Forum Topics LIC discussion forum
Bear77
2 months ago

12-Jan-2024: I have discussed here recently the LICs managed by Wilson Asset Management - see here: WAM - WAM valuation (strawman.com) ...and how LICs that have traded at significant premiums to their NTA for years can move to NTA discounts once they lose their loyal shareholder base, i.e. once people move on - and move their money into something better (in their opinion). One clear example of this is Karl Seigling's Cadence Capital (CDM) which was flying high in that 2012 to 2015 (inclusive) period, but has fallen significantly since then:

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They were trading at an NTA-premium of around +14% to their pre-tax NTA and +12% to their post-tax NTA at the end of December 2015; See here: NewsletterCCLDecember15.pdf (cadencecapital.com.au)

That premium was +17.8% to their pre-tax NTA (& +13.4% to their post-tax NTA) on January 31st, 2016. [Source: https://www.cadencecapital.com.au/investment-update-1/]

Their top 2 positions at that point were Macquarie Group (MQG) at 9.2% of their portfolio (had been 11.4% at 31-Dec-2015) and Melbourne IT at 6.9% (7.4% the previous month). Melbourne IT had been a large part of the CDM portfolio for some time at that stage, and I'll share some history because it was a big bet by CDM that went pear-shaped:

Before he got into politics, former Australian prime minister Malcolm Turnbull owned 8% of MLB (Melbourne IT) [Source: https://istart.com.au/news-items/melbourne-tech-acquires-wme-group/ 03-May-2017]

All three founders exited Melbourne IT (MLB) after it had become a large position in the CDM portfolio, and all three started their own ventures, including the software business Snap Send Solve. In May 2017, Melbourne IT acquired WME Group for approximately AU$39 million. One year later, on 28 May 2018, Melbourne IT Group officially rebranded as ARQ Group. In early 2020, the now struggling ARQ Group announced that it was selling its Enterprise Services Division for AU$35 million, leaving the company with only its SMB (Small and Medium Business) Division and the need for a new name as it had also sold the rights to the ARQ brand. In May 2020 they became known as WebCentral Group Limited.

The following year (2021), WebCentral merged with 5G Networks - see here: https://www.zdnet.com/article/5g-networks-to-become-a-subsidiary-of-webcentral-under-merger-agreement/

And: Webcentral sinks but 5GN rockets before companies merge | ZDNET

For the 18 months ending 30 June 2021, the company reported an after-tax net loss of AU$61 million, a further 33.7% tumble from the AU$46 million net loss recorded during the 2019 financial year. 

In October 2023, WebCentral announced that it would sell off its web and email hosting businesses for a total transaction value of $165 million, having entered into binding agreements with a European investment group led by Oakley Capital to sell two-thirds of its Webcentral and Melbourne IT domain name registry, consumer hosting and email hosting services business by November.  As a result of the sale, Webcentral changed its name to 5G Networks Limited (5GN) and is now purely a telecommunications carrier and owner of infrastructure, servicing enterprise and wholesale customers. [Source: https://www.arnnet.com.au/article/709276/webcentral-sells-hosting-business-165m-rebrands-5gnetworks/]

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While Karl didn't ride this dog all the way into the ground, he initially doubled down on them. By the end of 2018, ARQ Group as it was then known, was by far CDM's largest investment, representing 12.1% of their portfolio - see here: Cadence Capital Limited December 2018 Newsletter - Cadence Capital....and the next largest was MQG at 4.7%. Their 3rd largest position was Money3, now known as Solvar (SVR) and their portfolio also included Resimac Group (RMC) which later (at the end of 2019) became their largest position. They held RMC through until August 2022 when the RMC share price had halved from a high of over $2.50/share to around $1.28/share.

At this stage the CDM SP was at $0.885, a circa -5% discount to their pre-tax NTA (of $0.934) and around -18% discount to their post-tax NTA (of $1.077).

They haven't traded at NTA premiums since then.

By the end of 2019 (see: NewsletterCCLDec2019.pdf (cadencecapital.com.au)) Cadence Capital (CDM) had Resimac (RMC, 6.8%) and Money3 (SVR, 4.6%) as their top two positions, with Macquarie (MQG, 4.5%) third. However, ARQ Group was still there with a 2.5% weighting, and the ARQ share price had declined by about 79% in 2019, and that suggests they didn't add to their ARQ investment or sell any during 2019 because their ARQ weighting in their portfolio declined by 79% also (from 12.1% to 2.5% of their portfolio) along with the ARQ share price.

