AVOID THIS LIC FLOAT IN 2018!

Warning fictional post. There is so much cheap money around I fear that if I don’t include such a warning, some will think this is real and want me to send them the prospectus!

Ok I come across so many articles about what to look for in an investment to buy, so I figured one that covered what factors to be wary of might be interesting.

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The LIC universe has been expanding at a rapid pace. Let’s imagine say, there is talk of a new LIC in 2018 named Fictional Unity Corporation.

Here is some of the marketing spin that you may need to be careful of with a new LIC like this.

Spin                                                                                      

Targeting a 6% yield

Reality

We know Australian retail investors have an obsession with yield. We know this will have bugger all relevance to the total shareholder return but hey, it sells. This headline figure will be large and on the front cover, maybe insert a picture of a retired older investor at the beach smiling over a cup of tea.

 

Spin

Quarterly dividends

Reality

We are not confident in our future shareholder returns so will go for any extra gimmick that sells.

 

Spin

Proven track record

Reality

We have been outperforming as a team as shown from our “long term” performance dating all the way back to 2014 in the bull market! (Please don’t look at our record before that at different fund managers or with different products that failed).

 

Spin  

Positive alpha over many years

Reality

Our performance is expressed as returns grossed up to include the benefits of franking. It is before taking into account management fees, performance fees, director’s fees, admin fees, marketing fees. It is measured against the All Ordinaries Index (not the accumulation version, so this index does not include dividends). Going forward it will be expressed without taking into account the dilution to NTA from multiple capital raisings to “pursue other opportunities”.

 

Spin

Competitive fee of only 1% per annum.

Reality

Lets just ignore that we may only raise $30 million, so when we consider director’s fees, admin costs etc, the base leakage of fees may be closer to 3% each year!

 

Spin

Modest performance fee to align interests

Reality 

Only 20% of outperformance over the benchmark. As we are an “absolute return” fund, let’s be cheeky and make the benchmark the RBA rate.

 

Spin

Manager shareholding to align interests

Reality

The fund manager owns 19% of the shares, so that our interests are aligned with that of shareholders. Except for the fact that we also get paid management fees, and will use this voting power to ensure our clients are locked in the fund for a long time.

 

Spin

Long term IMA for stability

Reality

We want to be paid for as long as possible no matter how badly we perform. If not pay us a break fee.

 

Spin

Experienced independent directors

Reality

Insert a celebrity from the financial media if possible.

 

Spin

We can short to protect the downside

Reality

We can therefore charge higher fees.

 

Spin

Pleased to give you 1:1 bonus options

Reality

We are pleased to double our ongoing fee revenue should we fluke a good first 12 months, but also dilute the upside to your NTA at the same time.

 

Spin

We invest in global disruptors

Reality

We are momentum investors. And we were not smart enough to launch this product in 2011, when the AUD was high.

 

Spin

Flexible Capital Management Policy

Reality

If the shares trade at a 20% discount to NTA we won’t buyback shares as that will reduce our fee revenue.

 

Spin

Slightly reduced NTA at time of listing

Reality

Will probably be circa 96 cents on day one, rather than the $1 you pay at IPO. Sorry but there are listing costs. At least you can be comforted LIC IPOs generally trade at premiums to NTA after the first year anyway. Oh hang on, they are often at big discounts.

 

Spin

Cautiously optimistic initially

Reality

We haven’t got a clue how we will invest the funds, but saying this we can kind of say we were right no matter what happens at a later date.

 

Spin

Expecting volatility / stock pickers market

Reality

We haven’t got a clue how we will invest the funds, but saying this we can kind of say we were right no matter what happens at a later date.

 

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4 thoughts on “AVOID THIS LIC FLOAT IN 2018!”

  1. Really funny article – you must be a cynic / realist like me 🙂 I have often thought just like this for a range of companies!

    Like

    1. Unfortunately I think you have to be a cynic as an investor. We just need to remember not to carry over too much of that attitude to life in general.

      Some will read it and think of their own similar thoughts like yourself. For others who are new to LICs it could be an eye opener.

      Glad it gave you a laugh anyway!

      Liked by 1 person

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