4 ingredients for a successful LIC

While most people likely think of Geoff Wilson AO as a stock picker, he freely admits to being “the old guy” who does “very little” these days – compared to his younger portfolio managers at least. One thing he still focuses a lot of his energy on though, is listed investment companies (LICs). After launching WAM Capital (WAM) more than 20 years ago, Wilson has grown his stable of LICs to seven, many of which trade at premiums to their net tangible assets (NTA) – a rarity in today’s LIC sector. But it wasn’t always that way. Despite posting strong early performance and paying dividends from year one, Wilson says it took a couple of years for the share register to “tighten up” and for that discount to close.

“Once you are listed on the stock market, for some reason, people that bought in the IPO change their mind or they decide to sell and it takes a little while to effectively get your tribe and the people that realise they want to invest in what you’re doing and that really took two and a half years for WAM Capital. In the first period we were trading at a twenty percent discount.”

In this wire, I share some key lessons from Wilson’s decades of experience with LICs, including the four attributes that he thinks a LIC needs to be successful.

Image: Geoff Wilson AO, Chairman & Chief Investment Officer, Wilson Asset Management

Closing the gap

WAM Capital may have been Wilson’s first experience with closing the gap between NTA and share price, but it certainly wasn’t his last. Five of the seven LICs managed by WAM now trade at premiums to NTA, but many of these have been through similar journeys to WAM Capital’s. WAM Leaders (WLE) was floated on the ASX in May 2016, but for a while after listing, it too traded at a discount.

“The good performance from the guys, the increase in dividends, and then you tend to find the share register tightening. A year ago, it was trading at a 10 per cent discount, now it’s trading at a premium.”

He says there are four key ingredients for success in LICs:

1. Strong underlying performance. All the marketing and engagement in the world can’t help if the manager is consistently underperforming or losing money.
2. A steady stream of fully franked dividends.
3. Respect all shareholders, and ensure that if raising money, it’s being done in the best interests of all of them.
4. Strong shareholder engagement and communication.

While some LICs get the first two right, the third and fourth are where many of them fall down according to Wilson.

A time for consolidation

Back around 2003-2004, there was an explosive boom period for LICs, with more than 20 IPOs hitting the market in a period of nine months. Perhaps unsurprisingly, there was a period of consolidation several years later, as the managers with poor performance or a lack of commitment to the sector dropped away. These periods can offer great opportunities for savvy investors as these neglected and unloved LICs can often be purchased for significant discounts to their NTA.

“With most industries, you will go through a strong growth phase and then after that you will go through a consolidation period or a consolidation phase. That is where the strong get stronger and the weak either get absorbed by the strong players or fall by the wayside, and it is how industries tend to develop over time.”

He believes that we’re entering one of these periods of consolidation now, after several years of expansion in the LIC sector. He believes that the number of LICs on the ASX is set to shrink in the coming years as managers turn their backs on the structure or are taken over by more successful ones. This might not be such a bad thing for investors in the sector though, as discounts begin to narrow and only the best survive.

Wilson takes an active approach to discounted LICs, often buying up large stakes and then lobbying for change to help investors realise the value of their holdings. A lot of the time, this approach works and the value is realised. Sometimes however, management chooses to act in a way that’s not aligned with shareholder interests, and this is when he often steps up his engagement. This can result in lobbying for a change in management, as seen with WAM Alternatives (WMA – formerly Blue Sky Alternatives Access Fund), or a complete wind-up of the fund, as with the AMP Capital China Growth Fund.

“I think listed investment companies are the holy grail of investing because you get an opportunity to buy a dollar of assets for potentially eighty cents.”

As for Wilson, he’s putting his money where his mouth is. He says he’s been buying shares in WAM Global and WAM Alternatives recent as both vehicles are trading at discounts to their NTA.

You can access the full discussion between Geoff Wilson and Kate Thorley in the WAM Vault here.

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