REPORTING SEASON WRAP UP, BUT FIRST SOME FURTHER THOUGHTS ON INTERNATIONAL LICs.

Please do not read these comments as advice for making decisions on the below stocks.

My financial goals and circumstances may be totally different to yours and my decisions could be totally irrelevant. And readers cannot be sure I have a clue what is going on anyway, or what my track record is!

 

Before I begin on some notes I made on some of my holdings (warning – this is a long post of individual stock comments), I thought I would just point out a link to an article about the latest offering from Magellan.

It is pleasing to see an article that goes quite in depth about many considerations a prospective investor should have. I would be happy if I could have come up with such a well written piece myself!

I think it challenges the idea that LICs (or Listed Trust in this case), are always a product for time poor investors who want a relatively simple passive approach and leave things up to the experts. The prospectuses can make very lengthy reading, and the variations of features and structures of the LIC sector seem to be expanding, not getting any simpler.

Sometimes I wonder whether products are to help the time poor investor, or capitalise on the fact they may not have time to read a prospectus, aiming to lock in generous long term fixed revenue streams for the manager. (Not referring to this float, just a general comment).

Anyway, here is the link.

https://www.livewiremarkets.com/wires/magellan-s-monster-listed-trust-masterstroke-or-misfire

I also note that another new global offering (VGI Global Partners) charges performance fees on any positive investment performance, rather than over a typical equities benchmark.

I see that in recent years other new international LICs began with plenty of marketing enthusiasm and initially traded at a premium to NTA, only to then trade at wide discounts as the marketing hype had worn off. It seems many investors love a shiny new prospectus and the upbeat articles from most of the financial media pre-IPO, but can get bored and impatient quickly at times once they are listed for a year or two. It will be interesting to see how the new international LICs that were launched in 2017 trade a year or two down the track, compared with potentially picking some of the older ones now or in the ensuing months instead.

 

RESULTS ROUND UP

Anyway, now to reporting season. For a change, I may have got through it without too many battle scars (touch wood).

I will firstly go over some stocks I have mentioned previously on the blog that I no longer hold. In the case of AGS & NAM I may have exited too hastily as the prices seem a bit better now than my sell levels. If one day I ever get around to do a bit of a post mortem again on how the blog stocks have fared I will make sure I use my lower sell levels rather than today’s higher prices.

Note below is certainly not all my holdings, and there may be others I have mentioned on the blog where simply I don’t have much to add to what I have said not that long ago.

AGS –  I have sold these at a bit above 8.6 cents. Occasionally I have done ok about of these small opportunities in the mining space, where activists take positions in shell companies and push for a capital return and other opportunities. MEL was an example in my first year blogging, but looking at the price after I sold maybe I was just lucky there. Over the journey I am not sure this has been a great hunting ground for me so perhaps that is also a small factor playing on my mind in selling AGS.

I did receive a capital return quickly, but management were also reasonably quick in spending a decent chuck of the remaining cash on an acquisition which hasn’t fared so well. Phoenix Capital and Sandon are still major holders and I normally find their investment style interesting, so perhaps I have been impatient here. But the share price fails to respond as management seem to do a lot of work on their presentations to the market. I think my sell level was still below the cash backing, and they have other assets as well. Their cash commitments are about to be stepped up though, and I originally went in this hoping more of the capital might come back to shareholders. This has had a share consolation as well as a capital return so the result may be a bit confusing, but I believe I lost 7% here after holding for nearly a year.

 

WMI –  I have sold WMI at $1.22, after picking them up in the IPO at $1.10 in what was most likely always to be a short-term trade of this nature. The premise was mainly that WMI represents closer to what the original WAM capital was during its first 5-10 years of a LIC, and achieved great performance numbers. That is, hunting a lot at the smaller end of the market. Growing AUMs now has changed WAM to have to move up the scale in terms of the size of companies it looks at. Considering this, for WAM to trade at a 25% plus premium to NTA and WMI to trade close to NTA seemed like an anomaly. I was also comfortable with the microcap sector in the short term after recent underperformance, and thought there may be some follow through buying on the companies WMI gets set in from fans of the Wilson investing methodology. They could run a bit higher but by and large the reasons for the trade have played out, and felt was time to exit WMI.

 

NAM – I have held this since the beginning of the blog where I think the shares were in the low 30s at the time, having bought even lower. There were enough murmurings at the time about dismantling the co-op structure yet the price was stagnant near the low of the range. Over the last year the operations of NAM have been brighter, and finally they are going through the process of the corporate restructure. This has been foreshadowed for some time now so I felt the catalyst I identified has pretty much taken place. I am reluctant to keep hoping for further gains now this is widely known and things are travelling ok for them, as they have a very cyclical history. I sold at about 44 cents.

 

FGG – I have started accumulating this and some of the rationale was discussed in my recent blog post. This is a stock that in an ideal world, perhaps I would see my initial purchase underwater and I can slowly accumulate a large holding. I see it as potentially being a holding you can have a relatively high weight in your portfolio and not stress about it. Eight years into a bull market that kind of sounds good as you must hunt hard and wide these days to come up with bargains in the market.

 

APW – This may be taking shape as I suspected when I commented about the situation after the wind-up vote failed in the first week of this year. Whilst the wind-up vote fell marginally short (adjusting for the prospects of the AIMS vote potentially being disallowed), it may have come close enough to tempt activists to try and accumulate a few more percent.

