The new Wilson LIC, WAM Strategic Value (ASX:WAR)
Whilst WAM Capital has some form using the underlying investment strategies planned for this new LIC, there are a few reasons to 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.
WAM Strategic Value (ASX:WAR) Performance Fee
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.
WAM Strategic Value (ASX:WAR) Current opportunities for the strategy
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 could 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. Takeover plays like Think Childcare Ltd (ASX:TNK) & Mainstream Group Holdings Ltd (ASX:MAI) have seen bidding wars, 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.
We should also note that these sorts of strategies are not new hunting ground for the WAM investment team. They have used these strategies for many years in the likes of WAM Capital & WAM Active in particular. It is just that going forward they would like to simplify the structures of their LICs and are moving the strategies I just referred to mainly to the new WAM Strategic Value LIC.
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 might have 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 could 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.
Here are some potential targets of WAR based on prior holdings they have disclosed. 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?
Are these WAR targets?
LICs WAR COULD TARGET IN 2021 / 2022?
Templeton Global Growth Fund (ASX:TGG) – Whilst the discount is not as large is it used to be, other Wilson LICs own 15% of TGG.
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.
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.
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. Not sure if that solves all the issues though!
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.