Is the new Wilson LIC, WAM Strategic Value (ASX:WAR) a buy?
Whilst WAM has proven form using the underlying investment strategies planned for this new LIC, there are a few reasons why I would be cautious about jumping in. The performance fee is high, opportunities for this overall strategy have dried up somewhat compared to last year, and then there are the usual potential issues of buying LICs at IPO.
As I understand it, 20% of positive returns on the portfolio. This is rather than for example a performance fee charged on outperformance over the ASX200 Accumulation index which is more common. There is a high watermark so I have seen worse structures I guess.
Current opportunities for the strategy
The positive here is that there looks to be a limited supply of new LICs which I expect to be the case for at least the remainder of this year. (This new WAR LIC of course is an exception). That should arguably see the trend of discounts tightening continue, which is positive for this strategy. On the supply side the demand is more being fulfilled in part by the usual suspects of existing LICs rushing to conduct bonus issues, SPPs etc. I blogged about this trend late last year, here is a link.. ASX LIC TRENDS FOR 2021 IN TERMS OF DISCOUNTS / PREMIUMS & POTENTIAL IPOs – Value Investing for a living
The challenging part is that discounts have already tightened quite a bit from the middle months of last year. There is also the challenge that WAR will have in getting set in the opportunities they like. Whilst they might see a LIC that is attractive with a market cap of $100 million or less, it might be challenging for WAR to get set. Volume traded might be fine for smaller investors like us, but we probably don’t have a new portfolio of $225 million to invest!
Potential investors in WAR should bear in mind that discounted LICs will not be the only strategy. Other discounted asset plays can be targets. Other opportunities will be in the likes of takeovers, wind ups, spin offs, corporate restructuring, hybrids. Once again this would have been a lot more attractive to start on this strategy last year. A goal of mine I discussed on the blog late last year was to search for more takeover and wind-up plays. I certainly did not expect markets to continue so strongly in 2021, but my performance has been acceptable thanks in part to some luck in the areas of takeovers and wind ups.
We have seen a boom in takeovers of late. As a shareholder in takeover plays like Think Childcare Ltd (ASX:TNK) & Mainstream Group Holdings Ltd (ASX:MAI), I wonder how long the music can keep playing where so many acquirers remain so hungry to do a deal?
WAR will also look at the likes of IPOs, placements & block trades. These are areas smaller investors generally can not access well themselves, so that strengthens the case of getting exposure via an active manager here.
Buying ASX LICs at IPO
A lot has been said about the pitfalls of going in at IPO stage.
My thoughts on the typical cycle of a LIC from the IPO stage are outlined in this blog post here:
One thing that WAR has going for it though, is that a fund size of $225 million is small in the context of the large marketing distribution that WAM has to promote to. That should help it to avoid this new LIC trading at a large discount in the first year. Shareholders in other Wilson LICs though have shown how they love their franked dividends. That might mean at some point in the first year or two we might get a lull in demand for WAR shares as patience is tested waiting for significant franking credits to build up to pay out high dividends.
WHICH LICs WILL WAM GO TO WAR ON?
In the prospectus and presentation WAR has mentioned some LICs that other Wilson LICs already own. It also cautions not to assume these will be the ones that WAR invests in. That makes sense because they may have accumulated them when discounts were different and far more attractive to now.
Therefore I am not just relying on what other Wilson LICs currently own when I try to guess here what the new WAR LIC might look to buy. I am more thinking about opportunities right now. i.e. current estimated “live” discounts, and also LICs where trading volumes might suit WAR getting involved, amongst other factors.
Here are some potential targets of WAR. Bear in mind that does not necessarily mean I am bullish on these, I just thought it is an interesting discussion point. I would be interested if readers have an opinion on this, and maybe some other suggestions of WAR targets?
Looking out for LIC activism targets can be useful. When I blogged about some target LICs in 2019 here, there ended up being 5 out of the 9 LICs discussed that since either converted to unlisted or were taken over.
One other from that list I suspect will undergo some change soon so I shall start with that one, which is:
Templeton Global Growth Fund (ASX:TGG) – Whilst the discount is not as large is it used to be, it is probably wide enough to tempt WAR to accumulate some. Other Wilson LICs own 15% of TGG, to me it makes sense to try and claw up to 20%. The extra voting power can help influence what happens from the strategic review at TGG. My guess would be this might convert to an open-end structure.
OTHER ASX LICs THAT MIGHT GET TARGETED BY WAR IN 2021 / 2022?
Antipodes Global Investment Company Ltd (ASX:APL) – Double digit discount of late and partial exit near NTA provided late in year via off market buyback.
L1 Long Short Fund Ltd (ASX:LSF) – Perhaps discount already tightening too quickly (after a recent Livewire podcast) for the new WAR LIC but in April generally larger than 10% discount to post tax NTA and larger than that to pretax NTA. WAR might like to give them a hurry on terms of taking profits on investments and coming up with a formal targeted regular yield strategy.
Spheria Emerging Companies Ltd (ASX:SEC) – I see this as more a LIC that they might be happy to stay in longer term rather than necessarily an activist target. I covered SEC briefly in this article, 2 ASX LICs I’m Watching Like A Hawk | Rask Media.
QV Equities Ltd (ASX:QVE) – Another one where the discount has tightened already a lot from the wides. Downside might be protected in the event the manager performed poorly in the next couple of years. The manager may not argue too strongly against converting this to an open-ended fund.
Ellerston Asian Investments Ltd (ASX:EAI) – We are getting to the back end of the IMA here and I don’t think Ellerston representatives hold a lot of voting power in the stock. Some substantial shareholders have been selling of late, but such liquidity might provide an ok opportunity for WAR potentially.
NAOS Small Cap Opportunities Company Ltd (ASX:NSC) – It might make sense to push to consolidate this LIC with other NAOS LICs to address the discount issue.
VGI Partners Global Investments Ltd (ASX:VG1) & VGI Partners Asian Investments Ltd (ASX:VG8) – Large LICs here that got off to a poor start. Volumes easier for WAR to get set compared to others. Their discounts are still currently clearly larger than most LICs. Media has highlighted other activists that are circling here VGI Partners activists take aim at VG1 governance (afr.com)
Morphic Ethical Equities Fund Ltd (ASX:MEC) – Volumes probably too small here but I mentioned this in my blog post in 2019 as one that won’t likely last in its current form in the longer term. Future Generation Global is a large shareholder of this so that is a connection with Wilson already.
Platinum Capital Limited (ASX:PMC) – The discount is quite wide considering you won’t get hit by performance fees for some time given where they sit versus their high watermark. An activist could push for it to execute on the buyback.
Absolute Equity Performance Fund Ltd (ASX:AEG) – There was talk of this one converting to open ended so something like that may resurface as a plan again in the future.
Thorney Opportunities Ltd (ASX:TOP) – A large discount remains (probably deservingly so to a large extent given fee structure) and their on market buyback has been a bit of a joke.
For disclosure from the above right now I only own TGG, APL, LSF & EAI. Keep in mind that may change at any time in the future and I may or may not happen to comment about it on future blog posts.
I must admit the last few months I have not spent too much time looking for different LICs to start new positions in. My thinking has been the low hanging fruit has been picked off in 2020. Takeover plays have taken up more time for me of late. Therefore perhaps others who have been more closely following the LIC space of late might come up with a better prediction of potential WAR targets so interesting to get any feedback. My list here of potential targets I rushed together quite quickly this morning as I quickly browsed over the WAR prospectus.
Feel free to comment below, are you tempted to buy the new WAR LIC? What LICs do you think the WAR LIC might invest in?