LIC/LIT July Monthly

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90 LIC/LIT profiles, rankings, etc and as per usual.

The predominant developments in the sector over the last month, or so have been twofold:

1) ongoing capital expansion from well placed LICs/LITs and, 2) distribution guidance from Debt LITs.

Yes, the sector may be consolidating in terms of number of strategies (see MHH and MLT) but the total FUM has increased recently with well timed capital raisings from well placed vehicles (PIC, WLE, WHF, for e.g).

Secondly, the debt LITs by way of FY22 guidance (NBI, KKC for e.g) show a continuance of not having missed a beat in relation to distribution consistency and exceeding target levels. And to think, all the ‘hysteria’ regarding the public and private debt LIT segments in Peak Covid when the sector was sold down in lock-step with equities (despite being higher on the capital stack). What a buying opportunity that turned out to be.

LIC Monthly July 2021

 

WAM Leader’s Capital Raise – Who Said the LIC Sector Couldn’t Raise Capital

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WAM Leaders (WLE) announced a pro-rata 1 for 5 non-renounceable Entitlement Offer at an issue price of $1.44/shr, representing an 8.0% discount to the 12 July closing share price of $1.565 per share and equal to WLE’s pre-tax NTA of $1.44 per share as at 30 June 2021. The offer equates to a maximum capital raise of approximately $240m, having the potential to increase total FUM to circa $1.45bn, and making it the sixth largest LIC/LIT (assuming the MLT/WHSP merger proceeds).

This announcement was part of broader announcement of a record operating profit for the FY21 period (on the back of 37% portfolio returns for the period) in addition to a final dividend (ff) of 3.5cps, providing shareholders with a fully franked dividend yield of 4.5% and a grossed up yield2 of 6.4%. RRM also notes The Company recorded a profits reserve of 35.3 cents per share as at 30 June 2021, representing 5.0 years of dividend coverage for shareholders.

Just like PIC, which recently issued a 1 for 1 Bonus Options, it is all about timing. And on that front, RRM suspects this will not be the last capital raise announcement over the next month, or so.

AUI / DUI – When Old School goes New School

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RRM recently published an article regarding AUI / DUI but under the guidance of relatively recently appointed Company Secretary James Pollard we are happy see changes are afoot. Note the new websites.  And no bad thing – 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. Specifically:

  1. As an ‘old style’ LICs, and by virtue of its capital account status / material embedded unrealised capital gains, portfolio turnover is necessarily low. 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, especially against other old style LICs. Again, the point is to note the relative stability and the ‘no surprises’ aspect.
  2. 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 (3-6% 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).

There’s plenty to like in a world of ever change and uncertainty.

WAR Gets off to a Flying Start

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WAR has investments in both TGG and MHH. And given announcements this week on both investments, do an annualised return on both those investments – very nice indeed. To detail both:

The TGG Deal

On 29 June, WAM Global Limited (WGB) and Templeton Global Growth Fund Limited (TGG) announced it had entered into a Scheme Implementation Agreement to acquire 100% of the TGG shares it does not currently own.

Or more to the point, what WAR does not already own. Wilson Asset Management first bought shares in TGG back in 2015 and since which time steadily increased its stake to 14.6%. This 14.6% holding was transferred into the WAR portfolio as part of the internal seeding of WAR portfolio as part of the IPO process.

Looking at the Scheme, TGG share holders and WAR for that matter can opt to cash out at TGG NTA or take scrip in WGB. WAR opting for shares in WGB raises a few obvious interesting points about conflict of interest management processes. But the way the process is likely to work is the following: WAR will opt to cash out if WGB’s discount to NTA + the expected FY21 amount is less than 100%. i.e. it would immediately receive a greater return through the cash. If, however by the date WAR must make a decision the discount to NTA in WGB has narrowed and, when combined with the dividend + the implicit value of the 1 for 1 Bonus Options in WGB that it would also be eligible then there may be consideration to take part or all in WGB shares.

While it appears that there are no hard and fast rules regarding this potential conflict of interest, RRM would note the Wilson Asset Management track record of going into bat for investors and, further, it is highly unlikely it is going to incur reputational risk for, in the scheme of things, a relatively small amount of capital (a max of circa 14.6% * $300m in TGG FUM).