Unfortunately for CDM, they also added another dog to their portfolio in 2019, Retail Food Group (RFG) which fell -69% in 2020 from 32 cps to 10 cps.

By the end of 2020 (see: NewsletterCCLDec2020.pdf (cadencecapital.com.au)) they had stopped providing portfolio weighting info, instead choosing to just provide their top 20 each month in alphabetical order. Speaking of which, they held Alphabet (Google) because Cadence has always invested in mostly ASX-listed companies but also overseas-listed companies and the occasional unlisted company. Their December 2020 top 20 list did not include ARQ Group - or WebCentral as they had become known, and RFG was also gone. There were however other names on that list that have more than halved in price since then though - like EML Payments (EML), RedBubble (was RBL, now known as Articore, ATG), Baby Bunting (BBN), Electro Optic Systems (EOS) and PointsBet (PBH) - remember, you have to look at their three year charts to see how these companies have performed since the end of 2020 when CDM held them. MNY (SVR) & RMC were still on their top 20 list from two years earlier.

By the end of 2021 (see: NewsletterCCLDec2021.pdf (cadencecapital.com.au)) they had significantly changed their portfolio with EML, RBL, BBN, EOS and PBH all gone from CDM's top 20 list and a significant increase in exposure to Coal, Iron Ore and Copper (10.1% of the portfolio in "Basic Materials") but the majority of the portfolio exposed to the Communications (16%) and Technology (14%) sectors. They still held MNY (SVR) and RMC.

By the end of 2022 (see: NewsletterCCLDec2022.pdf (cadencecapital.com.au)) they had added some gold exposure (BGL, TIE), increased their exposure to coal, reduced their exposure to iron ore (BHP in, but FMG, MIN & CIA out), and added exposure to rare earths (LYC) and graphite (SYR). They remained exposed to copper but the names had changed (OZL out, CHN & Capstone Copper [CS.tsx] in). Their exposure to Basic Materials had increased from 10.1% to 29.3% of the portfolio in 12 months. For the sake of clarity, OZ Minerals (OZL) was acquired by BHP in the first half of 2023, so this snapshot of the CDN portfolio at December 31st 2022 pre-dates that acquisition. The most amazing thing to note about the CDN portfolio during the 2022 calendar year is that they started the year with 30% of their portfolio exposed to the Communications and Technology sectors and they ended the year with less than 2% net exposure to those sectors including some short positions like NVIDIA Corporation (NVDA.nasdaq). Shorting NVDA was an interesting choice...

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As you can see above, shorting NVDA during 2022 might have been a good move, but to be short NVDA at the END of 2022... not so much.

Understandably, by the end of January 2023 (see: Cadence Capital Limited January Newsletter - Cadence Capital) NVDA were absent from CDM's top 20 list and they had zero Technology sector shorts, however their shorts across other sectors still accounted for 8.3% of their portfolio (down from 10% a month earlier). They had also increased their net exposure to the Basic Materials sector to 33.5% of their portfolio (35.2% long & 1.6% short, with a 0.1% variance due to rounding), partly due to the inclusion of Pilbara Minerals (PLS, lithium, long position) to their portfolio.

By the end of 2023 (see here: Cadence Capital Limited December Newsletter - Cadence Capital) Cadence Capital (CDM) had stopped giving out their top 20 list in their monthly reports, instead just giving their sector exposure (or "Portfolio Sector Analysis" as they call it):

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And their "Portfolio Market Capitalisation Analysis":

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You can get a few names from their commentary:

"The top contributors to performance during December were Zillow Group, BHP, Meta Platforms, Whitehaven Coal, Stanmore Resources, Genworth Financial, Strike Energy and Capstone Copper. The largest detractors from performance were Meg Energy, QBE and Red5."

However, it's nowhere near a "top 20" list, so their disclosure of what they own has certainly gone backwards.

In terms of their discount to NTA in their SP:

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So they were trading at a 14.9% discount to their pre-tax NTA and a 30.3% discount to their post-tax NTA.

That's a big turnaround from those double-digit premiums we were seeing in 2015 (example: NewsletterCCLDecember15.pdf (cadencecapital.com.au)) but that's what happens when you underperform.

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Because of the major underperformance in that 2016 to early January 2020 period, as well as the -6.2% p.a. underperformance since then, the fund has underperformed their benchmark All Ords Accumulation index over the past 10 years, despite the major outperformance in many of the prior years, and that has meant that their profit reserve has been depleted which has resulted in a reduced stream of fully franked dividends, something that many LIC investors rely on for income.

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So investors move out and move on, and the premium turns into a discount. And in the current environment, once a LIC is trading at a discount to their NTA, it seems very difficult to get them trading back at an NTA premium again.

