WHICH WILSON LIC STANDS OUT?

Previously I couldn’t see much difference between CYA and WAM (apart from WAM costing 30% more!) although today’s announcement has clarified things to some extent.

I thought as a result one should CYA (cover your arse, thanks Redwing for that one). Hopefully this link works.

https://hotcopper.com.au/threads/ann-wilson-asset-management-investor-presentation.3366726/

Pages 6-8 offer some good quick summary tables on the differences in the Wilson LIC stable.

It looks like CYA will be more focused on the ASX300. WLE targets the ASX200. WAM targets small to mid-cap companies. These three all use “research driven and market driven” approaches. A new additional term is added for CYA with “investment driven”, described as more medium to long term valuation based investments.

There is a big difference particularly when we look at the premium/discount of WAM & WAX. (huge premiums!). WAA less of a premium. WLE more in line with NTA remembering there are some options outstanding.

Why the differences? WAM & WAX has great long term performance numbers, and the research driven approach has worked very well for WAX, with WAM also using some of the research driven approach. These two often focus on mid cap opportunities which seems to be Wilson’s strength.

Some may not realise but WAX used to be known as WIL before 2010, and didn’t do very well when the strategy was different focusing on larger companies with a less active approach. This may be one reason why WLE is not commanding a big premium since it is focused on larger companies.

WAA numbers are not as great as WAM & WAX. You could say the market driven approach is not as successful. I would say it is more complicated. WAA had a tough inception date in January 2008 and its style is more an absolute return approach with less volatility, so I would say it is getting the job done. That is probably why it also seems to always attract a large premium. It is much smaller in size though so it makes sense the premium would be smaller than WAM & WAX.

Where should CYA fit in? Maybe you can tell me? Currently it looks to be a clear discount to its after tax NTA. The cheapest in relation to NTA of them all.

After the restructure CYA should be larger than WAA. WAM of course is huge versus the others which helps with the management expense ratio. Yet it is so large now that some may possibly ask the question whether it is getting too large to find smaller opportunities in the market. Just to confuse things further it has been reported Wilson will start a microcap LIC this year specializing at the small end of the market. CYA might be in the sweet spot, it can probably focus heavily on companies just outside of the ASX200 which should favour Wilson’s strength. It will use a combination of research driven and market driven strategies. The third component is the “investment driven” approach towards valuation based ideas that can be held for longer timeframes.

Hopefully I have not made plenty of mistakes above as I put this together quickly (the restructure has only been approved by shareholders this afternoon), and have a fear of using TMA (too many acronyms)! Please feel free to correct me on anything as the information booklet on the CYA deal was probably like the Yellow pages so I could have missed something. It is important that one does DYOR. There are other factors relating to the buyback and new share issue that I haven’t explained here, plus a whole host of other considerations you may wish to take into account. I just felt today’s summary announcement from Wilson may be useful for many investors to look at, now that the shareholder vote has approved the change in direction for CYA.

Dividends might be slower in the earlier period for CYA but because of a good reason. Franking credits may build up slower because there will be some tax losses still to utilize. This shouldn’t be viewed as a negative, and I see in today’s announcement they are making a special dividend just to utilize existing franking credits as much as possible.

I should disclose I still own CYA, first purchased in September last year, but also have topped up late last year and early this year because have felt it trades cheap in comparison with the rest of the Wilson stable of LICs.

UPDATE 20TH APRIL

Today I attended the Wilson presentation in Melbourne which was made to cover the details of the CYA restructure. Becaue this blog post was initially put together quite quickly I thought I should add some comments on any matters I have picked up from today’s presentation and having some more time to think about things. I still stand by the initial thoughts in the post above.

I have covered how CYA will be inclined to own smaller companies at the margin when compared with WLE. From today’s meeting though it seems CYA will resemble WLE more than I probably initially thought. I was slightly disappointed to hear that although it is not a great deal different to what I was thinking. Most other things I picked up from the presentation made me more inclined to think that the relative pricings (here I am only referring to discount/premiums to NTA, not absolute prices), between CYA and WAM/WAX will surely move closer together. I haven’t the faintest whether for example that means WAM goes back to only a 10% premium and CYA stays around NTA, or maybe CYA moves to a 10% premium. I also am not too sure where the NTAs are headed in the short term.

