Tag: Hunter Hall Global Value Fund Limited

DANGER IN LICs?

 

I came across a couple of articles in the last week or so that reminded me we are indeed in buoyant times with regards to the appetite for new LICs, reminding me about the times just before about 2005. This eventually spelled trouble for many as they were hit with widening discounts to NTA after the GFC. At this point after the GFC and even well up to 2012, LICs played a major part in my investment strategy whereas now I feel there are risks that many investors do not appreciate. Looking back at some of my trades in 2016 I see that I have exited a few such as WMK, GVF, HHV, HHY, KBC, AGF, TOP, NCC. I don’t see myself as that likely to be buying LICs in 2017 unless there is some sort of panic. Of the handful I do own I see it more probable they could be lightened up on rather than topped up more.

By the way the pictures above are from Pai, in Northern Thailand where I was at last week. To keep me interested in blogging I may occasionally drift off into areas such as travelling. That seems to be what people do after completing blogging 101, then advancing to photos for clickbait 101. Believe it or not the pics did make me think about investing in some ways. I have incorrectly held the view for the last couple of years that the bigger risks lie in the developed markets regarding the optimistic valuations in the U.S. The enthusiasm post-election has carried further on hopes for pro-business policies in terms of less taxes and regulation. It seems to me the huge amount of taxes and regulations put in place over many years are a bit like the tattoo you get when you are drunk. It would be nice to get rid of but I’m not sure it is necessarily that easy. The markets are extremely bullish about less regulations in the US, yet in some emerging markets the business environment is far more free in terms of getting things done. Today though we fine the valuation gap between US and emerging markets around the globe at extreme levels.

Spending more time in South East Asia in recent years, the lack of rules in general still sometimes surprises me. The cliffs at Pai Canyon where many tourists take photos such as the above are met with a couple of basic warning signs as shown, but then you are free to accept the level of danger you desire with no fenced off areas at all. At a glance, and going by what I read on the net, a slight slip when going for a photo like this is almost certain to be greeted by death. Still, it makes for an impressive Facebook post, or an impressive picture at a funeral. I suffer from very poor balancing skills, and have more of a beer gut, so rest assured this picture is not of me.

Oh yes, so what were those articles that made me feel many LICs have an element of danger ahead.

I thought 2014/15 was a big period for new LICs plus many capital raisings from existing LICs, and that maybe 2016 things were beginning to slow, but then I read this.

http://www.afr.com/street-talk/fat-prophets-joins-lic-brigade-hires-taylor-collison-20170117-gttesb

A few more to add to the LIC universe. It is also interesting how a lot of fund managers who traditionally focused on the ASX are now prepared to back their talents in the global markets. What a shame they didn’t arrive at this conclusion around 2011/12 when the AUD was at parity and before a major expansion in P/E multiples in the U.S.

I am making no comments about the prospects of this particular float above but would like to point out the following link which some may find interesting.

https://hotcopper.com.au/documentdownload?id=tuE7JrfFgm%2FOGe3lZXqKBG%2F3SUYM41vozw3104QOkqtzHLvSEYpGWgpkNEmowQdHiz15OdxMe4mmot%2FMBIsyyeEjZA%3D%3D

After reading this, some may wish to google how the Merricks fund went after 2010. For those that are not time efficient, here is a start.

http://www.smh.com.au/business/fund-exit-a-timely-lesson-to-tread-with-care-20130329-2gyos.html

The other link that made me cautious about LICs was the latest offer from Thorney.

http://www.theaustralian.com.au/business/companies/thorney-technologies-waislitzbacked-tech-play-on-strong-debut/news-story/a74081eec74dc7017942df4c08b1b0ca

I hope I don’t confuse readers here because I have remarked previously I think quite highly of Alex Waislitz as an investor. But the question is does that mean paying a 23% premium on market to the NTA of what is a new LIC with a very high fee structure worth it? What could occur if the fund has a lean run for a year or two, which can certainly happen to even the greatest of investors? Also is it not strange to pay a 23% premium on day one when one could have subscribed in the float and got all the shares they wanted, given they intended to raise between $50 and $125 million but only raised $42.5 million? There were some existing holdings in the structure but at a quick glance it doesn’t appear they have performed that well since the float and day 1. With the fund being at the smaller end of the range the listing costs will hurt the NTA also, which is why I would be very cautious about buying any LIC IPO. I see some trades have gone through at 26.5 cents which given some listing costs, I would guess is a 23% premium to NTA. I would also point out that the other Thorney fund (TOP) initially was greeted with similar enthusiasm in 2014. The shares came close to 60 cents when the NTA was around 50 cents, within 6 months investors had the chance to pay in the low 40 cent range. All through this time nothing too exciting occurred with the underlying portfolio and NTA.

