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LIC Report: A big year for listed managed investments

Peter Rae
December 20, 2017

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It was an exceptional year in 2017 for new listed investment company (LIC) and listed investment trust (LIT) raisings, with 14 new entities raising a total of $4.2bn via initial public offers. This significantly exceeded the funds raised by new LIC/LIT offers in the previous two years and lifted the total number of LICs & LITs on the ASX to 105 by the end of November 2017, for a total market capitalisation of $38.2bn. Three entities accounted for $2.6bn of the funds raised in 2017 with Magellan Global Trust (ASX:MGG) raising over $1.5bn, VGI Partners Global Investments (ASX:VG1) $550m and MCP Master Income Trust (ASX:MXT) $516m. 

We initiated coverage on five of the 2017 listings, URB Investments (Recommended), Contango Global Growth (Recommended Plus), Evans & Partners Global Disruption Fund (Recommended), VGI Partners Global Investments (Recommended Plus) and Magellan Global Trust (Recommended Plus). We are also undertaking research on Plato Income Maximiser and expect to initiate coverage in coming weeks. 

Investors Flocking to International Offers 

With the Australian sharemarket representing a very small proportion of global equity markets and lacking sector diversification, it has long been recognised that Australian investors need to have a reasonable exposure to international shares. Australian Taxation Office (ATO) data show that Australian SMSFs in total have just 0.65% of their assets in overseas shares, although we believe this understates international exposure as it is likely a proportion of the 15.3% invested in listed and unlisted trusts would be in international equity funds. Nonetheless, we believe total retail investor exposure to international equities is still relatively low. We believe this relative underweight position in international equities has provided an opportunity for domestic fund managers, with retail investors, including SMSF trustees, starting to recognise the need for international exposure. 

During 2017, half the new LIC/LIT floats were for entities offering international exposure with a total of $2.9bn in funds raised, of which $2.1bn was for the MGG and VG1 IPOs. We believe there is still significant opportunity for new LIC/LIT offerings in the international space and Wilson Asset Management (WAM) has already flagged its intention to launch WAM Global in the first half of calendar 2018. A show of hands at the recent WAM investor day in Melbourne indicated there would likely be strong demand for such an offer. We would not be surprised to see more international LIC/LIT offers in 2018. 

SMSFs Remain Cashed Up 

ATO data also shows that SMSFs still have large holdings of cash and term deposits, with an average weighting of 22.5% at 30 September 2017, down from 24.9% at 30 September 2016. With Australian interest rates likely to remain unchanged for much of 2018, we believe there is the potential for some of this cash to shift to higher yielding assets such as LICs & LITs. 

LICs/LITs that offered high yields with regular payments were popular in 2017 with the Plato Income Maximiser (ASX:PL8) raising $326m and MCP Master Income Trust $516m. PL8 invests in a portfolio of high yielding Australian shares and aims to pay monthly dividends whilst MXT invests in a portfolio of corporate loans and targets a return of the RBA cash rate plus 3.25% per annum, with monthly distributions to its unitholders. With SMSFs holding high levels of cash in a low interest rate environment we believe there are likely to be more LIC/LIT offers focused on delivering high, regular income payments to investors. 

Few opportunities in small-caps 

Based on IIR classifications, there are 27 LICs/LITs that invest in Australian mid, small or micro-cap shares. However, in our view many of these are sub-scale and 15 of these entities have market caps below $100m. We understand that a number of small and micro-cap strategies lend themselves to smaller fund sizes, but in our view entities with market caps below $100m are likely to struggle to gain market traction unless they can deliver significant outperformance. 

Another problem for investors in the small-cap space is that, in our view, most of the better performing LICs/LITs such as WAM Capital (ASX:WAM), WAM Research (ASX:WAX), Mirrabooka Investments (ASX:MIR), QV Equities (ASX:QVE) and Forager Australian Shares Fund (ASX:FOR) are all trading at large premiums to pre-tax NTA, making it difficult for new investors to enter the sector at a reasonable price. 

There were just two new LIC’s in this space in 2017, WMI and Spheria Emerging Companies (ASX:SEC), which raised a total of $287m between them. In our view, there is opportunity for more raisings in this space in 2018. 

Fewer LIC Options in 2017 

Finally, one trend we noticed in 2017 was that there were fewer LIC IPOs with options attached. Just 5 LICs that listed in 2017 had attaching options whereas in the previous two years every new LIC issued subscribers with options. One of the reasons LICs attach free options to their IPOs is that it gives the perception of providing investors with some value to compensate for the fact that day one NTA for the LIC shares would be 2-3% below the share issue price due to the offer costs. However, as we noted in our March 2017 LMI Monthly Update, over the past few years most IPO LIC options have expired worthless. 

A number of LICs and LITs that have not issued options have put in place arrangements that have resulted in day one reported NTA or net asset value (NAV) per security being equal to the offer price. However, potential investors need to understand that this may not necessarily be a cash NTA/NAV and it does not necessarily mean the manager is paying the issue costs. In some instances the NTA/NAV has been manufactured through accounting mechanisms and loan structures between the Managers and the LICs/LITs. 

In some of the arrangements we have reviewed the LIC/LIT has paid the issue costs in cash upfront. The costs are then recovered from the Manager over time with the LIC/LIT not paying performance and/ or management fees until it has recovered all the upfront costs of the offer. The LIC/LIT balance sheet records a non-cash asset, being the amount to be recovered from the Manager. This is the case with VG1. 

We have also seen one instance where the LIT provided a loan to the Manager to pay the issue costs with the Manager repaying the loan, plus interest, over time. However, the loan repayments are to be funded by the proceeds of a special levy paid by the LIT to the Manager. In this case the LIT investors are actually paying the upfront costs. 

To our knowledge, there has been only one offer, MGG, where the Manager has paid all the issue costs upfront so that the day one cash NAV is equivalent to the offer price. 

We will continue to monitor new offers in 2018 and will write further on this matter in coming months.

Published: Thursday, December 21, 2017


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