and benefit from active marketing by their managers or good economies of scale.

But there’s no way to gloss over it. Billions of dollars were invested in the best names in Australian funds management, every investment originally costing NTA (or worse if fees were involved), and now most of the issues trade at a discount.

And there is a residual adverse impact from the commissions paid to brokers and advisers to place LICs and LITs, which have now been banned. The reputation of the structures took a hit when some massive transactions traded at a wide discount, and investor trust is slow to return. 

It's one reason why some managers are moving into active exchange-traded funds (ETFs), where there is an in-built market-making function which ensures trading close to the NTA value. 

Perhaps it needs a major consolidation where the big funds take over the minnows. It might be better from the investor's perspective to turn some funds into unlisted vehicles in an open-ended vehicle which trades at NTA, or an active ETF, as long as managers are willing to face redemptions. Ouch! Less funds under management means less fees.

 

Graham Hand is Managing Editor of Firstlinks. Graham owns some of the issues mentioned in this article, much to his chagrin. This article is general information and does not consider the circumstances of any investor.

 

41 Comments
Ramon Vasquez
June 25, 2020

Hello .
My suggestion is not to listen to the siren call of so-called " guru " managers , but to think of Lics/Lits as an early type of ETF whereby one is able to trade them as a pure stock-like entity ; thus , who should care about waffle such as discounts / premia ? Just trade them per a good charting system .

Happy trading , Ramon .

Greg
June 15, 2020

I am confused at all the bad press for LICs trading at a discount.

As a long term investor, buying a LIC at a 20% discount to NTA means earnings are 25% greater on a per share or per dollar invested basis than if I bought the underlying holdings. i.e. Using a 10% as an illustrative return on the underlying investments then 10%/(100%-20%) = 12.5% return for the LIC (12.5% is 25% greater than 20%)

Long term:
- if the discount is unchanged, my earnings rate for that style/sector is 25% greater than buying individual equities
- if the LIC price reverts to NTA then I get the capital upside.
- if the discount increases then I am worse off - however I have a couple of extra percent earnings buffer providing some mitigation

Unless I am missing something, there appear to be several advantages to buying the discounted LIC as opposed to "do it yourself" buying the underlying equities.

Michael
June 14, 2020

If the LIC continues to trade at a significant discount to its share price it surely is the responsibility of the board to initiate action to address the issue by either delisting or winding up the fund and return the proceeds to the shareholders. I recently emailed (Twice) the chairman of one of my LICS, expressing these views but , guess what, no responses. I would have preferred to have an extra 20% in my account than leaving up in the clouds. The question we have to ask is whose interest is the board concerned with, the shareholders or the management company?



C
June 14, 2020

If it’s mainly retirees buying these for regular dividend income, wouldn’t most of them be better off getting an annuity?

Ramani
June 14, 2020

In theory yes but in practice the frictional transaction costs, the value of investments backing the annuity if unit-linked and the inevitable resort to matched fixed interest assets would into potential earnings. On top APRA’s capital rules and prudential margins would make annuities unattractive.

SMSF Trustee
June 29, 2020

Getting an annuity also involves taking credit risk on the annuity provider. Having all my investment in a BBB credit risk that's under pressure right now and raising capital is not a comfortable situation.

GM
June 14, 2020

The LIC's should be able to buy back their shares in a manner but not have to cancel the shares. Basically act as an internal market maker. After all, what better investment could the LIC make than buying a known investment with a known value at a substantial discount for its investors? Its ridiculous that the only thing they are allowed to do is buy back their stock and then cancel it. How is that in anybody's interest except those trying to greenmail the investment manager?

Ramani
June 14, 2020

The disincentive to improve LIC liquidity through market-making (which might entail additional costs) apart, is there a reason why LICs should not offer an investor a pro-rata in specie redemption if the holding is large enough, or by using an intermediary?
Given the gap between NAV and quoted price would keep off investors, why is this not being considered by well-known fundies?

Graham Hand
June 14, 2020

Hi Ramani, yes, there is a simple reason this does not happen. It leads to a loss of funds for the manager. Let's not be too naive about vested interests here.

There is a LIC which offers a redemption facility, Ironbark (ASX:IBC). To quote from their website:

"The IBC board intends to offer shareholders the opportunity to receive the NTA backing per share (less costs and expenses) every 3 years as part of its capital management program."

