Investing in global LICs at IPO stage & brief thoughts on WAM Global.

Author’s note: In compiling this article I have used data as at 25th April, 2018.

Recently I was checking out Morphic Ethical Equities Fund (MEC) and observed how fickle the premium / discount to NTA can behave. It is almost one year since listing and this type of pattern I see quite often in new LICs.

ipo

Below is the relevant chart for MEC. The interesting thing is that the first 6 months the fund’s performance was relatively flat. They have actually improved performance in the last 6 months.

MEC.jpg

Source: http://www.etfwatch.com.au/data-analysis/MEC

 

This discount widening appears to be a theme across other recent global LIC floats in 2018. I have emphasised on my blog in the past to be very cautious about participating in LIC IPOs.

Whilst this was a little cynical and tongue in cheek, I tried to point out some of the risks in this article here.

https://valueinvestingforaliving.com/2018/01/02/avoid-this-lic-float-in-2018/

In August last year I wrote an article for ETFWatch that discussed some of the merits of examining global LICs that had been around for a longer time. This was around the same time the market was quite excited about large new floats. A couple of prominent floats at the time were VGI Partners Global Investments (VG1) & Magellan Global Trust (MGG). Below is the article.

http://www.etfwatch.com.au/blog/time-for-global-active-managers-to-outperform–common-catalysts-for-lics

Now that a few of the new global LICs are around the one-year mark, and some others are approaching that stage, I thought it is worth taking a look back. Will it be a happy first birthday for investors who have participated in these IPOs? Let’s not forget that despite increased market volatility in 2018, global share markets have been strong in the last 12 months.

As I write this on April 26th I have tried crunching the numbers for how some of the new global LIC floats have performed. Where possible, I shall also include any value of associated options that are still trading or any dividends that have been received along the way. Below is what I have found for approximate total shareholder returns since IPO. I have not adjusted to take into account the better returns some Magellan investors may have effectively got from the “loyalty units”, as this would have varying impacts. It could mean that certain MGG investors have done better than below, and that the investment gets closer to a pass mark like VG1 at this stage.

Contango Global Growth (CQG) –                                          -10%

The Fat Prophets Global Contrarian Fund (FPC) –                  -7%

Morphic Ethical Equities Fund (MEC) –                                    -7%

Evans & Partners Global Disruption Fund (EGD) –                +17%      

VGI Partners Global Investments (VG1) –                               +8%

Magellan Global Trust (MGG) –                                                +1%

Now bear in mind these all have different starting points ranging from early 2017 until October in the case of the Magellan listing. As a group though they haven’t been too great for investors in the IPO. This is in the context of global share markets being in a broad uptrend since they all listed. The exception above is the Evans & Partners Global Disruption Fund (EGD).

Contrast this with some of the global LICs I mentioned in my article in August that had already boasted solid track records. Perhaps this was being forgotten as the media focused on the slick marketing contained in the prospectuses of those mentioned above. We can cut a bit more slack with VG1 & MGG who listed in September & October respectively. Yet some IPO investors may have set aside money in August in preparation and missed other opportunities.

Since August 24th when the ETFWatch article was posted I calculated the following approximate shareholder returns of those LICs discussed.

Ellerston Global Investments (EGI) –                                                     +9%

Ellerston Asian Investments (EAI) –                                                    +19%

PM Capital Global Opportunities Fund (PGF) –                                 +15%

PM Capital Global Asian Opportunities Fund (PAF) –                       +20%

Platinum Asia Investments (PAI) –                                                        +27%

Future Generation Global Investments (FGG) –                                 +16%

Admittedly the specialist Asia funds here have had a large tailwind as this region of the world has been a standout. Having said that though there are some very solid numbers from the likes of EGI, PGF & FGG who have broader global mandates.

 

So how about the next major global LIC IPO?

I also thought this article may be topical now that the WAM Global (WGB) IPO is just being launched. I personally think it has a better chance of being successful in the first year than the floats I discussed earlier. One thing going for it at least in the early stages, is the size is being capped at $550 million. Wilson does have a very large loyal following of retail investors. When they restricted the size of their WAM Microcap (WMI) float last year (and also not issuing “free” options), that helped in seeing the shares trade well. Obviously though the very good early investment performance was the main contributing factor. WMI was restricted at $154 million though, whereas the $550 million for WAM Global is one of the larger LICs you will see. VGI Partners however were able to raise about $550 million, close to this maximum amount set for WAM Global. Also in the back half of last year, we saw Magellan raise almost 3 times this amount! I know this is a totally different mandate, but I note that the recent L1 Capital (LSF) IPO doubled earlier expectations and went to way over a $1 billion raising. There does appear to be plenty of cheap money still sloshing around.