Should WAR cash out then that is not a bad return on investment if you annualise it. The circa 8% uplift (TGG was at a 8.5% discount to NTA at 31 May) over an extremely short time period.

For WGB, what matters is the percentage of investors that opt for shares in WGB in terms of how much additional capital not held by WAR (circa $255m). For TGG share holders while the discount to NTA in WGB currently plus the expected FY21 yield is less than 100% (the cash out amount), the sweetner not to cash out is 1) the eligibility for the FY21 WGB dividend, 2) eligibility for the WGB 1 for 1 Bonus Options, 3) rollover relief (i.e., it may not be a good time for an investor to crystalise a gain), and 4) access to a proven manager that adopts an active style agnostic investment approach and which has investment vehicles that almost universally trade at a premium to NTA (bear in mind that the dividend yield in WGB is likely to continue to increase over time).

The MHH Announcement

Then on 1 July 2021, Magellan Asset Management announced yesterday its intention to transition the Magellan High Conviction Trust (MHH) from a LIT to an ETMF. Should this receive unit trust approval (meeting intended to be held in the September quarter), MHH will be the second LIC/LIT to convert following the recent conversion of MA1 to MAAT. Again, a very nice return on an annualised basis for WAR.

TGG – The Opposite End of the Activist Spectrum to the MHH Purchase

The TGG investment is the converse of the purely passive, market opportunistic discount capture strategy associated with the acquisition of MHH shares. TGG represents the other end of the activist spectrum for the WAR strategy, namely a takeover. But note how long it took to come to fruition – circa 6 years.

This long duration investment timeframe of TGG is typical in what RRM views as pure activism. Typically, there is an initial co-operative approach, if changes are not forthcoming a tactical pivot occurs by the activist who becomes more assertive and sometimes confrontational. The playbook in terms of engagement by the activist is typically sporadic, being characterised by heightened periods of activist engagements interspersed with often relatively long periods of inactivity. It is a higher risk, higher internal resources yet potentially a higher returns strategy than, for eg, the purely passive strategy WAR is engaged in with MHH.

But it is necessary to 1) potentially amp up returns and 2) justify the double layer of fees. However, pure activism often has a highly idiosyncratic and j-curve alpha returns profile, driven by particular campaign outcomes (and which can be binary). WAR, by presumably engaging in a range of investments across the activist spectrum, will likely mitigate this potential j-curve effect. So, from the perspective of RRM, this mix of activism is no bad thing for investors.

As for TGG, RRM must confess to not having closely followed its trials and tribulations over the last number of years. But we do know that a number of internal reviews were conducted with the objective of providing a better outcome to investors. We also note that TGG restructured its MER such that the MER is a function of the lesser of the market cap or FUM. Now, given TGG had been trading at a discount to NTA, obviously that meant lower fees to investors. To RRM’s knowledge, this structure was a first in the Australian LIC/LIT segment (although it is adopted in the UK). TGG should be given credit for both actions. And to be fair to TGG as a value house, the investment vehicle did get caught up in what was historically the greatest and most protracted Growth / Value disparity the market has ever seen. Of course, that has turned in more recent times.

MHH to Convert to an ETMF – LIC/LIT Consolidation Continues

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Magellan Asset Management announced yesterday (1 July 2021) its intention to transition the Magellan High Conviction Trust (MHH) from a LIT to an ETMF. Should this receive unit trust approval (meeting intended to be held in the September quarter), MHH will be the second LIC/LIT to convert following the recent conversion of MA1 to MAAT.

MHH’s discount to NTA had been languishing (at least until WAR took a stake) and partly due to poor relative performance post March 2020. The expected timeframe of the conversion is a bit of an unknown currently, but it will no doubt be a lot quicker than that of MA1 which was held up by the ASIC review into Active ETFs, then general Covid staffing disruptions at the regulator / ASX, then the ASX adopting a cautionary approach to the MA1 conversion given it was the first.