We've still got some LICs around that still trade at premiums to NTA - like WAM and WAX and WMI (all managed by Wilson Asset Management) but I'm seeing those premiums reducing and I don't believe they are sustainable in most cases.

I have been invested in the LIC space in prior years, including in CDM back in their glory years - and DJW (Djerriwarrh Investments) who were trading at circa 20% to 30% premiums at one point and now trade at double digit discounts to their NTA - and the WAM Funds LICs, as well as a bunch of others, but I'm completely out of LICs, LITs and all other closed-end funds at this point.

The big selling points of LICs was their profit reserves, which allowed them to hold back profits in their good years and pay out more in years where they had generated less profit - so enabling them to "smooth out" their dividends, something that trusts are not supposed to do - trusts are supposed to pass through all profits (after expenses) to their unitholders every year.

The dividend smoothing effect of profit reserves used by LICs has suited many people who rely on such investments for income to live off - such as self-funded retirees. However, when the fund doesn't perform and the profit reserve becomes depleted, the dividends usually reduce, and that's when those same investors lose faith in that LIC and move on, either to another better performing LIC, or even to another asset class. With elevated interest rates, people may be able to generate enough income now from interest payments from TDs to get by - without the risk that equities carry. I just get the sense that LICs have had their day in the sun and they are not going to be as popular in future years, hence we have seen a number of them either being wound up or converted into open-end funds that trade at NAV (same as NTA).

Traditionally the fee structures of LICs have been high. I haven't looked lately, but Karl used to charge a 1% management fee and a 20% performance fee for CDM, which is reasonably high, not that he has been able to charge much in the way of performance fees in the past 8 years, especially if he has a watermark feature where he has to make up prior year underperformance before any outperformance can be calculated.

Anyway, I was going back through CDM earlier today and I thought it might interest people how this particular LIC has changed so much over the years. When he first started to underperform seriously, Karl was explaining in his newsletters that a lot of the underperforming was directly due to his own rules which had served him so well in prior years. He used to scale in and out of positions in tranches and he would only add more when the shares were increasing in price and if they dropped in price by 5% or more (or whatever the prevailing number was that he was using at the time) he had to sell the position. He said at the time that recent "whipsawing" in prices due to increased volatility had knocked him out of positions that were moving up and down a lot, but still trending up. However, as I've explained above, he did keep a number of positions in the CDM portfolio that had substantial share price falls over sustained periods of time, so he must not have always stuck to his own rules, or else he changed them.

Changing your own rules or not following them is sometimes a good thing. Often when the facts change, so does my opinion. But it's not always a good thing. Like if your rules are there to cap your losses rather than let your losses grow ever larger, then ignoring them or changing them may be a big mistake.

Anyway, that's enough for now - have to go cook some dinner...

11

Mujo
2 months ago

Thanks, great history recap. Agree most LICs are in for a tough time with ETFs definitely more prevalent now.

8

Bear77
2 months ago

And heaps cheaper too @Mujo - even the so-called "Smart" ETFs or "Active" ETFs - where there is some management discretion as to inclusions and weightings - tend to usually have MUCH cheaper fee structures than LICs and other traditional managed funds.

Graham Hand penned a decent article on the fall of LICs that was published in September in Morningstar's "FirstLinks" newsletter (used to be called "CuffeLinks" before Chris Cuffe sold it to Morningstar), see here: https://www.firstlinks.com.au/lics-closing-more-should-follow [20 Sept 2023]

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Source: Bell Potter LIC Report, 1 September 2023

The table above identifies the discounts for many of the leading LICs. Some notable exceptions are Plato (ASX:PL8) and three of the Wilson funds (ASX:WAX, WAM and WMI), with the premium driven by a strong reputation for delivering income which encourages buyers to focus on the dividends rather than the premium, plus an ongoing commitment to marketing.

It’s a strange that people still choose to invest in Plato through PL8 at a premium of about 24% when their unlisted managed fund run with the same strategy is available at NTA (/NAV) and can be accessed easily via the ASX online mFund service.

Source: Excerpt from Firstlinks article by Graham Hand linked to above.

Another interesting table from that article:

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Those are some funds which have (based on the Bell Potter numbers for 1 September 2023):

  • A current large discount
  • A five-year large average discount
  • A range of high to low discounts over five years which are all negative


Graham says: The boards and management of these LICs need to justify to their investors why they believe in a future turnaround in the discount despite little evidence for at least five years. There are many more in a similar position. It’s not that the managers have weak governance, little marketing or even poor reputations, but how are they balancing their own desire for fees against the ability of investors to realise full value?

