Three LICs we love right now

LICs continue to rise in popularity, and luckily for investors, the number, and variety, on offer continues to increase. Some of the more recent prominent IPOs include WAM Global Limited (WGB), L1 Long Short Fund (LSF) and the Gryphon Capital Income Trust (GCI). Together, these three LICs account for around $2 billion of new funds into the LIC sector.

Quite a few new offerings are also underway or rumoured to be in the pipeline. They include a market neutral fund from Firetrail, a natural resources fund from Tribeca and a second offering from the team at Cadence Capital.  In addition, there are currently a number of capital raisings underway for existing LICs, and we expect more before the end of the year.

In the short term, the sheer number of raisings may be a small dampener on LIC prices. But in the long term, it creates more opportunities for investors. Through LIC’s you can access some of the best asset managers in Australia. These days, there are almost always a range of LICs trading at attractive discounts to underlying NTA, and some at unexplainably large premiums. While this premium or discount creates an additional risk for investors, we see it as a big opportunity to add value if you can buy well.   

Below are three LIC’s we believe are currently some of the most attractive. As at September 2018, all three are top ten holdings in our Affluence LIC Fund portfolio.

Bailador Technology Investments Limited (ASX code: BTI)

This is one of the more differentiated LICs listed on the ASX. Bailador has a focus on technology private equity. Bailador is managed by David Kirk and Paul Wilson. David Kirk captained the All Blacks to win the World Cup in 1987, is a Rhodes Scholar, has a degree in Medicine, a degree from Oxford University, was awarded an MBE in 1988 and is the former CEO of Fairfax Media. Paul Wilson has had extensive private equity investment experience as a Director of CHAMP Private Equity in Sydney and New York, and MetLife in London.

Their strategy is to hold investments in a number of private technology-related businesses with strong growth prospects. Their preferred business models are Software-as-a-Service (SaaS) and marketplace businesses. SaaS businesses dominate the portfolio, making up 76% of the total. The portfolio currently includes ten investments, making it quite concentrated. In aggregate, those businesses delivered 32% revenue growth for FY18.

Their normal process is to take a position alongside the founders of the business through convertible preference shares, take a board position, and assist the company to install top quality executives to steer the company through the next phase of growth.

BTI was listed in November 2014. While it has traded at a premium briefly, it has mostly traded at a substantial discount to NTA. Portfolio performance initially was outstanding, with the NTA increasing by over 25% to $1.26 per unit in just over 12 months. However, through dilution from option exercise and some investment write-downs, the NTA fell to $1.06 per unit in mid-2017. This saw the share price fall from a high of $1.34 to $0.74 in mid-2018. While some discount to NTA is justified for BTI, it widened to almost 35% at one point. BTI is currently trading at around a 25% discount to NTA, which is still quite substantial.

We believe investors’ expectations were initially unrealistic with BTI, perhaps expecting private equity would be producing 20% per annum returns every year. The reality is that private equity returns are usually staggered, with the larger amounts often at the end as underlying investments are realised. It is likely that a 3-5 year investment period would be required for upside to be realised. With that in mind, we would expect BTI to start realising some investments over the short to medium term. This could be the catalyst for a re-rating. One or two realisations at current values or higher will substantiate investment performance. This could produce our favourite combination of an increasing NTA per unit and reduction in the discount to NTA.

While not without risk, this small, differentiated LIC could perform well.

Thorney Opportunities Limited (ASX code: TOP)

We have discussed TOP as one of our three favourite LICs previously. This LIC is managed by Thorney Investment Group, a Melbourne based investment group controlled by BRW rich-lister Alex Waislitz.  Thorney Holdings currently controls 29% of TOP, ensuring a very strong alignment of interests for investors. 

The portfolio is very concentrated with the largest holding accounting for up to 20% of the portfolio.  There is usually low turnover, and the portfolio is mostly made up of small and mid-cap ASX listed stocks.

TOP has a very good performance track record. The TOP portfolio has delivered over 13% per annum for almost five years and over 16% per annum for three years. However, the last 12 months performance has been only 5%, which appears to have weighed on the share price. A 5% year is hardly a terrible result, but the market is obsessed with short-term comparisons.

The current discount is around 18%, compared to the average discount since listing of 6%. An outstanding manager who has had a soft period and is trading at an unusually large discount to NTA. We believe this is an attractive proposition.

Century Australia Investments Limited (ASX code: CYA)

In April 2017 the investment manager for CYA was changed from Perennial to Wilson Asset Management (WAM). In our view, this was a good decision. CYA shareholders got access to the excellent stock picking abilities of WAM and CYA came to the attention of the very loyal investor base of Geoff Wilson.

CYA focuses on large ASX equities, in a near identical strategy to much larger stablemate WAM Leaders (WLE). CYA has a market capitalisation of $94 million compared to WLE at $865 million. Performance of CYA since the appointment of WAM has been just above the ASX 300 index. However, the share price performance has been lower, as it has drifted to a persistent discount to NTA over the past 18 months. It reached a peak discount of 8% in mid-2018, which is in contrast to most other WAM vehicles which can trade at substantial premiums. Today, CYA remains at around a 3% discount. The disparity could be due to its name (not having WAM in it), its smaller size and a slightly reduced portfolio trading flexibility to retain previous tax losses.

While it’s hard to say what the stabilised discount or premium for CYA should be, we believe accessing the stock-picking skills of WAM at a discount to NTA is a reasonable proposition. In addition, there is potential over time for CYA to be merged with WLE or another WAM LIC. Any such transaction would likely be positive for CYA holders.

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.

A good starting point for education and ideas might be ASX’s investment products monthly report. There are also various LIC research reports available through Livewire Markets and brokers. We’ve also written an LIC Guide that explains how we invest. 

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) to enable investors in Affluence Funds to understand the underlying investments of the funds in more detail. 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.