With the discount to NTA having narrowed recently, it was probably an opportune time to do so – it presents less of an arb opportunity for those investors, like Sandon Capital, that may have been inclined to do so. And less arb trades on the books means less FUM loss on day 1 of the conversion to an ETMF. Not that Magellan would be overly concerned either way given its sheer FUM scale.

Very tidy profit for WAR if you annualise the return. This is also the case regarding its involvement in TGG, which RRM has written about.

Does this portend further conversions to ETMFs? Potentially, but there is a lot of factors at play for each and every LIC/LIT manager to consider and RRM believes most managers will not to go down this route. The conversion of MHH makes a lot of sense for Magellan (been down the ETMF route, know the process, understand that being an ETMF provides better future proofing, and they don’t run potential reputational risk from a vehicle trading at a material discount to NTA).

WAR / WGB – Wilson’s Moves on TGG

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WAM Global Limited (WGB) and Templeton Global Growth Fund Limited (TGG) announced it had entered into a Scheme Implementation Agreement to acquire 100% of the TGG shares it does not currently own.

Or more to the point, what WAR does not already own. Wilson Asset Management first bought shares in TGG back in 2015 and since which time steadily increased its stake to 14.6%. This 14.6% holding was transferred into the WAR portfolio as part of the internal seeding of WAR portfolio as part of the IPO process.

Looking at the Scheme, TGG share holders and WAR for that matter can opt to cash out at TGG NTA or take scrip in WGB. WAR opting for shares in WGB raises a few obvious interesting points about conflict of interest management processes. But the way the process is likely to work is the following: WAR will opt to cash out if WGB’s discount to NTA + the expected FY21 amount is less than 100%. i.e. it would immediately receive a greater return through the cash. If, however by the date WAR must make a decision the discount to NTA in WGB has narrowed and, when combined with the dividend + the implicit value of the 1 for 1 Bonus Options in WGB that it would also be eligible then there may be consideration to take part or all in WGB shares.

While it appears that there are no hard and fast rules regarding this potential conflict of interest, RRM would note the Wilson Asset Management track record of going into bat for investors and, further, it is highly unlikely it is going to incur reputational risk for, in the scheme of things, a relatively small amount of capital (a max of circa 14.6% * $300m in TGG FUM).

Should WAR cash out then that is not a bad return on investment if you annualise it. The circa 8% uplift (TGG was at a 8.5% discount to NTA at 31 May) over an extremely short time period.

For WGB, what matters is the percentage of investors that opt for shares in WGB in terms of how much additional capital not held by WAR (circa $255m). For TGG share holders while the discount to NTA in WGB currently plus the expected FY21 yield is less than 100% (the cash out amount), the sweetner not to cash out is 1) the eligibility for the FY21 WGB dividend, 2) eligibility for the WGB 1 for 1 Bonus Options, 3) rollover relief (i.e., it may not be a good time for an investor to crystalise a gain), and 4) access to a proven manager that adopts an active style agnostic investment approach and which has investment vehicles that almost universally trade at a premium to NTA (bear in mind that the dividend yield in WGB is likely to continue to increase over time).

TGG – The Opposite End of the Activist Spectrum to the MHH Purchase

The TGG investment is the converse of the purely passive, market opportunistic discount capture strategy associated with the acquisition of MHH shares. TGG represents the other end of the activist spectrum for the WAR strategy, namely a takeover. But note how long it took to come to fruition – circa 6 years.

This long duration investment timeframe of TGG is typical in what RRM views as pure activism. Typically, there is an initial co-operative approach, if changes are not forthcoming a tactical pivot occurs by the activist who becomes more assertive and sometimes confrontational. The playbook in terms of engagement by the activist is typically sporadic, being characterised by heightened periods of activist engagements interspersed with often relatively long periods of inactivity. It is a higher risk, higher internal resources yet potentially a higher returns strategy than, for eg, the purely passive strategy WAR is engaged in with MHH.

But it is necessary to 1) potentially amp up returns and 2) justify the double layer of fees. However, pure activism often has a highly idiosyncratic and j-curve alpha returns profile, driven by particular campaign outcomes (and which can be binary). WAR, by presumably engaging in a range of investments across the activist spectrum, will likely mitigate this potential j-curve effect. So, from the perspective of RRM, this mix of activism is no bad thing for investors.