Since the vote AIMS have bought back near 1%, but Sandon Capital is a new player on the scene having slowly accumulated 5%, whilst Samuel Terry Asset Management has crept up by another percent. The top 20 in the latest annual report to me indicates if anything, more shareholders would be against management than compared with when the vote took place.

I continue to hold, and note with the business itself that while their Brisbane exposure has been disappointing, Melbourne looks ok and generally their unlisted holdings have done well this year. I have read some sales results in the St Kilda Road market near an AIMS property that has sounded robust.

I was tempted to dig deeper in the annual report about the issue of waiving the RE fee, yet at the same time reimbursing of fees for reasonable and proper costs, but fear my stress levels may rise.

 

TTS – The Tatts result was received well by the market, although having said that the shares were weak in the lead up. The result contained some one-off weaknesses such as higher expected win rates, and loss of race meetings due to weather. I still hold as the merger approval is not yet finalised. Whilst that is the case there remains a small chance of another proposal.

 

AJA – This turned out roughly as planned when I purchased earlier in the year. Sometimes I ponder whether a bit more of a premium to stated values could have been achieved, or less costs leakage in the deal, but overall this outcome was about what I was aiming for when buying. The only disappointment is the unfavourable exchange rate movement, as I bought when AUD/JPY was 84. I will likely keep holding and note a couple of weeks back the Weiss group went substantial. Not sure if that is a simple wind up arbitrage as a short-term play or they believe somehow there is time for a better deal to be put forward.

 

SVWPA – I was giving myself a pat on the back having written about this security in December last year after picking them up below $72. They look like they will hit $80 and they have paid some good income along the way. I wrote the earnings of the group look to have clearly bottomed but now I notice that the shares have surged in the same period, making me wonder if I am not so clever after all and should have bought the shares instead! In reporting their results, they announced they would sell WesTrac China, and beat market guidance. This gives them plenty of balance sheet flexibility. They have said they will look at acquisitions and / or capital management, I prefer the latter and will keep holding.

 

ILU – A strong result and outlook that was well telegraphed, hence a muted reaction. The price has been very strong in the last year and it is possible the stock just needs to go sideways for a while and digest all the profit taking selling, so I continue to hold.

 

SSM – No longer a hold for me but I thought I would comment. I finished selling my position a bit above $1.30 so that may well be an error. The strong result was no surprise but the large increase in dividend and relatively upbeat comments have been received well by the market. Looking back at my notes over the last year, it could be a case of missing an opportunity to sit on a stock for many years, and not incur the CGT liability. Effectively getting a tax-free loan from the government can have a powerful compounding effect if you can find a well-managed company where the share price increases by 5 to 6-fold. I also probably have a bias that precludes me from sticking with such situations that I need to work on perhaps. At various stages of holding I even realised about this bias, and thought to get around this I would remain a holder whilst the stock was above the 200-day moving average. This could keep me in the stock, whilst mentally thinking of the value at that 200-day moving average level, so I wouldn’t think of the large position as being so risky. Sticking to that would have kept the whole position alive at this point and would have made it a large one. Besides that, I could have approached the current strong cash flow of the company and dividend stream to also assist in holding this for longer without being too concerned of a large retracement. Live and learn perhaps.

 

REF – Not too many surprises as they did offer market guidance not that long ago. They have announced another small bolt on acquisition since I last wrote about REF which is good to see. Strangely in my opinion, albeit not huge volume, the price has moved a lot higher since. The ASX never ceases to amaze me how sometimes buyers step in after dividend announcements. At a guess that could be it, because the 25% rise occurred in the next day after it was announced the previous afternoon. It is strange I guess to see a company with a share price of 7.3 cents declare a 1 cent fully franked dividend. Yet in the case of REF should have come as no surprise. Anyway, it remains a hold to me as despite the jump I think it is too cheap to sell.  As I write it has gone ex the one cent fully franked dividend and liquidity is lower than normal. Although some volume went through at 9 cents today ex dividend. Effectively that is like 10 cents compared with 7.3 cents when I last posted not long ago on the stock.

 

MAH – Quite solid turnover followed their profit results. The reporting seemed quite upbeat, and the guidance still makes the stock appear cheap. The situation has panned out as I expected when I wrote about this in March, at the time when they were still fending off the bid from CIMIC and trading at 15.5 cents. Now the stock is at 18.5 cents, giving them a market cap of approximately $400 million pro-forma the AMNT transaction. They have cash of over $50 million on the balance sheet, with the share price not much higher than the reported NTA of the company at 17 cents. Guidance is for underlying EBIT of $40-$50 million. With upbeat comments on the tender pipeline and that we are past a recent cyclical downturn in this industry these metrics are not that demanding I feel. The company has disappointed over the years so investors may be a little skeptical, but I think it is worth me holding and hopefully we can see some further gains if they can manage to deliver on what they have put out in this presentation. As I am getting this blog post together I see an announcement where Forager may have done some selling. I am too tired to look it up again but guessing if this is the case it is minor for them as recently they have sounded bullish. They did have a very large weight to their fund in MAH so I would perfectly understand if they wanted to reduce, even whilst being optimistic on the prospects. Let’s not forget Forager reduced their SSM position at under $1.

 

PAI – Just announced their first dividend as only a small one cent one, but significantly they have recouped prior tax losses and now able to pay more fully franked dividends in the future. They may one day eventually pay dividends at a yield closer to what we expect from PMC now over time. They just unfortunately kicked this LIC off before they had a little bit of a lean run on performance. Eventually some higher dividends with PAI may re-rate the shares a bit higher with retail investors.