Many have probably wondered why CYA will not immediately change to a name reflecting the Wilson brand. Also, some may be curious why CYA has included this third approach added on to the research and market driven strategies, known as investment driven. Today I discovered it is more to do with the continuity of business or same business tests that one needs to satisfy to utilise the tax losses. The investment driven approach is just another small token measure to satisfy this because it more resembles the previous manager. I have heard others say that satisfying this test is getting more difficult. I posted once under the “my investment style” category heading on this blog (to the right), that amongst many underrated things I look for in some small companies are tax losses. I think going forward I may attach less weight to any as it appears utilising them via an acquisition is not always that simple.

At the meeting Geoff said that once these losses are utilised, there is a good chance CYA will reflect the Wilson brand and may even merge with another Wilson LIC, more likely WLE being the choice.

At this stage though it was deemed fairer that CYA shareholders share a good portion of the benefit of the tax losses, which was why the capital raising here is a modest $75 million.

From all reports, outside of the priority allocations to CYA and Wilson shareholders, there doesn’t seem enough shares to go around to satisfy the interest from the usual financial planning community and broker network that listen out for Wilson associated capital raisings.

I made a point initially that CYA might be in somewhat of a sweet spot in terms of size. This was backed today by some of the remarks from Wilson in my opinion. The example was given that the WAM fund is so large it simply cannot consider some good investment opportunities like it did in the early days going back to 1999. They were able to participate in an attractive placement of AIK shares at 11 cents at one stage, but it would have been immaterial for WAM to be involved. This is not necessarily the case for CYA or WAA. Do you really want to pay close to a 30% premium to be in the fund that is less nimble?

Partially due to this reason just cited, Wilson is almost ready now for the launch of the microcap LIC as I touched on in this initial blog post. In the future as an example, they may also take smaller opportunities like I just described above. Because of this the float will be capped at $150 million and there will be no issue of free options. I often say as a rule of thumb never invest in a LIC at IPO. Without seeing the prospectus yet, I believe this will be an exception to the rule.

Geoff told the story that in another meeting someone raised the question wouldn’t it make sense to sell WAM at the hefty premium, and replace it with a combination of CYA and the new microcap fund. Whilst obviously he can’t offer personal advice with his answers, his remark’s hinted that this idea could possibly make a lot of sense. You would also have to take into account if you had a large tax bill etc. If anyone at the meeting happened to have a buy order of WAM in the broker screens surely they must have come away thinking why wouldn’t I perhaps give CYA some thought, along with the microcap LIC if you could actually get hands on the stock.

I don’t have much more to add and personally I will give some thought come mid May, about deciding whether to perhaps increase my CYA holding via the priority allocation. A lot could change by then. I also want to stress that even over the last week or so price relativities of CYA do seem to be adjusting as I have expected for some time. I have mentioned the topic a few times on the blog since when CYA was clearly trading a few percent below the before tax NTA even after the Wilson deal was announced. Now as I write I believe it would likely be at a small premium, but still a discount when taking into account tax losses. I plan to hold still though until the relativities close some more between the WAM & WAX premiums one way or the other.

Now I will turn the attention away from CYA and get on to TGG soon.

As usual Wilson opened up questions for other topics. After some funny stories about the HHV battle, a few at the meeting raised TGG as a discussion. I was happy with this is readers of this blog may know CYA & TGG have been really the only two LICs I have been happy to continue holding these days.

I posted about buying some TGG in November last year. Here is the link.

https://stevegreeny.com/2016/11/16/templeton-global-growth-fund-tgg/

Some may see the comments as a bit harsh in some areas. Looking back at this post today I realised my comments were very soft, particularly in relation to the rights issues they did a few years back not that long after each other. They treated shareholders very poorly. Both were diluting them and one allowed some new sophisticated investors on board at a price below NTA to further rub salt in the wounds. After that they then underperformed the next few years with the capital raised!