As for TGG, RRM must confess to not having closely followed its trials and tribulations over the last number of years. But we do know that a number of internal reviews were conducted with the objective of providing a better outcome to investors. We also note that TGG restructured its MER such that the MER is a function of the lesser of the market cap or FUM. Now, given TGG had been trading at a discount to NTA, obviously that meant lower fees to investors. To RRM’s knowledge, this structure was a first in the Australian LIC/LIT segment (although it is adopted in the UK). TGG should be given credit for both actions. And to be fair to TGG as a value house, the investment vehicle did get caught up in what was historically the greatest and most protracted Growth / Value disparity the market has ever seen. Of course, that has turned in more recent times.

June 2021 LIC/LIT Monthly Report

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Key content-

Market Update: MLT Merger – Transforming an ‘Old School’ LIC Giant into a Diversified, Through Market Cycle ‘family office’ style Investment Vehicle; RF1 – The Massive Distribution and the ‘Money for Jam’ DRP; PIC – The Inside of the 1 for 1 Bonus Option Offer from the Best Performing Value LIC; The Smart Bonus Options Trading Strategy – How to Game Crowd Behaviours; Ryder Capital (RYD) – The Raw Undiluted Performance Numbers are Even Stronger; WAR – IPO Close, Expected Secondary Market Demand and what the MHH ‘Raid’ tell us; NBI – Why We Should Not be Concern about PM Vivek Bommi’s Departure. MA1 – The First to ETMF Convert – Where the Brave Tread.

Sector LIC/LIT Rankings – What’s Top of the Pops (MIR, OPH, HM1, RF1, PIC, WQG). Paul Moore’s (PGF) Thematic Long Game on the Move

Cross-Correlation Heat Maps – The Same, Same and the Renegade Outsiders (VG1, FGG, IBC),

RRM Monthly June 2021 ZIP 90 LIC/LIT Rated and Non-Rated Profiles – and All the Quant You May Want (HTML-embedded)

Click Here

 

NBI PM Vivek Bommi Departs – Why We Shouldn’t be Concerned

Vivek Bommi, Portfolio Manager focused on Global and European Non-Investment Grade portfolios with Neuberger Berman’s Global Non-Investment Grade Fixed Income team, has decided to leave the firm. Vivek’s responsibilities will be absorbed by existing team members. Senior Portfolio Managers Chris Kocinski, Joseph Lind, Joe Lynch, Stephen Casey, Russ Covode and Simon Matthews will continue to manage the Global Non-Investment Grade portfolios. Specifically for NBI, Simon Matthews will replace Vivek as a named PM on the portfolio.

The Global Non-Investment Grade Credit investment team (50+) is highly experienced, tenured and focused solely on Non-Investment Grade Credit. The team is part of the broader Neuberger Berman Fixed Income platform which is characterized by its depth, experience and collaborative approach, with more than 170 investment professionals globally. The platform is globally integrated and highly collaborative.

The departure is a surprise to RRM and we note that Vivek Bommi had been a regular and excellent communicator to the NBI unit holder base. This was particularly important during 2020 as well as more broadly in terms of getting a portion of the Australian investor base up to speed all things HY bonds.

Nevertheless, a benefit of a large global team, long standing investment process, a deep bench of talent is it generally minimising key person risk. In short, RRM would anticipate a seamless transition

WAR IPO Close and what the MHH ‘Raid” Tells You

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The WAM Strategic Value IPO closed on 10 June 2021 with investor demand significantly exceeding the $225 million maximum subscription, suggesting solid secondary market support given the consequent IPO scalebacks.

For those not intimate with the IPO, WAR, which commences trading on the ASX on 25 June 2021, will commence with a initial portfolio that includes the likes of TGG, AUI, PAI, LSF, VG1 and now MHH.

In what was its first transaction, WAR acquired a stake in MHH during the second week of June. RRM would describe the buying in MHH as purely a market opportunistic and passive discount capture move given the team at WAR could not conceivably provide anything constructive to Magellan (positive comment regarding both Wilsons and Magellan).

