Collectively, AUI/DUI has $2.6bn in FUM making it the fourth largest ASX-listed LIC/LIT (assuming the disappearance of MLT). AUI/DUI are both ‘old style’ LICs which, most importantly means it has a capital account tax status which, in turn, means portfolio turnover can not exceed a certain amount annually lest that status be jeopardised.
RRM’s understanding is there is no hard line in the sand as to what the turnover threshold is but have previously been told that such an investment vehicle may want to err on the conservative side of being 5% and below annual portfolio turnover. In turn, this also means that old style LICs, given the long history of these vehicles, have very material embedded unrealised capital gains in the portfolio – yet another constraint on being active with regards to turnover.
All this we understand and it has important implications, as we allude to below. But being old style does not excuse a website that a web-savvy seven year old these days could significantly out do. Case in point: http://www.aui.com.au/ . Furthermore, no monthly and/or quarterly investor reports and the ‘List of Investments’ dates from 31 December 2020. At $2.3bn and a weighted average MER of circa 0.13%, clearly it is not a money issue. RRM just had a perfectly functioning website built for . . . . . slightly more than I’d spend on a big weekend.
The point of this piece is not to take the proverbial. This analyst has a history of calling out fund managers that take captive capital for granted. Put it another way, no open ended vehicle would have the lack of disclosure / lack of communication that the Board of AUI/DUI has overseen. RRM has not met the Board so is therefore not expressing a view either way, but to the casual observer all of the above could lead to the view that the Board is either 1) lazy, 2) indifferent, 3) not addressing general fiduciary requirements, 4) inept, 5) arrogant, or 6) taking the proverbial. Or all combined.
In RRM’s view, captive capital actually increases the onus upon a manager / board to provide excellent level of communications, not the inverse. And we could into a range of factors as to exactly why RRM holds this view. However, we see this in the LIC/LIT space with a range of fund managers that provide better levels of communications than that generally unlisted open ended counterparts. The likes of the Pinnacle group, Pengana, Regal, Wilson Asset Management are just a few that come to mind.
They partly do this because, one, they know they should and, two, no manager of a close-ended vehicle wants to endure a sustained and material discount to NTA – it is reputationally damaging, creates internal headaches / work, and makes it very difficult to raise additional capital.
If doing the right thing by share holders is not incentive enough and running the risk that AUI will continue to be mentioned in the press regarding WAR (which has shone a light on the four basic things all LIC managers / boards should do) then may be the presence of WAR on the register will provide a kick up the A. Because now that WAR is a stand alone vehicle charging an MER, it can not be a passive investor when the measures it outlines that all LICs do are not being actioned. Otherwise, WAR runs the risk of being viewed as a fund-of-fund, double layer of fees vehicle (at least on a percentage of total FUM). But I always say its better to be on the front foot and choosing one’s on path rather than being ignominiously forced to do so in the public gaze.
RRM is a fan of the close-ended vehicle and, in turn, a supporter of the sector. But support means calling the negatives out in the attempt that in some small way shortcomings may be addressed.
AUI/DUI having nothing to hide. Both vehicles have performed relatively well and in a manner that is true to the larger cap old style LIC style. In actual fact, there is many a virtue that can be made regarding AUI/DUI, in just the same way as AFI, ARG and MLT. In that vein, here is how RRM would suggest the communications ‘division’ in AUI/DUI may want to think about communicating to the market:
- Build a new website, publish monthlies and with at least quarterly commentaries (discuss key stock / sector exposures, performance drivers, sector/stock outlook. Performance attribution, etc);
- Emphasise that ‘old style’ LICs by virtue of capital account status / material embedded unrealised capital gains are necessarily low turnover. The virtue of this is what you see is what you get regarding stock, sector, factor tilts. No surprises. While it is commonly stated that past performance is not indicative of future performance, old style LICs can have a persistence of relative performance, esp against other old style LICs. Again, the point is to note the relative stability and the ‘no surprises’ aspect;
- Stability of income and 100% fully franked dividends, and in an environment in which TDs are negative real yield as is Investment Grade bond strategies. All IG bond ETFs got slammed in Feb (3% drawdowns) – while that may not sound like much it will take investors 2-3 years to get their money back (and that’s a very long time-to-recover) and on what had been marketed as ‘Cash Plus’ investment vehicles. Again, the emphasis is on what an old style LIC vehicle can deliver – stability and no surprises (as per the portfolio as a whole);
- Cross-correlations with other Large Cap Aust Equities LICs – these are high not surprisingly but may present an opportunity if AUI/DUI is trading at a lesser amount;