I realise many of the readers here may already have come across this article from Daryl Wilson at Affluence Funds Management but felt it was worth a mention. I tend to agree with many of their views in articles I come across and this was no exception. I thought I would just comment further down about how some of the themes they brought up in the article may be impacting my own decision making.
It’s been a while since I have discussed some of my specific investments. Partially as I have found it hard to get excited about new purchases, and partially because my portfolio has been quite disappointing in recent months! Here is the latest article from Affluence Funds Management.
The first thing I wish to note is I have sold the majority of my holding in PAI when it has traded above $1.30 of late. The above article discusses to be careful of premiums and some of my sales were at an estimated premium of 7% to before tax NTA, or about 11% to post tax NTA. That is a far cry from only about 12 months ago of a discount to pre tax NTA of 10%. It is approaching a premium to NTA where if it expands further a SPP wouldn’t surprise me. In that case I could perhaps replace a decent chunk of what I have sold via any such plan if it was announced anyway. When selling stock in such an example I often leave residual holdings in different account type structures in case of such a chance.
PAI is a well-run LIC so I could understand many investors hanging on to everything they have and avoiding some CGT. Asian markets have been underperforming the US in recent months so from that point of view perhaps now is not the perfect time to exit. I still have plenty of exposure to the region via EAI, mainly their options, so was happy to lighten up on PAI.
I still believe the region will outperform the US from this point in time longer term. I am mindful though that current emerging markets sentiment may make this difficult to occur if we experience falling global equity markets. More than a year has passed since buying PAI so you can add on other year to my usual overly cautious statements that the bull market is mature. i.e. this is one of the longest bull runs now at
6,7,8,9 years etc. You get the drift. The longer it runs the more tempted I get to trim large bets that have done well. Helps with the sleep at night factor. At least with the EAIO I have remaining I am reasonably confident the downside is capped at zero!
Affluence Funds Management makes the point that last year’s underperformers can sometimes get a re-rating the next year when performance bounces back. I suppose above my sales are protecting me from potentially the opposite occurring. PAI being a standout outperformer in the last 12 months, and on top of that a discount/premium re-rating adding about 17% to returns. The recent IPO of the L1 long short fund (LSF), is an example that sometimes it is also the previous great performers that mean revert. I don’t mean to have a go at L1 capital. But I just read with interest their recent update about struggling with growth/momentum/expensive? strategies dominating returns versus value/cheap? strategies. It is my coping mechanism for my own lacklustre returns of late to see I am not alone!
The Future Generation Funds look to be now trading at least at the NTA, or even a small premium at times of late. This is another decent change from their earlier life where discounts of 5-10% stuck around for quite some time. It has been an impressive re-rating on the back of some good performance numbers and getting past the weight of the options outstanding. In this example I haven’t yet sold any shares. It is a rare case I feel where the unique product offering could see them develop a consistent premium. After all, assembling similar portfolios yourself would be far costlier. If these ever did trade at a 10% plus premium it also wouldn’t surprise me to see some new shares get issued. The charitable causes would benefit and I would guess there would be plenty of capable fund managers still happy to absorb more capacity to assist the charities. A SPP is more likely for FGG than FGX where capacity is likely to be greater. At this stage this appears quite some time away, and I also could be wrong and they slip back to a discount anyway!
LIC’s for turbulent times get a mention in the Affluence article and I have blogged about ALF & ALI previously that I feel fit this description. I haven’t added to LICs at all much this year but did increase my weight to these two. They certainly also fit the category that Affluence mentions of being last year’s underperformers! ALF I am guessing will look even worse versus the stronger index this month.
My last couple of blog posts have touched on plenty of the obstacles against you in participating in LIC IPOs. I agree with Affluence that it is pleasing to see some of these IPOs now becoming more share holder friendly. LICs absorbing the listing costs and not attaching “free” options is a positive. Recently I thought Wilson may even raise $600 million plus for WAM Global. I made a small punt thinking I might be able to flick it in the first few weeks for a small gain. It was only the second time (apart from WMI) I have ever subscribed to a LIC IPO and it will probably be the last time. I thought it may prove better for a small risk than keeping money sitting in cash for the short term. I got that wrong and sold on the open so no real damage done. Some will think that was silly but seeing a downside scenario of one cent a share with the experiment I don’t regret too much there. Maybe it is a sign though that we are seeing some fatigue in LICs. I have noticed discounts on average widening when glancing at my watch list anyway since WAM Global was launched.
From one point of view though it is a bit of a shame that issuing free options seems a thing of the past. On rare occasions I thought you could spot the odd ones trading cheap on the secondary market. I still own a few different ones although they haven’t been helping me much of late. But I thought they can be useful sometimes in playing the mature stages of a bull market. i.e. with some effective leverage but well defined downside.
I still think we have a long way to go with improving LIC IPO structures and performance reporting. Many fund managers will do what they can get away with. Whenever you get relatively buoyant market conditions then smaller investors will get taken advantage of. Unfortunately I expect that to be the case in the future regardless of any potential improvements in regulation. We will probably just get a different style of tricks to watch out for in the next cycle buried in the 100 plus page prospectuses.
The article notes that smaller LICs have seen discount widening and that some are looking interesting. I am trying to watch them more closely but think I will be a while way from getting tempted. In many cases I feel I need a discount of more like 25% to be compensated for relatively high management expense ratios. I also prefer to see the longer term IMAs getting closer to the end rather than the beginning. I also ideally don’t like to see the fund manager controlling a large conflicted stake in the shares. When the major fund manager owners don’t even have a 5% stake that can actually be a good thing sometimes. It can increase the chances of others buying in and making necessary improvements to LIC’s that have been struggling.
On the topic of the large cap Australian market lagging global markets (Well until the last few weeks!), I mostly agree with the Affluence article. I think CYA is a good LIC for such exposure and is cheap. I see they have mentioned AFI & BKI as potential opportunities which I have been a bit negative on of late. I have felt they may slip from recent premiums to a more permanent discount of about 5% to pre tax NTA. A little bit of this trend has occurred since I last wrote about them though. Therefore I can see where Affluence is coming from as they have cheapened (well not in price lately but premiums being unwound) in the last few months. I would prefer to back CYA to perform better, although that may not suit some investor types who want to keep their underlying fees low. As I am writing this though the ASX large caps are making a strong run into financial year end. I suspect Affluence timed it well as I read about this preference of theirs before much of this strong move. I would be reluctant to rush in now after this bounce. I expected some bounce as tax loss selling dries up mid June but not to the extent seen.
The Affluence article also began by discussing the potential move to LITs rather than LICs in response to Labor’s franking policy. As the LIC sector is already trying to digest a huge increase in supply of products seen in the last 5 years, it is another degree of uncertainty it can do without. I can imagine some investors may get tempted right now in certain situations to dive in where discounts have widened. Some discounts may seem wide when observing the pattern over the last 3 or 4 years. I think this discount widening trend though is a rational response to the increase in supply seen. Also the market has rationally finally discounted some smaller LICs with higher cost ratios and that may not have a proven track record over a full market cycle. It may have also appropriately partially factored in the risks of demand for the LIC structure should Labor’s franking plans eventuate. This is all quite distinct from there being a huge array of fantastic buying opportunities in the LIC space as a result of recent discount widening.