Home LMIs WAR / WGB – Wilson’s Moves on TGG

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.