 

COG – It has been a roller coaster ride since discussing COG on the blog almost 18 months ago. Initially the price was 10.5 cents and I witnessed it move all the way up to 18 cents in late 2016, where quite a bit of volume change hands, and wished I had been clever enough to sell then. I sold half my position after they reported their half yearly results in February this year at 15 cents. Bearing in mind my position had got larger than I first planned from participating in rights issues. I am certainly pleased that I did lighten my position then, not because of any concerns I have now, but rather it would have been stressful to see a large position in the portfolio decline by 44% from peak. Having a lower weight to this certainly meant when I saw it hit 10 cents not long ago it didn’t concern me so much.

Some nagging doubts I had in February were the pace at which they were making acquisitions, and some of the dilutive raisings taking some gloss off the merits of this expansion. At 15 cents, and with the change of the reporting from abandoning the LIC structure with at the same time accounting for acquisitions, it made it a more difficult task to get some transparency on likely future earnings and valuation. The company didn’t help with delaying the investor presentation on the half yearly results and an average presentation at that. I know that major holders NAOS and Sandon have been at management to improve shareholder communications and I can see after the latest full year results this has had an impact. The shares traded much stronger on the day of the release moving from 10.5 cents to 12 cents, but I will likely keep holding whilst the stock is around these levels.

I didn’t have concerns of the future growth potential, but especially at around 12 cents don’t see the prospective valuation too demanding. I have been encouraged to see them recently walk away from an acquisition post due diligence, and to see in the presentation some signs they will seriously consider a dividend policy next year after completing the proposed existing acquisition. It is also pleasing to see an improved effort in shareholder communications with this result. From listening to other shareholders, I had a slight concern that management may have had the ability, but perhaps were rushing into expanding and didn’t respect the shareholder base with communicating the story. If the stock happened to fall back to 10 cents then I have some comfort in continuing to hold and wait to see how the dividend policy may play out. I think 18 cents was a stretch last year in hindsight though so may not be looking to see that high in the year ahead.

 

JYC – In a tough sector this set of results was a comforting read. All facets of the business seem to be doing well and have good growth prospects for the future. Management seemed quite confident they can deliver good growth over the next few years. It looks like the raw profit numbers may have been held back to some extent due to it spending money on expanding Lloyds auctions. i.e. for a good reason and allows for plenty of potential for the next year ahead. They have a strong balance sheet and even when the special dividends cease, I still see the stock is offering a good solid dividend stream. The FY18 result should look even better. Momentum with the Bedshed business is underpinned by recent new stores and prospective new franchisees. Kitchen connection refers to considerable forward orders, and efficiency gains by making use of property for admin and warehousing. Expectations may have been high already for this result and the shares are illiquid, so weakness wouldn’t shock me, as the current EPS figure does not highlight the true worth of the business in my opinion. I think this will be one to probably stick with until they report in a year’s time, to hopefully see very likely profit growth reflected in the headline EPS figure for 17/18.

 

UOS – Typical no-frills but sound results release with limited commentary on outlook. I have asked them if we will ever see any type of investor presentation accompanying the results, and not holding my breath on this. I really am not too fussed with this though, as if you keep delivering there shouldn’t be a need to make fancy presentations. I see that the REIT they own has undergone audited valuations that point to a slight improvement if anything. Like many property markets in the world, KL is not without its risks, but I can’t see any reason for UOS shares to be discounting future problems like the current share price arguably implies. Some current projects just completed or nearing so that I witnessed still seem to be popular.

 

EAI – I mentioned in my last blog post for the first time that I was a holder of EAI. Equities to me in this region stand out for relative value when compared with the US. I believe Ellerston has proved themselves as a good manager across many products and this LIC seems far more reasonable with its fees compared to the latest offerings in the sector. I fully understand the discount is not quite as large as at first glance because of options outstanding, but looking further out the options may not be too dilutive and eventually when they are in the background other investors may be more willing to look at this. If am wrong and management don’t do a good job here then some activists may eventually look at this. This will never be a large dividend payer but some may be pleased that they announced stronger intentions today, transferring money to the dividend profit reserve waiting for more franking credits to build.

 

TGG – Kind of a boring holding but has done an ok job for me, as I picked it up last November when the discount to NTA was wider. Still holding but if it begins to trade much stronger and closer to NTA there may be more interesting ideas to switch into soon.

 

Ok that ends my reporting wrap for now. Once again maybe a little bias to selling rather than many fresh buy ideas, simply a function of the complacency in markets after about an 8-year bull run I guess. Now a little tired after all my rambling above, so don’t be too surprised if the blog goes quiet again for a month or two! Enjoy the weekend, I am trying to take an early one!

31 thoughts on “REPORTING SEASON WRAP UP, BUT FIRST SOME FURTHER THOUGHTS ON INTERNATIONAL LICs.”

    1. Ha ha true, I should have rather just owned a passive fund tracking the S&P500. The blog could be just one post and I’m finished! Or Bitcoin.

      WDE I suspect in years to come may not be run in the same style to how it was launched. Although the ASX has over 100 LICs now so that comment may apply to others also!

      It has broad ASX exposure (with the defensive gimmick overlay), so in an ideal world if the ASX200 suffers some more falls and looks a bit cheaper I may get more tempted. Sometimes now when Wilson goes to 5% there is more follow through buying initially, yet it can be a long wait for change to occur. I’d like to get a better opportunity with WDE one day but realise that may not happen.

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    1. Hi Oracle,

      I haven’t searched for such exposure for a long time so don’t know the main ones off the top of my head. I would guess there would only be a few to choose from though without too much differentiation between products, maybe someone who uses these a lot can post. Larger ones likely to be preferable in this category.