Cheers

David
June 14, 2020

It’s all too hard , I decided to sell (Alf and cdm at a loss, Magellan and Wam at a gain) and buy Reits like CIP, feel much better about the risk, and gold.

Steve
June 11, 2020

I investigated PAF in 2018 and have just checked it out after seeing it listed in the article. Over 40% decline and reducing dividends.... hmmmmm. An Asian opportunity to reduce your wealth? 

Graham Wright
June 11, 2020

Graham, In my view, the most important comment in your article is the following: "Yet for many reasons, investors do not support their listed vehicles in sufficient numbers to sustain a share price near NTA (examples are pre-tax NTAs, and in most cases, post-tax NTA comparisons are worse)."
I feel a number of factors contribute to lower investor support.
1. I feel that the relationship between share price and NTA of LICs is primarily a function of the profile and promotional activities for the LIC managers. My observation is that LICs trading at a premium are managed by managers who project a high profile for themselves, their team and their fund while those trading at a discount have a lower profile and less promotion towards LIC investors.
2. All LICs engage in strategies and investment sectors that need to be sold by the manager to gain investor interest yet many managers fail to indulge in such selling, instead using compensatory strategies such as "share buybacks". Some managers build their profile around their unlisted funds instead of their listed fund.
3. LICs are much more transparent then unlisted funds so that the sins of the LIC managers are more visible and visible sooner than those of unlisted fund managers. Some managers are worthy of our investment support while others are not. The detriment of this transparency for LICs is that some investors follow LICs for their investment guidance without investing in the LIC. Of course those managers who recognise this and deliberately provide some guidance gain in the promotional stakes.

To me, an LIC is all about the market sector, the Manager and the investment strategy. The relationship of shareprice to NTA will only change with investor demand or lack thereof driving the shareprice which drives my profit or loss. Just because the NTA changes, my profit or loss will not change.
I am happy to invest in my selection of LICs. At least I can convert to cash on demand, not have my investments sealed against conversion to cash by a manager.

George
June 11, 2020

At the end of the day, it is the Fund Manager who has the yacht, Polo Team and Art Gallery.
The fees kill almost any hope of the punter ending up better off than investing in a low cost Index Fund. The numbers are there for anyone to see. Why anyone would choose to bankroll the lifestyle of Fund Managers is one of life’s great mysteries.

Austin
June 14, 2020

Agreed.

Phil Kennon
June 28, 2020

George
I don't think you understand the difference in fees between the "traditional ", long standing, internally managed LIC's which charge fees below 0.2% and the newer LIC's with fees about 1%.
Your performance comparison between traditional LIC-s and the index doesn't stack up. Phil

Graeme
June 11, 2020

While a large discount is often the result of poor performance, it is instructive to look at why the performance has been bad. I will confine my remarks to the two of 'The Famous Five' (apologies to Enid Blyton) in which I retain an interest.
ALF: Adapted a market neutral strategy. It should be noted, however, that the original Prospectus Para. 2.6 states, "The number of short positions will not exceed 30% of the equity portfolio by value." Happy to be corrected but I am not aware of shareholders approving a change to this limit. One would assume the value lost over the last decade by exceeding the limit would be substantial. 
CDM: Managed to have around 20% of the fund invested in a single illiquid company (ARQ). When things went sour it was virtually impossible to exit this investment. No impropriety here but a fundamental error.

Sid
June 11, 2020

Graham has hit the nail on the head - less FUM means less fees, so the fund manager generally has a vested interest not to do anything to reduce FUM like offering an annual buyback near NTA which would keep the share price near the NTA.
In an ideal world, the permanent big discount and poor performers would be swallowed up by other funds, but there seems to be little appetite for such fighting these days.

In the meantime, aggrieved shareholders should continue to write letters of complaint to the board, vote against the Rem Report and against directors re-election come AGM time

Randall
June 11, 2020

Following a similar line to Jack and Desmond, I have bought and sold LICs over the years with not that much regard to the current NTA but looking more to how the price I am paying or getting relates to my 'value' rating of the company. All about what I am trying to achieve. So going through the last phase of work and into retirement I looked for a reliable and growing dividend stream over time and found that LICs delivered that. And still do. My first buy was CIN at a significant discount to NTA and today CIN is still at a significant discount to NTA. Yes my capital gain over the years is not great but with an overall portfolio gross spot yield in double digits or nearly so over the years, then why should I be concerned? All I have to decide is whether to DRP or take the income. A decision that does involve NTA and mostly leaves me better off via dollar cost averaging. And as the older LICS regularly state, I am not expecting to sell out any time soon!!