I did highlight in the blog post last year that the board is on thin ice. They were actually lucky to survive last year. It could be quite eventful come November this year so mark it in your diaries. Whilst I have been reasonably happy to see that the performance of the fund has improved of late, and the discount to NTA has contracted since I bought to see a handy return thus far, Wilson is still frustrated with the discount despite it closing a little. Last year amongst other things I suggested an aggressive off market buy back much closer to the NTA. I mentioned that today and Geoff didn’t disagree that this could form part of a lot of different options available to improve the status quo.

 

15 thoughts on “WHICH WILSON LIC STANDS OUT?”

  1. Hi Steve, many thanks for your CYA insights and feedback on Melbourne presentation. You mention that CYA traded at a slight discount even after WAM deal was announced, what I note (and can’t get my head around) is that retail shareholders can still pick up shares on the market cheaper then the estimated prospectus issue price. Doesn’t that imply that the offer might be undersubscribed?

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    1. Hi Solt,

      The comparison of market prices should be made with the live pre tax NTA, which may differ from any prospectus info where they can only estimate. It will be the live pre tax NTA that the new shares will eventually get issued at and this changes every day.

      After the deal was announced late last year you could certainly buy shares below the pre tax NTA, which continued this year. I believe it was only really this month when other Wilson shareholders were sent an email about CYA where this seemed to change. Since then I don’t think there has been much of an opportunity to buy at below the pre tax NTA but I could be wrong as I don’t necessarily track it exactly every day. But there was suddenly increased buying interest from that point as you see with the volumes.

      I think someone raised your point at the meeting though and Geoff always seems to have on hand “live” NTAs of many LICs, CYA obviously included. He believed the market price was at a small premium to the live NTA. (Of course that could have changed since).

      Don’t forget we are not privy to how the NTA has moved since March 31. Since I made this blog post we also must remember CYA has gone ex a 2.7 cents franked dividend, so this needs to be subtracted from any current NTA estimate.

      I was thinking the CYA NTA might be around 94.5 cents now and you might get some shares tomorrow at 94.5 if markets don’t do much tonight. Major players in the market may be limited to what is on offer though.

      I can’t see a clear discount right now though and hence guess punters will try their luck via the capital raising, probably preventing many from bothering paying up on market. Time will tell if they get their required fill there. Right now I see some shares on market possibly below the prospectus shares but possibly above. Investors may also have different appetite about getting exposure now or later.

      I think it’s page 17 of the prospectus might help with all this stuff, it can get a little complicated.

      Were you thinking there is much of a discount? Possibly a cent since ex div day but I don’t see much, possibly none.

      Steve.

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      1. Thanks for your detailed reply Steve.

        My NTA assessment was similar to yours, in 94c-95c range, but I didn’t word it properly, by slight discount I meant slight discount to the estimated issue price with a number of assumptions main one being portfolio stays largely the same (which I know is not a given, but IMHO likely due to business continuity premise).

        I have since decided to wait couple of weeks to see how banks’ results will play out and by the looks so far the first week of May is bringing some volatility for CYA’s holdings. If that continues I thought I might subscribe for a small parcel after I noted an announcement that priority allocations under 20k will be filled without scale back.

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      2. I’m taking a similar approach. Hopefully soon they release a NTA update that shows whether Wilson have already adjusted the portfolio meaningfully. As I hold some CYA already I’m hoping with a bit of luck they opportunistically lightened up on the banks. Wilson would generally hold far less banks than the index compared to the old CYA managers. They may not have traded much though as they would expect a big inflow of cash coming with the capital raising. Your point about business continuity is another reason the portfolio might still be quite similar. At the meeting though Geoff was asked about some holdings and the way he spoke he seemed quite comfortable trading out of certain stocks straight away if the opportunity presented itself.

        I suppose closer to the closing date for applications, if there is a premium gets established to NTA and the market drifts further I would consider applying. As you said you would get $20k in the priority allocations if it was oversubscribed. My best guess now as I write is it is very close to the live NTA level. Things could change though in the next couple of weeks so no need to rush the application.