      Steve.

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  1. Hi Steve,

    ALF announced a return of capital, you think people would want to hold onto the shares to get their capital back. But there are a lot of selling. Why? What’s your reading on the fund, has the manager given up? Thanks.

    Sara

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    1. Hi Sara,

      The capital return I just see as recognising that many shareholders like a regular cash flow from this LIC, so this is an interim step to achieve that whilst they haven’t managed to generate franked dividends to the extent they would like.

      Those shareholders who want the money inside the fund to grow instead of the capital return, may well have the chance to buy the shares cheaper than the NTA anyway if they really want.

      They are having a lean run but that happens to plenty of good investors. I think most investors place too much emphasis on recent good performance and recent high historical dividends. This led them to paying an overly high premium to NTA in recent years and taking on the extra risk that premium vanishes at the same time as performance softens. This risk is there within WAM & WAX at the present time I believe.

      Investors who have gone into ALF at a reasonable price to NTA, given them a reasonable timeframe to measure their performance, shouldn’t have any major issues with the performance that this LIC has given them I wouldn’t have thought.

      Steve.

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  2. Hi Steve,

    Backtracking here.

    I’ve been looking more into International LICs for opportunity to add at the appropriate time. As you know I’m a buy and hold investor who likes a close to set and forget, simple portfolio. A major reason being that if anything ever happens to me I want my wife (who has little interest in investing) to be able to manage it easily.

    But I find the choices quite limited due to the following reasons some which may have me sounding somewhat paranoid. Again looking at this from a very long term, buy and hold view:

    1. I have concerns about “asian only” LICs for a number of reasons including should hostilities erupt the Developed world will likely side with the US. So that automatically eliminates PAI, PAF, EAI. PMC however albeit having substantial exposure to Asia has a global mandate so it can reweight / eliminate exposure to Asia if it choses. So PMC meets my criteria.

    2. Antipodes is essentially a mini Platinum but with greater key person risk, new and will it survive long term? So PMC will again be the preferred choice at the right price.

    3. Ellerston wth small FUM, key person risk and concerns of long term survival is also of concern to me.

    4. As for TGG and HHV they have never really excited me at all.

    5. MFF has been a great performer but again key person risk, low income and don’t like the issue of options.

    6. Magellan’s new LIT has too many things that just don’t add up for me so not of interest.

    7. PGF is one that interests me though but I wonder what will happen when Paul Moore calls it quits. Staff turnover a problem at times. They’re only a small shop unlike Platinum so long term I wonder. But definately a good Mgr.

    I hold VGS but it will only be added to in times of extreme gloom when buying into the index makes a bit more sense. But indexing / ETFs are of less interest to me and a smaller part of our portfolios.

    So really there only seems to be one potential no brainer being FGG. Dividend low but Wilson knows that the dividend needs to build for FGG to do well. He has said that the dividend is unlikely to be as high as ASX focused FGX which of course makes sense. But I expect FGG’s dividend to be a lot higher than it currently is long term.

    So in summary current holdings are FGG, PMC, VGS. PGF a potential future addition?

    I’d be very appreciative of you challenging any of my thoughts / assumptions. Suggestions also appreciated. I value your opinion greatly.

    Thanks in advance.

    Cheers mate.

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    1. No problems, with the usual caveats of not being advice of course! All your points look valid so may be simply a case of sticking to them.
      Just a quick comment on key person risk is that is a common theme.
      Personally, the LICs I buy are often at discounts of 15% to begin with and with them potentially being able to launch buybacks, or other measures that somewhat mitigate the risks of further declines from a key person departing. That should buy you some time without as much damage to weigh up the situation. Kind of played out that way with Peter Hall and HHV.
      FGG I made an exception buying at a smaller discount given the fee structure and exposure to good managers, obviously not the extent of key person risk there. Anyway happy if this lags a little this year as I wouldn’t mind increasing my holding.
      Regarding the other points.
      1) Asian markets as a group have now outperformed quite a bit this calendar year so PAI may be a little less compelling anyway. If tensions escalate in the region though I wouldn’t draw too many certain conclusions about implications for PAI & PMC as I see some uncertainties. Does the market punish PMC for taking a huge position relative to benchmarks in China? The PAI mandate is to be in the region anyway. Maybe both then trade at a 15% discount to NTA and they buy back shares in a negative scenario? Does the region underperform the developed markets by a lot, Korea has outperformed the US comfortably this year when the news flow hasn’t been ideal. Just focusing on PMC’s NTA alone though, think it is still ok to stick with for the long term. On the subject of high event risk in a certain situation, sometimes if I have that feeling I just take a smaller position if I think an investment is still far too cheap given the risks. That can mean more holdings to monitor though which many don’t like.
      2) Agree.
      3) EGI is small but I found the expense ratios overall not as bad as I feared so that is not of great concern to me. I believe though they generally run their FX risks such that they don’t benefit when the AUD falls so I haven’t been as interested.
      4) The new manager at HHV I thought that when I looked they hadn’t necessarily established themselves as a proven manager in the international space. I hold TGG and discussed it a bit more in November last year on the blog. May not hold this longer term but has a low MER with no performance fee and I would think value managers might have a tailwind over the medium term from here. Has its imperfections but I acquired at a 15% discount knowing Wilson has put an end to their suspect corporate governance and if the manager underperforms changes could still occur.
      5) I’m a bit concerned with all the supply of Magellan products weighing on prices.
      6) See point 5
      7) I’m annoyed I didn’t buy PGF around Brexit last year! Maybe that’s why I still don’t own, my own weaknesses. Worthy of consideration.

