Opportunities in Undervalued Global Equity LICs

Peter Rae

Much has been written about the fact that Australian retail investors’ portfolios are heavily weighted to Australian equities, despite the domestic market representing a very small proportion of global equity markets. It is not difficult to understand the reasons for this home bias given the benefits of the dividend franking system in Australia, the difficulties of direct investing in foreign markets and currency risks associated with offshore investing. The universe of global equity investment opportunities is vast, but researching and selecting the right shares to invest in is a challenging task for the average investor.

There are numerous indirect options for Australian investors to gain international exposure, with both managed and passive opportunities. There are a significant number of exchange traded funds (ETFs) with a broad range of exposures to global equities. These are passive investments designed to track the performance of a certain index. There are also a large number of unlisted managed funds offering exposure to a broad range of international markets and sectors.

For investors looking for actively managed international equity exposure, with the benefits of ASX market liquidity, there are an increasing number of listed investment company, listed investment trusts and active ETF options. Our tables on the following pages list details for 27 LICs & LITs which invest solely in international equities. (This excludes those with blended portfolios of Australian and international shares). Pages seven and eight also provide details of 18 Active ETFs with International share and security strategies. We do not cover or provide ratings for any of these Active ETFs, so our data is for information only. Our focus of this article is on internationally focussed listed investment companies and trusts.

In our tables we split the 27 international focused LICs and LITs into different categories according to their investment strategies. There are 13 LICs/LITs that have diversified global portfolios, five with emerging markets exposure (although this reduces to four with the restructure of EMF) and seven with specialist strategies. There are also two Watermark absolute return funds that are predominantly invested in global equities.

One interesting feature of the international focused LICs/LITs is that the majority are trading at discounts to pre-tax NTA and at the end of May the average discount was 7.4%. Platinum Capital (ASX:PMC) was the only LIC to be trading at a significant premium of 14.0%. It is unclear why so many of the international focused LICs/LITs are trading at discounts and, in our view, this provides a good opportunity for investors looking to add international exposure to their portfolios.

IIR covers nine of the 27 international focused LICs/LITs and with research underway at present our coverage will increase over coming months. The above table lists these nine entities showing premiums and discounts at the end of May and our current ratings. We have also added WAM Global, which listed at the end of June. For those LICs/LITs with options on issue we have calculated an options diluted premium or discount. There are only two LICs/LITs trading at premiums and these are relatively small premiums. We view all the LICs/LITs on the list as suitable investments at current prices, although those at larger discounts represent better value at present. In our May 2018 LMI Monthly Update we wrote about WCM Global Growth (ASX:WQG) (formerly Contango Global Growth) which we believe represents good value at a 10.6% discount to option diluted pre-tax NTA. (The discount has narrowed since the end of May).

For investors looking for a well-diversified portfolio of international equities, it is hard to go past Future Generation Global Investment Company (ASX:FGG), a fund of funds LIC. It invests in a portfolio of 15 funds managed by quality Australian fund managers who forgo management fees so that the LIC can make a 1% annual donation to charities. The charity donation is less than the fees that the Managers would normally charge, with the difference being to benefit of investors in FGG. The Managers also forgo performance fees, which is also to the benefit of investors in FGG. The portfolio is well-spread across geographic regions and has a mix of large, mid and small cap exposures. FGG shares were trading close to pre-tax NTA at the end of May.

Magellan Global Trust (ASX:MGG) is the largest of the international focused listed managed investments. It primarily invests in large international companies and has a high weighting in US technology companies. Pengana International Equities (ASX:PIA), Ellerston Global Investments (ASX:EGI) and the newly listed WAM Global (ASX:WGB) all invest in mid and small-cap shares, providing a point of differentiation. PIA also offers the benefit of a high, fully franked dividend yield.

This article provides just a brief overview of the international focussed LMIs that we cover. For more details we encourage investors to read the individual two page profiles in our recently published Listed Managed Investments Quarterly Review.

Click here to view our full report.


Peter Rae

Peter has 35 years’ experience in the banking and finance industry, including 15 years as an equities analyst. Peter was a sector head in the equities research team at Morningstar with a focus on consumer and industrial companies.

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