Even though not as much was raised as expected I still see it as signs of optimism that even $40 mill could be raised with the high fee structure. The management fee looks to be 1.5% per annum. On top of that if I read things correctly they receive a performance fee of 20% that looks to be different from your standard performance fee. That is, it is on the increase in net value, not on an increase over a benchmark. There also does not appear to be any “high-water mark” clause. Then we should remember that the general expenses running the fund will be higher in a relative sense from them having only raised $42.5 million, rather than between the hoped $50-$125 million. Think about how great the fund must perform for investors to experience great performance, the two are not entirely the same.

My comments may also confuse readers in the sense I often advocate following the better investors and we can see from the article that Geoff Wilson and David Paradice are involved. I would just say that I advocate looking at what they are doing for ideas but not to blindly follow everything. It may be relatively small money for these two. They may also like the idea of having a close working relationship and at least they didn’t pay a large 23% premium to NTA!

I don’t like investing in potentially dangerous sitatuions so for the time being I will pass on the chance at buying TEK at 26.5 cents, despite seeing Alex Waislitz as a talented investor. I will keep an eye on the fund though, as I discovered SSM at under 27 cents by keeping an eye on his work at TOP.

My travelling photography will stick to less dangerous situations also, here is a more comfortable snapshot of my time in Pai, Northern Thailand. I felt my age a bit inside the main town here with the young travellers, but I would recommend getting accommodation just a little bit outside where there are many small homestays where you can experience the great views all day.

pai-cafe

Simplifying the portfolio & raising cash. Small market inefficiencies in the LIC space.

Recently I wrote that I had some shorts in the US indices that in part gave me protection to pursue some more compelling opportunities on the long side. Continue reading “Simplifying the portfolio & raising cash. Small market inefficiencies in the LIC space.”

COMMENTS ON RECENT TRADES – AAC, MVT, CYB, HHV, GVF, EVN, KBC, AGF, SSM, WCB, RNY.

I have been posting about more general themes of investing styles of late so now I wanted to get up to date in terms of providing more detail about recent trades, or news on companies I own. Continue reading “COMMENTS ON RECENT TRADES – AAC, MVT, CYB, HHV, GVF, EVN, KBC, AGF, SSM, WCB, RNY.”

Various recent portfolio changes

I would have to admit I am quite staggered by the moves we have seen since Brexit. I am not surprised that the market found some support given the initial panic, but to post new highs so quickly together with highs in bonds and in the gold price was a shock to me. Continue reading “Various recent portfolio changes”

A couple of trades in the last week

HHV – I purchased some at $1.22 last week as the discount seemed to be getting to around 18% pre-tax, having sold shares over a year ago when the discount was less than 5 %. Some points in their favour are that performance has improved greatly over the last year or two. They have quite a defensive portfolio with large exposures to some gold holdings, cash and Sirtex, and largely the portfolio is in foreign currencies. The large cash balance could be used to aggressively buy back shares soon. They could take some profits in large exposures in SBM, SRX, DRM and pay out large fully franked dividends. Since they made two capital raisings that arguably did not treat all shareholders fairly Wilson Asset Management has increased their stake from about 6% to 13%. Since then the shares understandably have been a bit on the nose but now WAM have more of a stranglehold on the register and the fund is much larger we should expect to see the end of them greedily tapping shareholders, and more likely major share buybacks down the track when the discount is this large.

S & P 500 PUT OPTIONS – September 1775 puts. Buy level was at 21. Please refer to post under the Asset Allocation category about volatility and portfolio protection for my thoughts.

 

Don’t fall in love with LICs

In 2010 I had a very large percentage of my portfolio in Listed Investment Companies (LICs). Stock markets had already had a huge bounce from the financial crisis lows yet some LICs surprisingly still traded at very large discounts to NTA. MFF & TGG spring to mind as these traded at discounts to NTA in the order of 20-25%. The Wilson asset management funds the same or even larger. MFF & TGG appealingly had portfolios of large multinational companies on undemanding multiples listed in major exchanges in the world, unhedged at a time when the AUD was very overvalued. It was almost like paying 75 cents and receiving a $1 instantly. HHV also was at a big discount although their portfolio was not as clean.
I bring this up as I noticed TGG and HHV seeing bigger discounts of late. I remember selling both stocks very close to NTA (less than 5% and TGG may have even been at a premium). Once they get close to the NTA or premiums it is normally far too tempting for them to conduct a capital raising and boost the AUM fees so it is wise not to fall in love with them. This occurred with TGG and HHV on more than one occasion. Now these recently have seen discounts again nearing 15%. Not yet tempting enough for me to buy as the underlying holdings I am also not as bullish yet, however I’ve began to watch them a little closer. I know WAM is a major holder in both and likely to pressure for more active stock buybacks and larger franked dividends. If the AUD rises again to recent highs in the high 70s and these discounts further widen they may soon appeal to gain some offshore exposure.

Another quick example to highlight the fickle nature of these vehicles is TOP. Early December it amazingly traded at a 7% premium to NTA. Their investments have done very well since yet this week traded at an 11% discount. In other words you could have bought TOP back then, patted yourself on the back with regards to the underlying portfolio rising by about 6%, yet be down 11% on your investment!