      Just some quick comments to ponder over a home brew or two, food for thought to DYOR to arrive at your own preferences. (not be done over 10 beers). Although I think my thoughts align closely with all your points anyway.
      Cheers
      Steve.

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      1. Thanks Steve. Great info.

        “Not advice” – he he I’m sure I’ve seen that somewhere else🤔.

        In relation to key person risk if I was only investing for myself it’s of little concern. As you say buying at a deep discount offers a level of protection and things often sort themselves out or if a LIC folds funds are returned around post tax NTA possibly even at a profit. I’m just thinking of my wife and trying to hold product that’s less likely to experience such issues.

        So it still seems to come back to PGF as the only contender but if it turns out to a Yes now it certainly not the time to buy. Something to ponder as you say. As for making decisions over 10 beers what’s wrong with that, I’m not about to change now😎. Liquidity is good.

        Thanks again

        Cheers

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  3. Steve getting back to FGG I was rereading FGG’s Half Yearly Results media release:

    “We expect returns will primarily be delivered in the form of CAPITAL GROWTH through market cycles over the medium to long term.”

    http://www.asx.com.au/asxpdf/20170829/pdf/43lv43b4vtcg4d.pdf

    This potentially suggests that the dividend in the longer term may be lower than many investors, particularly SMSFs, were expecting. Wilson had been promoting “a stream of fully franked dividends” as a primary objective.

    With so many fund Mgrs using different strategies it’s possible the LIC may struggle to outperform the index significantly but volatility may be less due to hedge funds in the portfolio. So if the dividend remain quite low this could really have a negative impact on the fund. In the world of LICs a reasonable dividend is critical unless perhaps capital growth is shooting the lights out. However as soon a capital growth falters then without dividend support the LIC can go downhill quickly.

    Wilson knows this more so than anyone and has mentioned it a number of times. So I’m surprised with the comment from Belinda Hutchinson about CG being the primary objective.

    Thoughts?

    Cheers

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    1. I don’t see anything that unexpected in that comment. I interpret it as the underlying funds are invested in global companies that payout less in dividends, meaning more of the return is from capital gains. However as the capital gains are slowly realised they will flow through to realised profits and dividends to shareholders.

      Wilson always wants any profit reserves and franking getting into shareholders hands relatively quickly, and I expect the board would be hoping eventually dividends are greater than say a couple of cents a year. He is also always harping on about the importance of dividends for LICs. Will depend on the underlying funds performance though.

      Certainly a risk that the next few years if performance struggles dividends will be low. I am thinking the market is already disappointed at the dividend (a bit silly really as it takes time to build provisions for reserves and franking), so I doubt it’s vulnerable to that much extra disappointment. Happy to be proved wrong and accumulate more on a sell off based on dividend disappointment. Who knows, looking at the recent Magellan raising there has been a flood of international listed products this year, may weigh on FGG and lead to a big discount.

      I don’t expect them to target explicit dividend amounts but interested what you may think they would privately be aiming for in an ideal world over the long term?

      If they could eventually pay out 3.5-4% yield and achieve growth in the capital of 5% it is still consistent with the comments from Belinda Hutchinson? This in a kind of normal to good environment, which my gut feel says probably won’t be the case anyway!

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      1. Thanks Steve. Wilson has stated that a stream of fully franked dividends is one of FGG’s primary criteria in addition to capital growth and preservation. But he says that about every LIC he’s involved with. He has however also stated that the dividend wouldn’t be as high as FGX for obvious reasons. My expectation is that overtime the dividend yield might reach around 3.0 – 3.5% plus franking. But anyone’s guess.

        I’m probably reading more into Hutchinson’s comment that she intended. As you say the current low dividend is to be expected until FGG is able to build their reserves being a newer LIC.

        Don’t get me wrong I’ve continued to accumulate FGG when it dips well below $1.10. We have accumulated a decent holding of FGG now at an average price of around $1.06. We also hold it in the SMSF in mostly pension mode so if I need to realise capital for income at some stage there is negligible CGT.

        What I was getting at is that should the dividend disappoint in the LONGER term the NTA discount could widen offsetting CG. But Wilson knows this more than anyone else so I’d imagine they’ll be doing whatever possible to manage NTA and ensure the success of this LIC.

        I like to think, too much at times. Regardless of what I’ve said I’ll continue to be a buyer when opportunities present. This fund will not be allowed to fail and activists won’t dare interfere with a charity focused LIC. So it’s an excellent long term “desert island” holding for investors with any decent NTA discount at times to be seen as a good buying opportunity.

        Cheers

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      2. I agree 100% with your comments. Yield of 3 to 3.5% probably fair call in normal market cycles. My 3.5-4% probably what internally they may hope for if the funds do quite well and markets behave.

        If the markets struggle though the above may prove difficult. If we hit a bear market may take longer to achieve above and some will get impatient. But it’s more about performance rather than dividend intentions that ultimately determine the dividend. WAM has paid a high yield for a while because they have picked good stocks that have grown. Not so much due to investing the portfolio to receive dividends, as they often hold 30% cash. So we have to see how the FGG funds do.

        You could always contact them if you are still a bit concerned about the comments from Belinda Hutchinson. Perhaps it will also become clearer when they release their annual accounts early next year.

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      3. Me being as I am I did email FGG about Hutchinson’s comment. Will post here if I get a reply.

