Christopher Joye

In the AFR I explain my involvement in helping shape the unprecedented new listed investment company (LIC) structure pioneered by global equity hedge fund VGI Partners, which for the first time ever will involve the fund manager---and crucially not the LIC's investors---paying 100% of the enormous 3% sales commissions offered to brokers to push these deals to their clients, which normally result in the LIC (and investors) suffering a capital loss on day one given it has to absorb these costs. Superstar equities manager Magellan has aped this idea with its new listed "global trust" that it announced this week, which will also pay for all the sales costs and offer investors an extraordinary 6.25% extra return to convince them to give Magellan permanent capital. In total, Magellan appears to be paying a lot of money to secure this perpetual capital in an initiative announced the day before they released disappointing financial results (AFR subs can read directly here). Excerpt below:

"When the founder of a global equities hedge fund manager I admire, VGI Partners, asked me to consider serving on the board of its new listed investment company (LIC), I stipulated two unique requirements. First, the investment manager, VGI, should bear 100 per cent of the absurdly high 2.8 per cent sales commissions LICs pay to brokers to push deals, which are normally entirely borne by the LIC (and thus investors). This is why LICs typically start trading at substantial discounts to their issue price on day one, slugging investors with upfront capital losses. My second condition was that investors in VGI's LIC should pay the same management and performance fees as investors in its $1.1 billion unlisted unit trust, which has historically been restricted to wealthier families given its minimum $1 million subscription. (My family invests.) This product has returned an impressive 14.6 per cent annually since its January 2009 inception after all fees notwithstanding its very high average 28 per cent cash balance. That's about 4 per cent annually above the MSCI World Net Total Return Index in Australian dollars. By way of contrast, Magellan's Global Fund has returned 14 per cent annually over the same period, albeit with a much lower average 8 per cent cash balance. While I could not ultimately serve on the LIC's board because of my existing obligations, VGI did not disappoint. The product they brought to market is a landmark LIC structure that is shaking-up the industry and effecting a large, and entirely equitable, wealth transfer from fund managers back to their historically exploited investors. And it is being aped by Magellan and others...VGI's approach has set an extremely investor-friendly precedent for all future LICs, and rivals are being forced to mimic its structure. The highest profile imitator is Magellan's new "global trust", which was announced on Wednesday. Chief executive Hamish Douglass boasted that "we have sought to align the interests of investors with those of Magellan" by "picking up all of the costs of the offer so that the opening cash net asset value per unit is equal to the cash paid by investors". That's VGI redux. Magellan's global trust is noteworthy for several reasons. In addition to covering the circa 3 per cent sales costs, the investment manager, Magellan Financial Group, is also offering to pay existing shareholders in MFG and investors in Magellan's retail strategies a "valuable loyalty reward" worth 6.25 per cent. MFG will further shoulder the cost of the 5 per cent discount offered on the global trust's dividend reinvest plan associated with its proposed 4 per cent cash distribution yield. If you add up all these costs, MFG is paying about 6.45 per cent for every cent in the dollar it raises from its "250,000 to 300,000" eligible shareholders and investors, who will be allowed to subscribe for the greater of $30,000 or 10 per cent of their shareholding or retail exposure. If everyone takes up the offer to grab the 6.25 per cent return, and allocates, say, $30,000 each, Magellan's new trust could secure $9 billion in commitments." Read full article at AFR here.


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Boyd Peters

Maybe someone can confirm but I think a few other managers have covered the costs of listing in other LICs? I know a widely respected broker in Adelaide has been advising this for a good 5 years. >absurdly high 2.8 per cent sales commissions LICs pay to brokers to push deals, 2.8% may be absurdly high but best not to look too closely at every small and micro cap, resources or tech IPO and placement. This one will be a monster. Oversubscribed. Flip on day one guaranteed stag. Who wouldn't load up!. All other LICs coming to market might as well go away until 2018.

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