With these demand / supply dynamics in mind, I think WAM Global can perhaps have a better first year than many of those previous new global LICs discussed. Last year I made mention of having a rule of thumb that I never invest in a LIC at IPO stage, but WAM Microcap was an exception. I haven’t yet made up my mind on WAM Global but appreciate that the maximum raising amount it has put in place adds to temptations to invest. I could once again break my rule of thumb here, hoping to make some shorter-term gains with WAM Global like I did with WAM Microcap last year. It doesn’t look to be as clear cut though this time around. I do also wish to point out that such short-term thinking has its risks. It could still easily trade at a discount to NTA in the future, but I do have some faith in the Wilson team being able to replicate their success with a global mandate.

If someone participated in this IPO and the shares were to soon trade at premiums to NTA of 10 -20% then if it was me I would likely exit. This is merely a hypothetical and not a prediction. As I said some of the global LICs with longer histories that have broad mandates may still be better alternatives. The likes of EGI, PGF & FGG still regularly trade at discounts.

Please don’t view the above as financial advice as I am not qualified and don’t know your personal circumstances. In light of the news in recent weeks, also be very careful if you do seek professional financial advice! Hopefully though it does give some investors a more open mind when trying to evaluate the global LIC IPOs that come along. It can also pay not to forget about existing similar LICs that are out there in the market.

 

For disclosure purposes, I should note that at the time of writing I own shares in EAI, FGG & PAI, of those mentioned above.

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16 thoughts on “Investing in global LICs at IPO stage & brief thoughts on WAM Global.”

  1. Thank you very much .. nothing like hard figures to compare.
    And the comparison here is pretty stark.

    I’ll also watch with interest how L1’s huge (30% Global ?) long short LIC goes.
    I saw in the marketing stage BLD was their “number 1 long idea locally” and its down fairly sharply since then , including another 3% today.

    1. Well I just hope my calcs are right, they are subject to fat finger errors!

      Yeah it will be interesting to watch L1. Loads of money for a fund manager can be like getting the top weight in the Melbourne cup. Their performance fee makes it challenging for investors to make great after fee returns.

      I didn’t buy them in the IPO just in case you didn’t guess that!

  2. The Evans and Partners Disruption Fund was on the back of the tech stock ride which blind freddie could have accomplished success with last year. Did you see the fees associated with them ? Sheesh ! I bought NDQ ETF for a much smaller fee and whilst I would miss the Chinese and Euro tech exposure (minor) I some Chinese Tech stocks directly for minor once off brokerage fee. As they say in the classics – remember the fees!

  3. PS I will participate in the WAM Global IPO. They can hold a lot of cash (nice in these turbulent times) and I think that their small / mid cap strategy can work in a large universe of stocks. My only concern is whether they can get the right information up to date with the right folk. It’s a lot easier to do locally than thousands of kms away. One’s personal network cam be strained in a bigger pond.

    1. I’m only likely to be interested in WAM global for the chance of a quick profit in the early days. I.e maybe just see if it opens up at a profit in the first month or two. If I do play this game it would be for less than I did with WMI.

      Whilst I think they can succeed with a global mandate, if they happen to start off slowly I think others will have doubts about them. For example if they underperform in the first 6-12 months some investors will highlight lack of track record working together in global equities and depth of team. Obviously silly after a such a short time but that’s how fickle the LIC market is.

      Still I think it has less weaknesses in the float than I observed with the 6 floats I took a look back on in this blog article.

      As for the evans and partners LIC I am with you, not my cup of tea.

      1. I agree with your comments – a soft start would be very bad for them. I see that Geoff Wilson is travelling with Catriona Burns on their overseas trips to start out. I was also skeptical about the recruitment of only 2 global analysts who were new to the company. Moving from the safe small pond of Australia to the big bad world with up to $500 million can be fraught with danger. Time will tell !

  4. I agree the team looks too light, no disrespect to them, but covering a global market on $550m at 1.25% base fee I’d have thought it might’ve paid for a few more. It’s a tough gig globally just to beat the index and compete against the likes of Hamish Douglass , Kerr Neilson, Jacob Mitchell, etc etc not to mention all those abroad.
    No doubt the IPO will be well supported by WAM’s loyal investor group but I’m going to sit back and watch for a while myself. As you’ve pointed out Steve there are plenty of global lics available at a discount.