What the buying in MHH highlights to RRM is the spectrum of strategies WAR will employ to crystallise discount capture plays. These will range from purely passive in well managed LICs/LITs (‘well managed’ in the sense of marketing, communications, dividends, accountability to share holders, solid investment teams) to actively seeking to implement some or all of the above ‘well managed’ attributes in less well managed LICs/LITs.

This latter strategy is an activist approach to discount capture. It starts with an approach to help (the ‘carrot’) but if changes are not forthcoming a pivot is required (the ‘stick’), potentially becoming confrontational.

A diversity of the two approaches has a number of benefits. Firstly, hard core activism often involves long and proacted campaigns that, if successful, deliver something of a J-curve and very idiosyncratic returns profile. By mixing these campaigns with passive and benign activist campaigns, the diversification has greater potential to smooth out any inherent J-curve effect.

However, hard core activist campaigns, while arguably inherently higher risk, are also likely to deliver greater alpha and true absolute returns. A decent percentage of these campaigns (as a percentage of the total portfolio) will also be required if WAR is to avoid what would become legitimate criticism that it is partly / materially a double layer of fees, largely passive fund-of-fund vehicle.

But then again, Geoff Wilson is not one to shy away from getting his hands dirty with respect to a IMA take-over or a roll-up. But now WAR has become a separate vehicle, any such campaigns will need to be highly polished in terms of convincing existing share holders why they should vote in the favour of WAR.

MLT – The Transformation of an ‘Old Style’ LIC Giant

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On 22 June 2021 Milton Corporation Limited (MLT) and Washington H. Soul Pattison (WHSP) announced both parties had entered into a scheme of arrangement under which WHSP proposes to acquire 100% of the share capital of MLT that it currently does not own.

Under the proposed transaction, which has been unanimously recommended by the Committee of Independent Directors of MLT, MLT shareholders will receive scrip consideration reflecting a 10% premium to pre-tax NTA in addition to two fully franked dividends totalling 45 cps and access to a FY21 dividend from WHSP.

Based on prices on 22 June 2021, following completion of the proposed transaction, existing WHSP shareholders will own 66.2% of the combined entity with MLT shareholders owning the remaining 33.8%. RRM notes however that the WHSP share price jumped 8.5% on 23 June.

It is not RRM’s role on how to advise MLT shareholders but we would note the following. The 10% premium to NTA compares to what had been an approximate 5% discount to NTA. The three to five year investment portfolio plan of WHSP involves a material increase in private market assets. Having spoken to the CEO of WHSP, Todd Barlow, RRM is favourably predisposed to this asset class / portfolio evolution strategy, and in part because we are well aware of the potentially attractive risk-adjusted returns in the private market space in Australia.

The simplest way to view WHSP is like that of a large US-style family office. It is well resourced, experienced and very well connected. And connections particularly matter in the private market space. There is also a very strong focus on capital preservation, which is a common hallmark of family office portfolio management.

The combined entity will also over time, based on the three to five year plan, become more of a true through market cycle investment vehicle given its diversification. That diversification will be by asset class, geography, sector and presumably be relatively ‘factor’ neutral (growth, value, market cap size, etc).

The other point RRM would make is there will not be any material changes to the existing MLT portfolio, at least not in the foreseeable future. Perhaps a better way to state this is that RRM would not anticipate any ‘style drift’ in relation to the existing MLT domestic equities portfolio. This is a friendly merger. The principal shareholder in WHSP, Robert Millner is the Chairman of MLT – i.e., well familar with the style and strategy, not to mention that WHSP is an existing share holder in MLT. Furthermore, the capital account status of MLT precludes any potential material portfolio turnover in any financial year period, even if it was on the cards.

RRM likes this stability – an MLT share holder is not being put in a situation of having to choice here and now type thing. The portfolio evolution will occur over time rather than over the shorter term.

Of course, an existing MLT shareholder can simply sell on market if concerned or unsure about the combined vehicle. A review of the cross-correlation heat map analysis contained in this publication indicates a number of highly correlated strategies, not surprisingly including AFI and ARG, for example. That is, comparable alternatives exist to MLT.