James
June 11, 2020

You need to buy the larger, more liquid LIC's. Historically they trade at or slightly below NTA so buy when they trade at a slight discount to NTA (5% to 10%). If the smaller ones continually trade at a deep discount then surely they will be taken over/ merged or wound up to release the value.

Stephen Mattani
June 11, 2020

Almost never occurs because of embedded long term contractual agreements between the manager and the fund/trust otherwise it would be an easy arbitrage opportunity. Sadly it's not. When these agreements expire, it is an opportunity.
On market aggressive buybacks can narrow the discount but many managers are loathe to do so because they're cannibalising their own business.

Jason
June 11, 2020

I'll throw in a possible reason for the discount to NTA from investing and observing LICs for a long time and also being involved in the advice space. It is that no one has a vested interest in recommending them, particularly the smaller LICs. Lack of demand leads to the discounts to NTA.

Brokers don't recommend them beyond the initial issue of shares (driven by commission), as putting together a portfolio of direct holdings is what they are supposed to be doing. For many financial planners the same story holds.

Advice licence holders have historically been dominated by financial institutions with the aim of directing money to their own products (typically unlisted), so LICs are often not part of approved investment lists and where they are they are typically of the AFIC and Argo ilk. Not surprisingly these trade around NTA.

Changes in the advice licence space won't change this situation quickly, as for most its still about directing clients money to particular platforms.

The above leads to little demand for research houses to review and provide ratings on LICs, which adds further to the problem of little awareness or demand for LICs.

MFF is a great example. Despite its capitalisation and long term consistent outperformance it traded at a substantial discount to NTA for years until Bell Potter brought some awareness to the company and narrowed the discount somewhat (but still a material discount).

I suggest its less about fees and performance (PMC is a good example of an LIC trading at a premium for years despite ordinary performance and high fees) and more a question of marketing (incentives) and, consequently, demand.

David Close
June 26, 2020

This seems reasonable to me. Presumably brokers and financial advisers, managed funds, industry and large private super and pension funds do not buy LIC/Ts for their portfolios, leaving only the small retail investors, SMSFs and so on - a much smaller market.
However if you buy at 20 % discount and the entity continues at 20% discount while paying 6-7% net yield then you have not lost while benefiting from expert(we hope) stock selection. The NTA should increase in line at least with the appropriate index and hopefully better despite the discount, with the extra possibility that the discount may narrow.
The entity also has some cash in hand for opportunities which ETFs do not, as far as I know.
The other factor is fees which may be excessive. It bemuses me to note that a performance fee is universally applied for good performance (which is usually the result of a bull market rather than clever stock selection) but not deducted for poor performance.
As noted elsewhere those LICs who are better known to the small retail investors eg Argo and AFIC trade closer to NTA, as do those who ensure a high profile such as the WAM group.

Jack
June 26, 2020

David, re your comment on the WAM Group, in the past, their good marketing, high profile and client liaison probably helped avoid discounts to NTA, but this theory was blown out of the water by their global fund, which on last check had a 16% discount to NTA. So much for the brand. I think their Aussie funds trading close to NTA had more to do with producing consistent fully franked dividends.

John
June 11, 2020

I dipped my toe in the water for a high dividend active ETF - has traded since I bought it at a 20% capital loss. Does not look like going up either and high dividends do not cover the loss in capital. Read the Australian today (11 Jun) - there are some Active ETFs burning investors with limited scope to return to the buy in price. Apart from the transparency in my opinion Active ETFs carry the same potential traps of LICs. And to make matters worse the more active the ETF the more difficult to understand the prospectus describing how the ETF works. I now stick to the old school LICs and Index Tracking ETFs as recommended by Warren.

Graham Hand
June 11, 2020

Hi John, I think you're confusing two ideas here. Active ETFs trade at NTA, they have market-makers who buy and sell units to keep the price at NTA. So they do not 'carry the potential traps of LICs' of trading at a discount. The fact that the price has fallen is not a discount to NTA, it is due to the stock market falling. All index funds and old school LICs would have the same problem.

Mark
June 11, 2020

I don't and have never held LIC's etc. and was almost swayed by the somewhat positive (independent?) review above. Having read all the responses I'm glad I've stayed out. Thanks everyone for sharing.

