There are now well over 100 LICs on the ASX. I must have looked reasonably closely at the fee structures of more than half of the current crop and have noticed a couple with unusual structures. I would be interested in the view from others about these features, and also if other LICs follow a similar arrangement?
Argo Global Listed Infrastructure Limited
(ALI) investors incur base management fees of 1.2% per annum. Argo is the “manager” and Cohen & Steers Capital Management is the “portfolio manager”. Argo pay 60bps of this to Cohen & Steers and pocket the other 60bps for themselves every year for their work. The IMA was set originally at 5 years but in all likelihood will simply extend every 5 years. A resolution would have to be put forward to change things which seems unlikely. The ALI portfolio is currently over $300 million in size. Had it performed in the first year or two the 1:1 options gave them the potential to be managing over $600 million with this now.
Another LIC, WCM Global Growth Limited (WQG) – (formerly named Contango Global Growth Limited under code CQG) has a similar approach. Contango is the “manager” that gets a base fee of 1.25% per annum. They decide to pay the “adviser” who is WCM Investment Management, a fee of 75 bps to make the portfolio decisions. i.e. Contango keep 50bps every year. WQG also has a performance fee in there whilst ALI does not.
The main responsibility of picking the underlying stocks rests with U.S. based portfolio managers Cohen & Steers and WCM Investment Management respectively. Argo & Contango get a large slice of ongoing management fees every year mainly for the services that sit outside this primary task.
There are some reasons this makes good sense. Argo & Contango have much better distribution reach in Australia and these products are now readily available to ASX investors. Without their work Australian investors wouldn’t have this specific easy access to these U.S. portfolio managers. A greater selection of products is good, no one is forcing us to buy the IPOs. They are also bringing capable U.S. managers at a relatively cheap fee compared to what investors may have to pay in the U.S.
Cohen & Steers & WCM Management I can understand would be happy to accept a lower fee for such sticky money from Australian investors. It is common in the investment management industry to give a discounted rate to larger mandates. The LIC arrangement can offer these two revenue streams for a very long time given the long term IMAs and closed end structure. These fund managers already deal primarily in very liquid stocks and have the staff and infrastructure in place to do the job anyway. Taking on an extra few hundred million dollars or so shouldn’t damage their chances of outperforming in the future. For these reasons, I personally don’t think they should expect to earn any more than they currently do in fees with this situation.
It was all fully disclosed and easy to understand in the prospectus so from that perspective I don’t have any issues. Investors got what they willingly read and paid up for. It has come to my attention though that many LIC investors do not read much of the prospectus so that is partially why I like to blog about some of these features and write posts like this.
In this case the LICs have gone with the ongoing fee arrangement for the likes of Argo & Contango. Another way they could have perhaps structured it is to establish the LICs for Australian investors with more weight to a one off fixed fee versus an ongoing cut. This came to my mind since to me at least it appears most of the work was done around the IPO (they would have spent a lot of time in negotiations with the U.S. managers). Regarding LIC IPOs, with some of them a retail broker may get involved and use their distribution reach to assist in raising funds. They would charge a one off fixed fee in such circumstances. Interestingly I mentioned already that I felt Argo & Contango had good distribution networks in the industry. They still however paid brokers lead management fees on both their IPOs in these cases.
I am not saying this example is the same though, because after the brokers accept their fixed fees that is where their work ends. Argo & Contango have an ongoing duty to still be the “manager”. It is this aspect that I would like to learn more about what this entails. In most LICs I look at, the board of directors are already meeting directly to amongst other things, evaluate how the portfolio manager is doing at selecting stocks. Various other types of tasks entail fees that are normally categorized separately to management fees. Such as Accounting, Taxation, Audit, Legal, Registry, Custody etc.
I simply do not have a strong idea about the ongoing work that is required from the “managers” in the relationships as described above. The work they do may well be worth more than what they are effectively taking in fees (around 50-60bps annually). I would welcome the LICs to provide more transparency in regard to this.
I just think it is a good idea as consumers to understand where their fees are going. When I have discussed the above with other investors they have sometimes been surprised to learn of this arrangement.
With these two LICs, in my opinion despite the unusual fee structure above, I think their overall costs are quite reasonable when I observe the universe of international LICs. ALI has not performed that well since listing, but the long term track record of Cohen & Steers can be respected. Also there is no performance fee here.
The long term numbers I saw for WCM Investment Management also looked fine. The total management fees for WQG are cheaper than many of their rivals in the LIC sector. They have got off to a good start in managing the portfolio since listing. The problem of course for IPO investors with WQG are other issues that I have discussed a lot on this blog. Listing fees, options overhang and other issues (including perhaps the unusual structure above?), can contribute to a discount to NTA. Shareholder return figures are therefore not necessarily acceptable even if the portfolio manager’s stock picking was.
Since both these LICs trade at sizeable discounts to NTA, I was curious how other investors felt about the fee structures. I am curious to better learn whether it may be playing at least a small role in keeping the discounts wide. I am aware that a lot of the discount with WQG can be attributable to the options overhang and potential dilution that can take place.
There has also recently been another WCM Investment Management product come to the ASX with their quoted managed fund under the ticker WCMQ. This is not the same investment strategy as WQG but it is possible the supply here in WCMQ has weighed on the shares of WQG. It has similarities in the fee structure in that the Responsible Entity (Switzer Asset Management which is owned by Contango) pay the investment manager 65 bps per annum as a base fee to run the portfolio. This comes out of the top level management fee that investors see of 1.25% per annum. The gap between the two (60bps) is for the RE and is an ongoing fee. They raised $44 million for this to list in the first week of September. WQG has a portfolio size of about $114 million. Pleasingly though in regard to the WCMQ IPO, the RE absorbed the costs of the initial offer themselves. Finally as usual, apologies for this article containing TMA-2KTO (Too Many Acronyms To Keep Track Of).
Disclosure – At the time of writing this post I still own ALI. I have never owned WCMQ or WQG (or formerly CQG) but do however hold some options at this point in time (WQGO). I did though sell about half of this WQGO this week.
Above is not investment advice, please DYOR (LAIWUIP) – Last acronym I will use I promise.