        Fully understand that FGG’s dividend will mostly be comprised of CG from trading profits. Normally I’m mostly focused on NTA growth. But due to Super pension requirement of increasing withdrawal rate as one ages, for the lower yielders I’d like to see NTA growth also reflected in price. As price (not NTA) is what I get when converting capital to income. Hence why I’d prefer to see this one trade closer to NTA in the longer term:-).

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  4. Hi Steve, wonder if you have any view on Cadence Capital as a fund manager? It doesn’t look like there is anything special in what they do. I have a small holding of CDM from some time age. Just noted that it’s doing a SPP, thought I’d pass on it. Thanks.

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    1. Hi Sara,

      I generally don’t get too excited by the higher fee LICs trading near the NTA, with one reason being they get tempted to issue more shares which gives them more management fees. Extra supply can put a lid on the share price sometimes.

      I think they are an ok manager but once you take the fees away I’m not sure it’s been that great like their website would want you believe. Eg I think they quote before fees returns then choose the All Ords returns (not counting dividends for their benchmark) and suggest massive outperformance.

      I also think a lot of their good performance came from a big bet on RHG many years ago. Whist it was very smart at the time it looks like it’s been lean pickings from them for awhile.

      I see their portfolio has some high weights in certain stocks, whereby I don’t have much of a clue about, so another reason for me not having much of an opinion.

      One strong opinion though is certainly don’t apply for the SPP early in the process, looks like the shares could even fall below the SPP price.

      Steve.

      Like

      1. I have a moderate holding in CDM. As for many LICs, the real return for a, lets say 30% tax paying, shareholder for 5 years is 3.8% pa, not the newsletter stated pre-fees 9%. And this still includes some of the RHG largess. As you also noted, their portfolio weightings appear lopsided. They also have a strategy of staged buying as prices increase and selling as prices decrease, which they have yet to show adds value. I have doubts it does.

        In view of the above, one may ask why I still hold them. If not for the fact that I was lucky enough to buy them in 2009 at a 29% discount to the post-tax NTA, and hence have a substantial CGT liability, I would have sold them ages ago!

        Liked by 1 person

  5. Hi Steve,

    I ended up ringing up about FGG’s dividend and spoke to one of Wilson’s portfolio Mgrs. The following is a summary of the discussion:

    FGG board was being very conservative with upcoming dividend (1 cent) as those who exercised their options were also entitled to the dividend. Hence the dividend allowed for potentially 100% of options being exercised. However only around 10% of options ended up being exercised:-).

    30 – 40% of funds are based overseas (eg Cayman Islands) which restricts distributions. As detailed in the prospectus:

    “investments in global equities (whether held directly by the Company or indirectly through an underlying fund managed by a Fund Manager) may be subject to restrictions on the ability of foreign-domiciled companies to make payments of principal, dividends or interest to investors located outside the country, due to blockage of foreign currency exchanges, changes to tax laws, changes to local regulations or otherwise which could cause the Company to lose money on these investments;”

    Because of distribution restrictions of Overseas domiciled funds and nature of unit trusts (irregular distributions) the board is being extra conservative in building reserves to try to smooth and steadily grow the dividend overtime.

    Board currently discussing ways on how to improve dividend eg redemption of units to generate profit.

    Likely yield target potentially around 3% plus franking but may take some time to get there. They realise they’re up against Magellan’s new LIT and other International LICs which target roughly around 4% gross yield.

    I think they also understand that despite the charitable nature of the LIC most investors in FGG are likely there for expected fund performance. Low uptake of options seems to support this. FGG can’t rely on the charity thing alone, it needs to perform to do well.

    For me personally given that International index funds / ETFs are likely to pay less yield and are becoming bubble like due to the passive investing fad I think FGG looks an attractive option.

    Like

    1. Appreciate that Austing, good to get some detailed feedback there.

      I think it is consistent with our earlier comments on this thread. I personally am happy to look out a year or two, and then ask myself what is the sustainable dividends from that point. I think some LIC investors get too obsessed with current and historical yields and extrapolating what may not be sustainable.

      FGG & PAI might be a couple of examples where the market in the last year just glances at the yield column, sees nothing and moves on to the next one. A couple of years from now they might jump on the bandwagon if they eventually lift their dividends. That’s part of the point I was making in my post on global managers I shared at the etfwatch site. It can help to dig a bit deeper on dividend policy and reserves Etc, like you have done here. I am comfortable with the feedback there.

      I am not overly concerned about the funds based offshore and the prospectus comments. I think it is mainly them being ultra conservative. If this really presented issues in the medium term they could make a few switches here and there, but I doubt that will be necessary.

      As I write this just got an email from WAM and a snippet that the WAM global product may appear next year. Has always been on the cards and one small reason I didn’t want to hang in WMI forever, wary of Wilson fatigue and some questioning their resources. It may be another reason the global LICs could stay at discounts for longer with all the supply though.

      Like

      1. Yes the number of LIC IPOs is getting rediculous. I assume Wilson’s global LIC will have the standard fee structure of 1 plus 20 (add GST). This is where FGG appeals given the low fee but great quality Mgrs.

        I wonder what happens though when Geoff, the driving force behind FGG/X, retires? There needs to be driven and investment savvy people willing to put the time and energy into these LICs in the long term. Add to that fund Mgrs are “voluntary” and can withdraw from the LIC anytime. So a few potential risks there but I’m willing to stick with it long term. Hopefully it proves to be a good decision.

        Like

      2. One thing I am certain is Geoff retiring will hit the WAM price a lot more than FGG, think he will keep involved until a very old age though.

