Rising interest rate risk in debt LITs

Rodney Lay

Risk Return Metrics

In the January 2022 LIC/LIT Monthly, we take a timely look into the rising interest rate risk of ASX-listed debt LITs which cover a spectrum of debt segments encompassing high yield bonds, leveraged loans, private debt, and Australian RMBS amongst other segments. The good news is that all ASX-listed debt LITs invest in segments that are either directly rising interest rate protected or, in the case of high bonds, indirectly so. On the topic of debt LITs, we also provide a detailed update on Gryphon Capital Income Trust (ASX: GCI), an investment vehicle that has not missed a beat since listing over three years ago.

Wilson Asset Management drives further consolidation in the LIC sector

In terms of newsflow development, the key developments over the last 4-6 week period has been a continuation of a key industry trend, namely initiatives, in one way or the other, to address discounts to NTAs in certain LICs. This has come in the form of the acquisition / merger of three LICs by WAM Capital (two of which are subject to shareholder approval), the proposed merger between Regal Funds Management Pty Limited and VGI Partners Limited and in mid-December the conversion (delisting) of APL to an ETMF (AGX1).

Wilson Asset Management has and will likely continue to be the primary driver of the ongoing consolidation of the LIC sector. What is often publicised as weaknesses of the LIC sector is actually an NTA accretive opportunity set for Wilsons’ LIC shareholders.

The go to vehicle in acquisitions / mergers is WAM Capital Limited (ASX:WAM) for two rather obvious reasons. Firstly, it trades at a material share price premium to NTA and which acts as acquisition ‘currency’. Secondly, it has significant FUM (Funds Under Management) scale.

These acquisitions are beneficial to both existing WAM shareholders, being NTA accretive, and to shareholders in the acquired vehicle, generating a material uplift in value in addition to other benefits.

VGI Partners and Regal Funds Management merger

We are of the view that the proposed merger between Regal and VGI will serve as a positive in relation to narrowing the discount to NTA in VG1 and VG8. We have been of the view that both vehicles have been somewhat unfairly treated with respect to relative performance. With a strong investment team, the re-emergence of fundamental shorting opportunities, an increasing dividend yield and more effective marketing and distribution, both vehicles are well placed for a reversal of fortunes.

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Rodney Lay
Risk Return Metrics

Investment analyst with particular experience in listed and unlisted investment strategies, equities and structured products.

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