Wilson: Buying a dollar for eighty cents
More than 50% of LICs on the ASX are currently trading at a discount, including more than 30% trading at a discount of 10% or more. Geoff Wilson AO, Chairman and Chief Investment Officer of Wilson Asset Management, says that buying LICs at a discount is like “a real-life Boxing Day sale you can have on a consistent basis."
The last five or six years have been a golden age for Listed Investment Companies (LICs). As the sector has grown, and a spate of new products has hit the market. It’s not been all smooth sailing though, as the laws of supply and demand and mean reversion have wreaked havoc on some recent listings.
Wilson says the example of L1 Capital (ASX:LSF) is an important one to heed. Investors in the float lost around 25% of their investment in the first few months after listing.
“Unfortunately, people had to realise that high returns are gained by taking higher risks. L1 had some exceptional performance before they listed, which mean-reverted around the time they floated.”
But despite fears of investor sentiment turning sour on the LIC structure, Wilson remains upbeat on the prospects for the industry. “I think the sector is in great shape and you will continue to see strong interest,” he told Livewire exclusively.
Buying at a discount
Wilson Asset Management’s stable of LICs has generally traded close to NTA or at a premium, however, it’s not all been smooth sailing for the firm. Currently, WAM Global (WGB) and WAM Leaders (WLE), the firm’s newest LICs, are trading at discounts to their Net Tangible Assets (NTA). However, being newer listings, this is consistent with his experience.
“They say the bigger you are the closer you trade to NTA. My experience is that when you've been listed longer, your share register has settled down. You have a lot of people who have bought you for the medium to long term, all the shorter-term players have left.”
But a bad start to listed life doesn’t have to mean a bad investment. In fact, Wilson believes that LICs trading at a discount to NTA can present a great opportunity to ‘buy a dollar for eighty cents’.
“People say that one of the potential concerns about investing in LICs is the fact that they can trade at premiums and discounts. To me, that's one of the great positives of LICs.”
A discount alone isn’t sufficient though, as it can be indicative of bigger problems under the surface. As an investor, the key is uncovering whether the problems are cyclical or structural. Some managers can go through a bad patch, but has their process changed?
“There might be a legitimate reason for the discount; the manager doesn't create value.”
“The most important thing is that when you do your analysis, you remember that when you buy shares in an LIC you're backing the management. You have to be confident that they will perform for you, just as you'd put your money into their unit trust.”
When buying LICs at a discount, he says there are four key steps that a manager must undertake to close the gap to NTA:
- The underlying manager must perform.
- The company should deliver a consistent growing stream of fully franked dividends.
- The company should have a shareholder engagement and communication and marketing strategy.
- The company must treat the shareholders with respect, realise that the shareholders own the company, and they are only there as the manager because the shareholders allow them to be there.
The future for closed ended funds
Wilson still sees a future of growth for listed investment vehicles but thinks that growth will come from different areas of the market. Recent years have seen a large number of listings from equity managers, both global and Australian.
Currently, the uncertainty about franking credits is offering an opportunity for income-focused products. Wilson described the demand for the MCP Income Opportunities Trust (ASX:MOT) as “very strong”, and he expects similar products to hit the ASX soon.
He also sees demand for funds that provide returns with low correlation to equity markets. Wilson is currently engaged in discussions about taking over the emabttled Blue Sky Alternantives Fund, which is trading at a deep discount to net tangible assets.
“There's strong demand for alternative assets because of the volatility in the equity market. That's one of the reasons we are optimistic about the opportunity we see with taking over the Blue Sky Alternatives Access Fund… BAF has $210 million in assets, but it could be a one or two billion dollar fund."
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Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.
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