        If funds withdrew their volunteered services it wouldn’t be a good look for them.

        Regarding the WAM global I wonder even if TGG is at risk. They performed well lately and think the IMA might be hard to break quickly, but I think today I saw still a lot of votes against the remuneration report.

        Like

      3. Hi Steve,

        Yeah I think you’re right about Wilson being involved in the industry and Future Gen funds to a ripe old age. He seems to thrive on it. As you say WAM is way more likely to feel the impact of Geoff’s departure than FGX/G:-).

        Looking at TGG Wilson voting rights now at 7.8%. As noted an interesting voting result against renumeration etc.

        Wonder if there’ll be an attempt down the track to absorb TGG into WAM Global? Would likely be a big increase in fee structure. Then there’s substantial shareholders such as AFIC to contend with. As a long term investor I think I’ll do as in the past in staying away from TGG.

        Looking at PGF again. They very clearly state their focus is on capital growth. However they were keen to get a dividend happening especially when NTA was struggling. Steve you’ve been looking at PGF more than me so do you recall seeing a clear dividend policy from PGF?

        I was thinking about what would happen to PM Capital if Paul Moore called it quits? PM Capital from memory now has around $9 billion FUM. At that size it would seem very likely their funds would continue under someone else.

        Again as a low maintenance long term investor looking at International LICs, outside of Platinum and FGG, PGF seems the standout given PM capitals long history and outperformance. But given we can only get limited cash into SMSF going forward most future investing will be done outside Super. So reasonable franked dividends are preferred. Hence the interest in PGF’s dividend policy.

        Finally as part of your interest in potentially having a part allocation to passive holdings have you also looked at FGX? I can’t recall you mentioning it. We have a sizable holding of FGX in the SMSF now. Another set and forget one for us. Unlike FGG this is expected to have a noticeably higher dividend yield. I’m thinking of also adding FGX outside of Super. FGX’s funds including absolute return, mid / small cap and active large Mgrs are more able to avoid bank holdings etc if crap happens unlike the Older LICs which we own a generous quantity of already. FGX goes Ex-div this Tuesday. I might keep an eye on it.

        http://www.asx.com.au/asxpdf/20171013/pdf/43n6xb8bd8f4pw.pdf

        Enjoying your weekend I hope? Raining here so relaxing inside.

        Cheers

        Like

      4. Hi Austing,

        I think if TGG slips up then who knows. It is a partial reason for me buying last November, it gives some protection to the downside. For the next year I would say they are safe as their performance has picked up and the cycle has tilted a little to assist value investors in the last year. Wilson might need to get busy with CTN (I don’t own) protecting the waste going on there first.

        I should note firstly I don’t own the PM Capital funds right now so perhaps I haven’t necessarily looked at them as closely as you may think. At a guess over the long term their dividends might be a tad less than for example FGG & TGG. These two are influenced by Wilson either directly or indirectly and I think he places more emphasis on yield than perhaps PM capital do with their LICs.

        I think FGX are totally fine. My interest in FGG instead is probably just my preference for non AUD exposure. I have been travelling almost half the year overseas since finishing working in the finance industry full time. If the AUD falls 30% and the price of Chang beer or bia 333 effectively jumps for me, then at least FGG has a tailwind to performance.

        FGX gives you WAM, watermark , sandon , bennelong from memory amongst others. Occasionally people pay premiums for such LICs copping huge performance fees. Pretty easy to make a case for FGX getting exposure for 1%. I ended up doing a small top up buy in FGG last week though at 1.11 as I thought their NTA would be doing ok. The report that came out Friday looked fine almost keeping pace in a strong market last month. I may own FGX also one day.

        You are quite right to at least ponder if Paul Moore quits, but I’m a little surprised you have focused on this but not so much with Kerr Neilson? My style is normally to enter these types of LICs with a 15% or greater discount that hopefully cushions any negative shock effects such as this. When I can’t do that I am likely to invest more outside of LICs, so key person risk is a tough one for me to answer from your perspective here I think. Any negative market reaction may not be that rational, these guys have large teams behind them doing a lot of research. It’s more of a risk at some small cap LICs with 50mill or less with a team of about 3 people.

        As for my weekend I’m taking it easy and hope to do the same for some of next week, back to Melbourne after a few months away very much looking forward to it.

        Cheers
        Steve.

        Like

  6. Thanks Steve.

    More concerned about Moore rather than Neilson as PM Capital have around $9 Billion FUM spread across Global AND ASX concentrated / equity income portfolio. Platinum have $25 Billion FUM entirely in Global. I might be wrong but ability to attract good people and survivorship seems to favour Platinum? Then again you’ve worked in the industry and likely have greater insight than me.

    As for PMC I’ve been fortunate to have loaded up at rare times when it traded at a noticeable discount. A missed dividend or major cut to same is a wonderful opportunity to grab good Mgrs cheap as you know. Yield seeking retirees / SMSFs who dominate LIC shareholder registers are often very short sighted / impatient when it comes to LIC yield. I take a contrarian view provided I have long term confidence in the Mgr.

    Still raining here. Likely for a number of days.

    Like

    1. Ah yes I think I can see the distinction you are making, good point. I would agree Platinum would have an advantage in recruiting talent. I would guess PM Capital could attract plenty of talent also, even if maybe they don’t have the same dollars to throw at new staff like Platinum. Not an exact science of course getting the best people on board.

      Platinum does look far less exposed in this area I must admit, you can already see some succession planning evident. Still, I’d be shocked if Paul Moore did anything different any time soon.