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      3. Well, last couple of weeks sure were eventful. Budget, banks sold off, interesting comments in NTA’s and presentations. I gather they lightened on banks in WLE, but… Century portfolio is largely intact as they await ATO’s ruling, which i understand is another week away at best. Matt didn’t sound too happy when he spoke about it. With banks still being largest holdings NTA would go down somewhat. Hope ATO’s ruling would be favourable and hope they disclose the outcome regardless (do they have to?). In the meantime, I decided to partake in the raising, but with a smaller parcel. Looks like it will be a long play.

        Nice new design by the way, easy on the eyes.

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      4. Yeah I was disappointed to see how much banks featured in the CYA April NTA. CYA has traded better than WAM and WAX in the last month though. So the relativities have closed but not the way I prefer. I’d like CYA at a bigger premium rather than it be by the WAM & WAX premiums being cut.

        I haven’t applied for more CYA. Did you attend one of the Wilson presentations in the last week? I had planned to in Melbourne on Monday but didn’t bother in the end.

        If I could be sure I would get allocated WAM microcap I’d probably apply simply to sell in the first week or two, but not sure if it’s worth bothering. I keep a minuscule WAM holding for such things or a SPP. Maybe they will try and allocate as many parcels up to $20k or so? Any idea there?

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      5. Watched presentation online, check it out here: https://youtu.be/IzPThQH20uk Century comments are at 19min mark from Geoff and then just after 1h 8min mark from Matt.

        I dont see Century trading at bigger premium, not while the raising is still on. It probably has to wait until WLE gets rid of options, establishes a premium, and only then century will catch up. So a long(-ish) game.

        On the microcap I’d say they will look after retail shareholders as they have done before. I’d look out for announcements as I’m sure they will advertise when they hit 100mil or 154mil or any other significant milestone. They don’t close raisings early as far as I remember, so there’s still time to ponder.

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      6. Thanks I keep forgetting to go online for these.

        As I write I am just giving both some more thought. On the microcap your application is finalised when you pay them. Think I will just pay early anyway just in case. I suspect you are correct in that there will be an interim announcement with further milestones, but I can’t see myself changing my mind so might just get it in now.

        With the market very weak CYA is looking more interesting and not much time to decide. Right now I think you clearly have to pay a couple percent more on market to get shares versus going through the priority raising. I guess the shares are one or two percent above the pre tax NTA.

        I fully agree that WLE options limit the prospects of much of a larger premium being established with CYA though. Probably just stick with my existing CYA shares here but nice to see the price holding up today so far.

        Overall market weakness and particularly in the banks is handy for the Wilson relative performance versus the indices in the short term.

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  2. Very interesting. I own some WLE but was interested in this. Reading through the prospectus now to see if it is something I would be interested in. If it’s going to mirror WLE pretty similarly then I don’t really see the point in holding two basically identical stocks. Also, why would WAM consider running something like this if it were to be the same as WLE?

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    1. It will be quite similar but not entirely the same given the ASX300 is the benchmark for CYA.

      The tax losses are basically why this is not getting rolled into WLE immediately. They want CYA holders to benefit sharing most of these first. That is the main reason for this structure, rather than inventing a new product.

      If they use up these losses I would think a fair chance it merges with WLE at NTA in the future. If you believe this CYA is perhaps worth closer to the current after tax NTA, and maybe a better entry into WLE?

      Not that much pricing inefficiency between these two perhaps now CYA is a bit stronger than a few months back. WAM just seems very expensive now that they may have to drift away from smaller opportunities given size constraints, and the new microcap LIC coming on.

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      1. Agreed to all your points. As I am already a holder of WLE, I don’t think I will take this offer. But I may look into the microcap that Wilson put forward soon. Any ideas of a ticker yet for this?

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      2. I’m not sure about detailed info on the Wilson microcap LIC, just heard it is not far away. If they cap it at $150 million guessing it will be difficult to obtain much stock. A rare case of a LIC IPO destined to trade at a premium for some time I’d say.

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    1. Yes the Etfwatch site does make the point the market is not always rational and loves dividends so much right now, so maybe we don’t see much change in relativities. If the tax losses get utilised quickly though CYA should eventually pay a high yield.

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