Bell Potter: Our key LIC picks

Our key picks from the LIC / LIT sector, across pre-tax NTA and share price performance, distribution yield (based on the previous 12 months and including Special Dividends) and valuation, as of the end of the March quarter were as follows. 

Please note that historical performance is no guarantee of future performance. It is important that clients are aware that the share price of a LIC is impacted by the oscillation of the discount or premium to NTA, which should be taken into consideration when investing in LICs.

Market Update 

There were no new listings in the LIC/LIT sector for the March 2019 quarter following the December 2018 quarter which saw 4 new LIC/LTs enter the market with $888.7m in new capital raised. 

The $279.3m in secondary raisings for the March quarter was below the $334.5m December quarter figure, and was mainly attributable to the Magellan Global Trust (MGG) Unit Purchase Plan that raised $276.8m. MGG announced that almost 50% of existing unitholders participated in the plan that provided an opportunity for eligible holders to acquire up to $15,000 of new units at a 5% discount to the NAV. 

Magellan Financial Group (MFG) paid MGG approximately $14.6m in order to minimise the dilution of the offer given the offer price was executed at a discount to NAV. MFG is the parent company of Magellan Asset Management, the responsible entity and investment manager of MGG. The post fund size increased above $2bn, making it the 4th largest LIC/LIT as at the end of 1Q19.

VGI Partners Global Investments (VG1) added $2.2m from a manager reinvestment of 983k shares. As per the Investment Management Agreement (IMA), VGI Partners Pty Ltd (the Manager) and the Company agreed that to the maximum extent permitted by law, the owners of the Manager will re-invest in shares in the Company the after-tax proceeds from a performance fee payable. The performance fee is paid semi-annually in arrears, and equal to 15% (plus GST) of VG1’s outperformance over each prior semi-annual performance calculation period, subject to a high watermark.

Dividend Reinvestment Plans (DRPs) added $102.4m in capital raised for the March quarter, an increase from the $22.5m raised in the previous quarter. This was predominately due to the two largest LICs, Australian Foundation Investment Company (AFI) and Argo Investments (ARG), contributing a combined $65.2m. 

The DRP figure was also substantially larger than the 1Q18 DRP raising of $68.6m, which was largely due to the increased instance of special dividends accompanying 1H19 interim dividends. This was due to the underlying Australian securities held by the LIC/LITs paying out special dividends in the wake of uncertainty surrounding franking credits in the event of a potential ALP government weakening the future value of franking credit balances held by companies. Likewise, many LICs mentioned similar reasons in utilizing the built up franking credit balances on accounts, whilst providing an indication that the FY19 final dividend may also include further special dividends.

Options are regularly being omitted from LIC listing as managements opt to cover the initial listing fee to ensure the company begins trading at the NTA. For the foreseeable future they will continue to be a contributing factor in LIC capital raisings with $37.8m raised via option exercises in the March quarter. This amount, however, is substantially lower than the $152.9m from the past December quarter and $93.3m from the September quarter. This was predominately due to the options in Antipodes Global Investment Company (APL) expiring in October 2018 after raising over $201.9m in the second half of 2018.

Ellerston Asian Investments (EAI/EAIO) raised $37.6m in the March quarter before the options expired at the end of February. The options were trading out of the below, below the exercise price of $1.00, for the majority of the quarter. EAIO was the only option to expire during the quarter.

At the end of March there was $854.3m in options outstanding across 10 LICs. 4 option expirations are set to occur during 2Q19, with the largest based on outstanding options being Plato Income Maximiser (PL8/PL8O) and Pengana International Equities (PIA/ PIAO) with $325.5m and $280.6m respectively unexercised. Both PL8O and PIAO were trading out of the money at the end of March, which is also the case for other future option expirations were the share prices have all closed below the expiration price. Acorn Capital Investment (ACQ/ACQAI) announced the launch of the ACQ Short Term Recurring Option (ASTRO) program in December 2018. The offer of the pro-rate non-renounceable offer of bonus options occurs twice annually for shareholders. ACQAI will be short dated, expiring 7 days before the likely next ex-dividend date. Due to this they will be unquoted but will be transferable. The intention for funds raised from the exercise of the bonus options from the ASTRO program will be applied towards increasing the Company’s investable capital. Eligible shareholders receive 1 bonus option for every 3 shares held at the bonus option record date.

In the next section we have evaluated our LICs using the performance of both the pre-tax NTA and share price, and provide a one-pager on each LIC under coverage. 

Click below for the full 88-page report.