Graham Hand
June 11, 2020

Hi Mark, it was not meant to be a 'positive' review, it was meant to be balanced. There are enough warnings in there, and not sure what you mean by '(independent?)'. I did not recommend anything.

Chris Brycki
June 11, 2020

Perhaps the discount to NTA is a reflection of the present value of future fees. In quite a rational way investors no longer expect outperformance from active managers vs their benchmark so the discount reflects the index returns less the long term impact of fees. Less, in some cases, an additional discount for poor liquidity.

Adrian
June 11, 2020

Perhaps.... but it does not explain the several cases where the exact same strategy is offered unlisted (with many millions invested in the unlisted trust), yet the LIC is there trading at a 20% discount. I mean, I understand that the unlisted trust must trade at NAV, but if investors were acting rationally they would say this is overvalued by the present value of future fees, and should surely switch out of the unlisted trust and into the LIC, which would help reduce the LIC discount. As per alot of comments i agree, many LIC investors do not act rationally and are easily swayed by marketing/promotion and poor advice.

Desmond
June 11, 2020

At the end of the day the NTA is irrelevant to the investor. What matters is the share price of the LIC / LIT and any income generated. As others have commented, if the LIC has traded at a significant discount to the NTA for a long period of time then why hold on and more importantly why pay a fee to the manager.

Mike West
June 11, 2020

Why not buy an ETF ? no performance fee and transparent . As warren buffett says , these other fund managers cannot give long term returns above the market .

James
June 11, 2020

Have been a somewhat ambivalent holder of TOP & TEK in the past. Yes the fees are higher than many other LIC’s, especially performance fees. Made some money in capital growth, dividends were miserly and they have both traded well below NTA regularly for long periods of time. Alex’s Private Investment vehicle is not open to most of us. TOP & TEK trade off his reputation but investors aren’t so well rewarded!

Helen
June 11, 2020

I got fooled by the dividends Cadence were paying, bought 72,000 shares @ $1.26. I've lost $44,000 capital! Its of no consolation to me that the Management team also own shares, I'm a self funded retiree and need to survive
The only LIC I would ever buy again would be Magellan..

Gary M
June 11, 2020

Same here, Helen. I just checked my records for CDM. I first bought them in November 2013 for $1.42, sold half in February 2016 for $1.46, now 66 cents. Dividends do not make up for loss of capital.

Sean
June 11, 2020

As the article points out, the management team are shareholders, and Mr Siegling is keen to to tell us at investor presentations he is a keen buyer at discount prices. Does this mean, in theory, he is involved in a takeover without paying NAV let alone a premium?

David James
June 11, 2020

A missing element of the consideration is fees. I admire Waislitz. However when I looked into the management fees of TOP (I found it difficult to get clarity of their fee structure from their annual reports), it appears they are entitled to performance fees of up to 20% of the period change in NAV (on top of their base/mgmt fee). There was no high water mark. I.e. if the NAV goes from 100c to 50c back to 100c, they would collect 20% of the 50c to 100c rise (the fee could not be below zero so they didn't get 'punished' for the 100c to 50c drop). To mind, that doesn't seem fair to pay the manager a performance fee for volatilty, which could be gamed. I would hope I was wrong, but it stopped me buying TOP. I noticed similar issues in other LIC/Ts

Graham Hand
June 11, 2020

Thanks, David. I don't know if this comment is accurate and we will publish any reply from TOP. You're right, though, that there is no standard for performance fees and they are hard to compare. When you look at a platform that attempts to summarise the performance fees on the funds in its PDS, there is a wide discrepancy.

David James
June 11, 2020

Thanks Graham - I'll be interested to know if I understood the TOP clauses correctly.

Helen Christou
June 14, 2020

So is it any wonder Waislitz is a billionaire at his age???

Jack
June 11, 2020

While some discounts come and go, I have held LICs where the discount has been wide for many years. I originally bought thinking a 10% discount was good value and now it stays around 20%. I hang on hoping the manager will do something tangible to remove it.

Carlos
June 11, 2020

This issue posted by Jack is exactly why many people are shunning a lot of the smaller LICs.
Persistent and worsening discounts to NTA.
It is a major structural flaw.
Buybacks often don't seem to help: they have been trying that in LSF and others.
And some of bigger ones such as WAM and AFI are at a premium which makes for bad buying.
Bring on more active ETMFs.


 

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