If 24 LICs ran the Melbourne Cup... which would be our favourites?

Daryl Wilson
Daryl Wilson Affluence Funds Management

To win the Melbourne Cup requires a horse that is well trained, has a great jockey, and importantly hasn’t been hit too hard with a weight handicap from the stewards. To win the "Affluence LIC Cup", an LIC requires many of the same attributes...

They require a great trainer (the investment manager), an opportunistic jockey (the individual portfolio manager responsible for investment decisions), and a favourable handicap (starting discount or premium to NTA).

Who would make the cut?

We have analysed the field of over 100 LICs, and the following are all in the top 25%. Here, in no particular order, are our 24 starters for the “Race that Stops the Investing Nation”.

LIC

Starting Handicap

"Affluence LIC Cup" Form Guide

WAM Capital (WAM)

20% premium

In a race built for stayers, this LIC can go the distance. Hugely successful in previous outings, stewards have hit it hard with a whopping 20% premium. Will make it very hard to win.

Forager Australian Share Fund (FOR)

15% premium

Has had a different training program to many others, but continues to perform well at the races. Excellent jockey. May struggle under the substantial weight handicap.

WAM Research (WAX)

20% premium

Much like its stablemate WAM above, this LIC has won many races but it has come to the attention of stewards with a heavy burden. Will give its best, but you can’t win forever.

Wealth Defender (WDE)

10% discount

It appears there could be some horse trading going on behind the scenes (pun intended), with a rival stable increasing their ownership. Has been a sluggish runner of late, but a reasonable discount and the potential for some fireworks on the share register could create some chances late in the race.

Contango Microcap (CTN)

10% discount

This LIC enters the race with a very late trainer and jockey change. CTN has had an eventful couple of years, and would benefit from a consistent training schedule. New very capable jockey on board, and a favourable starting handicap, this could be a contender.

Monash Capital (MA1)

15% discount

This time last year they veered off track and were out in the parking lot. However, in the last 3 months this LIC has shown some impressive speed, much more like what we expected. The stewards have reflected the poor performance by going light on the handicap, and as a result this is a real chance to take a place.

MFF Capital Limited (MFF)

10% discount

Coming into the race, this big American was one of the out and out favourites. However, the stewards agreed, and have reduced the discount from 15% to under 10%. Given the rampaging run to date, they might struggle to keep the momentum going to the finish line.

Magellan Global Fund (MGG)

5% premium

We are not sure if the stewards have any idea what they are doing, as this new entrant is starting with a 5% premium compared to its stablemate above which has an easy 10% discount. Same stable, however different jockey, the handicap seems the wrong way around, with MFF being by far the favourite on this internal race.

WAM Leaders (WLE)

Slight discount

The dark horse of the WAM stable. Has performed solidly, and has been somewhat overlooked in the handicap. Should probably be starting at a 10% premium, therefore will be a real chance in the final furlong.

Australian Leaders Fund (ALF)

10% discount

From one of the favourites to back of the pack. Going into the 2015 race this LIC had to carry one of the largest handicaps around at a 20% premium, and they struggled under the weight. Going into this year, the tables have turned, and they have been given a 10% discount. If track conditions are dry and fast, they are unlikely to get up. However, if the storm clouds roll in, expect ALF to surge towards the lead while the others take a tumble.

Australian Financial Investment Co (AFI)

Around NTA

You would never call this an exciting racer. It is usually there or thereabouts, but rarely takes the win. Starting off scratch, expect a solid but not spectacular result.

Amcil Limited (AMH)

5% discount

Stablemate of AFI, however a little more up and down with form. This year its racing off a 5% discount, which will definitely make it more competitive. Deserves to be in the race but unlikely to win.

Australian Equity Performance Co (AEG)

Around NTA

We are not sure what to say of this one. The trainers of this LIC have in the past had tremendous success. However, this form has not yet transferred to this LIC. Like ALF, success may depend on track conditions, but don’t count it out.

Henry Morgan Limited (HML)

No idea

We believe this LIC has been entered for the race, but it hasn’t been seen since June. There were rumours that the stewards and vets had been called in, so it may be a late scratching.

Future Generation (FGX) and Future Generation Global (FGG)

5% discount

If ever there was an LIC designed to win this race, FGX (and stablemate FGG) are them. They can race under all track conditions, they will stay the distance, and the stewards are somehow starting them at a discount. These two thoroughbreds are race favourites without a doubt.

Bailador Technology (BTI)

20% discount

Everybody loves a roughie. Hard to predict how this LIC will race at the best of times and its recent performance has been tough. However, it comes into the race with one of the biggest discounts, so anything is possible.

8IP Emerging Companies (8EC)

10% discount

This LIC has already run quite hard over the past few months, increasing from $0.86 to $1.00. Stewards have evened up the handicap as a result.

Century Australia (CYA)

5% discount

Same stable as the other WAM vehicles, however the different name seems to have tricked the stewards up. Good chance this LIC will be wedded to WAM Leaders in the future, which should work out well for all.

Whitefield (WHF)

10% discount

Oldest horse in the race. Born in 1923. Certainly a stayer and will run all day, but age likely to count against it late in the race.

Benjamin Hornigold (BHD)

15% discount

From the same stable as HML. A young horse with the most expensive Jockey/Trainer (fee) combination in the race. Will start flat out and on its day could beat the field by 50 lengths. Don’t think it can keep up the pace though and expected to fade late. Rank outsider.

OzGrowth (OZG)

20% discount

Hailing from Western Australia, well trained and conditions likely to suit. Has run well at times, but can also be erratic. In with a shot.

Sandon Capital (SNC)

Around NTA

Well regarded runner, talented jockey. Has been known to be feisty during the race if it doesn’t get its own way. A real chance.

