Growth is in inverted commas because the fund very strongly favours the value investing style over that of growth. Also the fund has disappointed investors in regards to the level of growth achieved in recent years!
I bought some shares at $1.17 today so hopefully that is about to change.
There are hints of activism behind the scenes.
Despite this fund’s modest performance, I like the countries and sectors this fund is positioned in right now. I have written throughout the year that I believe investors are paying too high multiples for companies with strong growth, and some that are viewed as “bond proxies”. If you want to look further into the TGG portfolio, I recommend reading the company presentation on November 4th, it is very detailed and makes a persuasive case that value investing may outperform from this point in time.
They believe the portfolio will outperform strongly in a rising yield environment. The latest weekly NTA perhaps is a sign this may be taking place already. With a bit of luck that trend continued over the subsequent week and I my buy level may have been a discount to NTA even as high as 15%. This is very wide compared to the last few years, strangely at the time the activists may be gaining some traction to see that shareholders are looked after better.
In recent years, they have done what many of their counterparts do when the shares get close to NTA, get hungry for AUM’s and start issuing shares. The reason stated generally is along the lines that there are good buying opportunities available and a bigger fund will also reduce the management expense ratio. Since that time though they have hardly set the world on fire with their stock picking. They now cannot afford to treat shareholders this way, and must err on the side of many measures that although will not generate more fee income for the manager, they may reduce the discount to NTA. This is because they received a second strike against the remuneration report, with a large 44% against.
In order to make sure the management of the fund can stay in the same hands to hopefully give them enough time to see the eventual return to favour of value over growth investing, they may have to consider various measures. They currently have an on-market share buyback. Their portfolio is quite liquid and also the size of the fund is relatively large for an LIC, especially after multiple capital raisings in the recent past.
LIC discount to NTA
With a discount to NTA of nearly 15%, they could have room to substantially reduce the size of the fund by an off market buy back at a small discount to NTA. The management fees have been cut already in recent times, so that is a positive step although the performance has continued to suffer so there is room to go further. In recent years, we have seen evidence that the investor community loves fully franked dividends. TGG has tried to improve in this area yet once again more could be done. Given the modest performance of the portfolio they could perhaps consider an investing approach that is a bit more active. This may generate more capital gains and pay out higher fully franked dividends on a more regular basis than has occurred historically. A higher dividend policy exists, but with the fund quite large this policy could be strengthened. Perhaps the activists will be happy to see a different value based manager to try and execute this down the track if the current performance continues to struggle. I can sympathise to some extent that the performance has been weighed down by the “value” approach going through a tough time in the market. At the same time, not that long ago they were not shy in asking shareholders for more money to invest. In fact, twice in about 15 months they were saying there were great opportunities to invest the money, and hence needed more capital. That would indicate to me they had conviction that value investing would return to favour in March 2014, but wait let’s try again in June 2015.
To summarize, I recently became a buyer again because what we should see may be either..
- Some aggressive measures like I mentioned above to reduce the discount to NTA by current management so that shareholders will support them continuing.
- A return to favour for “value” investing. Despite my words above about not liking the capital raisings, I think they have put forward a good case that this can still occur soon in their November 4 presentation. We may be already seeing signs of this occurring.
- If the above two catalysts are not evident, eventually down the track we may see a new IMA with a manager that can potentially perform better with reduced costs. This can also give the share price a positive re-rating.
I find it difficult to see the discount to NTA going much wider than 15%, rather it could see catalysts to contract again. We are at a time where I don’t think it is easy to find much value in the markets. This is probably a fairly boring investment but I am comfortable with the type of countries and sectors the portfolio is placed. Also after the AUD has wrong footed everyone this year including myself to be back above 75, I still believe it is not a bad time to have unhedged offshore investments. I would be confident TGG will outperform many investments in a general market slump, but also feel it can match most indices from here if we continue to grind higher in a bull market.
This was an international stock I wrote about months ago. I still want to endeavour to disclose most holdings where I may have mentioned in the past but have since sold. I was stopped out of this and sold at 51.5 today. It spent a lot of the year around 60 cents but since has pulled back sharply. Whilst I made a good return on the investment, from the time I mentioned it on this blog it made a disappointing loss of 5%. It was a stock that had some potential in one of the faster growing regions in the world but also contains its risks. I doubt many readers follow it closely so will leave it at that.
Interesting to see the VIX back down at 13 today after seeing levels in the 20s around election time. When the VIX gets around sub 13, not such a crazy idea to have put options on the S&P500 indices as a bit of protection if you have managed to perform ok in the markets in recent years in my opinion.