      Like

      1. I agree it’s likely Moore is going to be there for a long time yet unless accident / I’ll health strikes.

        I’m probably too long term focused for my own good. I try to buy with the intention of keeping forever in theory. Simplicity of admin if wife ever needs to manage the finances is important to me. So I put in a lot of thought prior to adding something new to the portfolio nowadays. And given the inability to get larger amounts into the SMSF going forward I’m looking to perhaps add a couple of new LICs in own names rather than just duplicate too much of existing LICs in the SMSF. Another reason I want our LICs to survive very long term is to avoid unexpected CGT bills outside Super.

        You must think us long term investing types strange:-).

        Unimpressed with global market strength. I’ve still been buying selectively on a little price weakness eg FGG/X, PIC but still cashed up and would enjoy seeing a sizable correction / bear market etc. Plus final investment property will be sold this FY adding to the cash pile. A very unusual market at the moment. Starting to see the “it’s different this time” commentary increase so maybe that’s a good sign of volatility returning soon?

        Still raining so good excuse to bludge and browse the IPad.

        Hope my ramblings are not boring you too much. It’s a different type of conversation here than what I generally get to have on PC.

        Cheers

        Like

      2. I do ideally try and find companies and LICs where if they shut the market for ten years you wouldn’t worry, it’s just I normally can’t find them! When I noticed many LICs had not recovered in 2010, I sat on many that I didn’t touch until 2015. LICs will at least give you a chance to have a portfolio with simplicity and not much need to manage things (still not that easy to find the right ones), tricky with individual companies these days.

        I’m drifting towards looking more on the income of some LICs to become more of a core holding that doesn’t need to be touched. I’ll probably do less damage this way if the bear market comes soon. That is partially why I have discussed FGG, PAI & TGG a bit here. I don’t mind if the yields only end up being 2-3%. I don’t like doing what seems too popular, so wouldn’t be comfortable getting allured by current high yields on WAM & WAX like many seem to be right now.

        Keep the comments coming I mainly got blogging in the first place for this type of feedback and discussion.

        Like

  7. I recall seeing a fairly recent video (a LiveWire event?) where Wilson stated that he has little involvement in the portfolio management of WAM etc and that this gave him free reign to for his pet projects such as FGX and FGG. Hence any affect his retirement would have on WAM is purely psychological, though admittedly this may be significant when a large premium to NTA exists.

    There has always been an issue with key personal departing, though historically it has been leaving a large organisation to start their own show. Nielson and Moore both came from BT. People have obviously retired from some of the older LICs, but they typically had a low profile so didn’t have any affect. One assumes Buffet will be the bellwether.

    There have been a couple of instances where high profile principals of newer LICs have departed. Two that come to mind are HHV (Hall) and CYA (Morgan), both of which suffered, though the latter had extraordinary medical circumstances.

    My personal opinion is that investing on the basis of what a LIC’s management team may look like in five or ten years time is the same as investing on the basis of what party will be in government in that period. Not a productive use of my time.

    Like

    1. Thanks Graeme you raise some good points here. I got the feeling that was the case with Geoff Wilson so that’s interesting that it was also being communicated that way.

      Peter Morgan exit was obviously an extraordinary situation beyond any analysis. Peter Hall was always described as an “eccentric” character with various other interests in his life. But in his case the performance and his reputation had slipped a bit prior anyway.

      I don’t see many key person issues arising on WAM, Platinum or PM Capital for more than a decade. The chances of me owning LICs that long though probably aren’t that great, so like yourself the issue isn’t high on my priority. Austing might be looking for something longer than that timeframe though. Yet if Buffett can get to his age eating maccas, candy and 5 cokes a day then these guys we are talking about might easily be still there 20 plus years from now!

      Like

      1. Yep generally a boring very long term holder unless a sale is forced upon me such as my wife’s employment rules for a period. Although I’ve had a fair go at active investing (stocks, futures, LIC discount / arbitrage and active SPP opportunities etc) also when younger but it’s not for me anymore.

        I think it’s now around 34 years since I first invested in LICs. They weren’t as popular then and choice was limited. I’ve seem many come and go and others taken over both in friendly and unfriendly circumstances. The early to mid 2000’s saw the same as what’s happening now with a pile of new LICs listing. An improved environment nowadays post FOFA but my gut tells me there will be similar consolidation in the LIC environment when the current fad diminishes.

        My wife as I are very much passive income investors nowadays who purchase listed funds to meet this goal. In the case of International we obvisly don’t look for as high a yield as ASX listed product. Then again we tend to avoid high yield in general understanding the yield trap all too well.

        So yes I probably seem paranoid to some in terms of trying to select those LICs with best chances of surviving. And after all I’m investing for two people not just one so as a caring husband I’m keen to keep it all as simple and least disruptive as possible for her if I kick the bucket.

        But that doesn’t mean I don’t enjoy hearing other approaches given a lifelong interest in LICs. Steve has a very different approach to me as do otners but the conversations are most enjoyable.

        Like

      2. Meant to add that in relation to Wilson a couple of those that chatted with him in private at recent presentations like Graeme also said he mentioned that he has little to do with portfolio management nowadays. He also stated he is really just a figure head now. Which is a good for his pet projects like FGG/X especially in their earlier years whilst they need that extra push to get them well established. I feel he will stay involved with these for quite some time. Some criticise Geoff as being a walking headline but this is what’s needed to get these charity focused LICs well established.

        FGX/G despite being relatively new do meet my expectation of potentialy very long term survival. Hence unlike some other LICs the decision to hold these was much easier.

        Like

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