Thorney Opportunities (TOP)

12.5% discount

Has been one of the best performing LICs over the past few years, and starting at a helpful handicap. Don’t count this one out.

Who would fill the top 3 places?

Like the Melbourne Cup, the Affluence LIC Cup is not a sprint. It’s a stayer’s race, so we’ve thought about who will be the best performing LICs over the next couple of years. Here are our picks.

Future Generation Limited (ASX code: FGX)

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. The underlying managers are some of the top echelon of Australian investors and many of their 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 being exercised which diluted the NTA. We expect FGX to be resilient during market corrections, and through a whole cycle to produce superior risk adjusted returns. FGX is currently trading at a 4-5% discount to NTA, which is quite attractive.

Monash Absolute Investment Company (ASX code: MA1)

This LIC is managed by Simon Shields and Shane Fitzgerald of Monash Investors. They started Monash in 2012 to target double-digit annualised returns after fees, over a full market cycle.

MA1 provides shareholders with the opportunity to invest in a diversified portfolio of predominantly Australian securities (listed and some pre-IPO securities), through a long/short style of investing and a focus on capital preservation. The company listed in April 2016. At that time, the unlisted fund (similar strategy) had provided an impressive return of over 15% per annum since inception in June 2012. However, the launch of the LIC coincided with a poor period of performance. The listing price was $1.00, and by May 2017 the NTA was down to below $0.86 and the share price hit a low of $0.74.

No manager outperforms all the time, and most will go through soft patches. The NTA has increased by over 10% this financial year, through their exposure to small/medium cap companies. Even with this recent strong performance, MA1 is still trading at a 13% discount to NTA.

WAM Leaders Limited (ASX code: WLE)

Interesting time for this LIC. The options issued to investors at the IPO expire 17 November 2017, and they are currently in the money. Perhaps with this in mind, we have seen a substantial increase in buying support recently. Market cap is now well over $500 million, giving it good liquidity and scale.

Often with LICs, when the options expire the discount to NTA reduces as the potential for further NTA dilution is removed. It is currently trading at a 5% discount to NTA (2% discount if all the options were exercised). Some other WAM vehicles are currently trading at substantial premiums to NTA (WAM Capital 16% premium, WAM Research 19% premium, WAM Microcap 11% premium, WAM Active 5% premium).

WLE is now paying regular dividends, with a 2 cent fully franked dividend being paid in December 2017. We expect the manager to be able to outperform over the cycle, and from this starting position we believe the combination of market outperformance plus a good chance of trading at a premium will make this one hard to beat.

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). 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.

Comments

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Graeme Holbeach

One of the most useful, and entertaining, articles on LICs I have come across.

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Ed Fung

Totally hilarious and accurate. Thanks for the tip on WDE and the intrusion of Dennis The Menaces' nemesis.

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Michael Hill

No mention of HHV which has been actively targeted by WAM funds which now hold 14%, has new management in Pengana Capital and has wiped out the 15% discount to NTA Iin the past year.

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Boyd Peters

Always good LIC coverage. Funny how we say "Past performance is no indication of.." whereas in racing the form guide is what matters. Are you sure your 3 picks aren't smokey's who have shown pre-race form but haven't yet won a race and are unsurprisingly many lengths back? Also, if this is about picking winners, can I ask why when out of the field of > 100 "Horses", the horse which is the current holder of the 1m, 3m, 6m, 1yr, 3yr and 5 yr titles (a record worthy of Hall Of Fame) is not given a card to your race? Never mind that it has form, or that this is the_only_horse running that has no Jockey and no Trainer fee...and has Warren Buffet sitting on its back! This seems like excluded Makybe Diva from a conversation about potential winners in 2005. [Lest I be seen to be spruiking something I have a solid bet on I won't name said horse]

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Boyd Peters

@ Michael. Fair point. I think your girl was registered for the Non-Steeplechase events but during an ownership tussle the stewards had a peek inside her bags and detected traces of Gold, Silver, and Arsenic with a sniff of Cobalt. Time out called while experts determined which race to nominate her in. Expected to bounce back strongly in 2018

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Michael Whelan

Where’s the grand old mare called Argo ? As usual, underestimated and overlooked.........

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Carlos Cobelas

WMI , WAM Microcaps would have to be near the top of my list. Has performed superbly since listing in June. Also VG1 , VGI global partners ( market cap 583M by the way ) surprised to see those 2 left out. Monash has performed dismally this year. surprised to see you place that in your top 3.

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Pete Latham

Daryl, You didnt even save a place for WIC at the start. An average runner whose owners had put a solid amount into its preparation; saw its oppositions plans for the race and took a different “tack”, and raced home at the end to be a winner (certainly in the eyes of its investors!)

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Daryl Wilson

Some great comments in here and it’s probably worth highlighting how we assess the likely winners. Certainly, to be first over any extended period in the LIC space, you need to have good investment performance from the manager. So, every one of our 24 runners are ones we think can outperform markets over the long term. But to come first, second or third needs something extra. In the case of LIC’s, that extra usually comes from positive changes in the discount/premium to NTA. For example, if a LIC goes from a 5% discount to a 5% premium, the total return for a shareholder is improved by 10%. Our favourites are those we believe have the best combination of potential for good investment performance AND potential for improvement in the NTA discount/premium. These are unlikely to be last year’s winners, nor those already trading at decent premiums to NTA.

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Dick Hunt

AEG oppies are about to expire and may run after that. I can see this one trading ar a reasonable premium of about 5-10% in a month or so.

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Christopher Mayor

Very helpful on LICs. What about Australian Equity Fund-AEF?

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