    1. Jacob Mitchell has 5 analysts over 4 related funds/LICs and was deputy to one of the better global CIOs in the business. The AP LIC listed with a bit over $300 million back in 2016 and Geoff Wilson ‘s could look at $500 million with a lot less resources, Hmmm.

  5. Yeah and antipodes is very profitable based on pinnacles reports. Also Wilson’s process is arguably more time intensive since it emphasises company visits which is even more draining globally. Anyway time will tell. Short term trade maybe one thing but long term results will take time so it’s an act of faith and I don’t blame people for following Geoff Wilson, he has the runs in the board, so to speak

    1. The team depth issue is a legitimate concern that may get discussed further if performance starts slowly. Geoff does tend to run light and back himself hiring the right people which he has managed thus far.

      The structure of the IPO gives it a better chance than others though. ( this is not a great bullish comment as I generally advocate never buying LIC IPOs).

      Antipodes came on with a big option overhang. VG1 very cheeky performance fee. Magellan had huge marketing and there is probably too much supply of their product in potentially weak hands. Wilson at least here I think has capped the amount short of what he potentially could raise. Fat Prophets, Contango and Morphic went the old style where very small floats, big listing costs and options overhang make it a mugs game participating at IPO. The Evans and Partners one looks to have a high base fee when I think they are holding many large popular tech names that your average punter could buy themselves. But they are at least showing gains for shareholders.

      I disclose I have broke my rule of thumb again to never invest in a LIC IPO! So I applied form some WAM Global yesterday. Less than I did for WMI and I could be a seller early on we shall have to wait and see.

  6. You may be right on the IPO supply/demand Steve, good luck with it too. I’m commenting more from the longer term / core holding aspect.

    From the short-term angle i personally don’t see it as clearcut an opportunity as WMI. Yes, size limited (but at $550m which is still quite big for a market that has already digested some big global LIC raisings) and no options, these are favourable. But as you pointed out WMI performed very well initially. It was a case of Geoff and Chris Stott returning to their roots in a market space where their track record is compelling. And importantly they are clear benchmarks with WAM/WAX at 20+% premiums, as relevant markers for WMI (it is still relatively cheap from this perspective even at current 1.40). There’s no track record for WAM in the Global universe and no direct marker although NTA discounts tend to be the norm for global LIC’s. So my view FWIW… a near term positive start is not desireable but maybe essential for it to hold it’s value.

    Disclosure : I still hold WMI bought at IPO.

    1. Very good points Adrian I do have similar thoughts going through my mind. And I don’t think it is attractive as the WMI float.

      I am counting on the overall theme of many retail investors perhaps having too much home country bias in recent years. They may be feeling the frustrations of the ASX being a laggard mostly, and still be on the lookout for something like this.

      I know some holders of WAM and WAX felt WMI wasn’t a different enough of a product to bother (this opinion I thought was wrong but I still heard it). Also Wilson around the same time did a raising for CYA asking them for money. And there was still some WLEO overhang. So I hope the WIlson punters have more room in their portfolios and are itching for some global exposure!

      Like many things I do though I won’t be surprised if I am wrong! And I can understand you not participating. I hadn’t really decided but thought I’d take the plunge yesterday. The last few sessions global sucks anyway and the ASX has been great!

      Well done for keeping your WMI, I wish I had mine still!

  7. Wilson announced earlier this week that the minimum subscription for Global was achieved at opening of the offer.
    Looks like reaching $550m will be a walk in the park.
    Assume it will close early.

    1. Minimum is 7.5M shares for a $16.5M raise, so I wouldn’t pay too much attention to it.

      That said, most other recent Global LIC’s have been well funded. Only difference being this one doesn’t have a track record in Global.

      WMI did get some quick early performance (First 3 months) but performance this calender year has been much more moderated.
      Also being Microcaps, their purchase/joining the register has caused in some cases a big portion of that price inflation.
      The companies will now need to perform

      1. Yes the minimum amount they hit is still quite small.

        Great point about how WAM joining the register of smaller companies can help the share price in itself. That gave me more comfort with the WMI float, along with small caps being relatively depressed in Australia around June last year. So WAM global won’t really have these things working for it.

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