A small manager such as NAOS or Sandon needs the funds to run their business. Some managers argue that the LIC or LIT structure suits less liquid assets which cannot be sold easily to meet redemptions. Sebastian Evans at NAOS told Morningstar that he needs the committed capital of a LIC structure:

“If we converted to an active ETF and needed to liquidate our holdings it wouldn’t work. We have a 30% holding in a business. I can’t sell that in a day or two."

But there are plenty of unlisted property funds which manage liquidity by limiting redemptions at NTA to a certain amount or time period.

Larger managers with far more in their unlisted funds should consider whether the hassle of listing a small part of their business is worth it. When I sat on the board of Peter Morgan's 452 Capital, the operations people spent as much time on the small LIC as the rest of the much larger unlisted fund business.

--- end of excerpt ---

Graham ends his article with this:

Where do LICs stand now?

The development of active ETFs or ETMFs is relatively recent, opening the way for LICs to convert to listed open-ended versions, as well as unlisted funds, to close the discount. Managers with large discounts face disgruntled investors, activist competitors and the rising demand for ETFs.

Although discounts are historically wide at the moment, many of the large, traditional LICs have a record of drifting in and out of discount, and these can present opportunities for investors. There is a role for the right managers with the right LICs but it's time for many other managers to move on.

Footnote

In a fascinating development for the King of LICs, Geoff Wilson has announced plans for an open-ended version of WAM Leaders, looking to raise $500 million to $1 billion. It will be his first move away from closed-end LICs since his initial fund about 25 years ago. 

Then on 12 October 2023, Forager (ASX:FOR) announced:

"The Manager considers that the LIT structure served this purpose well through several market cycles in the subsequent seven years. In the past four years, FOR’s units have been trading at a meaningful discount to the underlying NAV. FOR has implemented a number of initiatives in an effort to address this gap, including a semi-annual distribution policy and undertaking a regular buyback.

Whilst there have been some periods of improved trading since those actions commenced, it has not been sustained and FOR’s units have recently been trading at an average discount of more than 15% to NAV.

It is the Manager’s view that investor apathy towards closed-ended investment vehicles has become entrenched and that smaller, less liquid vehicles like FOR are unlikely to trade at NAV for the foreseeable future. The Manager’s current view is that the magnitude and sustained nature of the discount to NAV now outweighs the portfolio management benefits of remaining a closed-ended fund.

The Manager has considered a range of additional measures to further improve the traded market price of FOR units. The Manager currently considers that the solution which will be in the best interests of FOR unitholders is likely to be the orderly transition of FOR back to an open-ended fund."

 

Graham Hand is Editor-At-Large for Firstlinks. This article is general information and does not consider the circumstances of any investor. Graham holds some of the securities mentioned in this article and was on the Board of Absolute Equity Performance Fund until two years before its delisting.

--- end of excerpt ---

Worth a Read: Why LICs are closing and more should follow (firstlinks.com.au)

11

Mujo
2 months ago

I think dividends are key as you pointed out for trading above NTA. It’s mostly retirees looking for income that invest in the space - and are used to the ARG and AFIs of the space as the diversified vehicles from yesteryear.

The monthly income over the quarterly income is the only think you could possibly make for holding PL8 over the managed fund, but the ridiculous premium makes that moot.

I believe it’s a worldwide trend with the big discounts - like Bill Ackmans vehicle too.

Definetly agree, there’ll be more to follow that convert, they have little reason not too and will sooner or later be targeted by an activist otherwise.

10

Bear77
2 months ago

Agreed @Mujo Dividends are the main driver for NTA premiums in the LIC space. The reason why those 3 LICs that WAM Funds manages have maintained such healthy premiums in their respective SPs is that they increased their dividends steadily for years and then when they couldn't keep doing that - in the case of WAM Capital (WAM.asx), they instead maintained the dividend and ran down their profit reserve, so self-funded retirees and other loyal shareholders who relied on that income remained comfortable with the income aspect of the LIC, despite the falling share price due to falling NTA. Those buying at those premium prices were buying to lock in the income stream. My observation however is that WAM Capital (WAM) has bugger all in their PR now, WAX has run out of franking credits, and WMI have to generate more profits than the other two because the microcaps they invest in do not tend to pay high fully franked dividends to them.

Microcaps are more often reinvesting most if not all of their profits (when they are actually profitable) back into their own growth - rather than distributing those profits to their shareholders like more mature companies tend to do. This means that the profit reserve (PR) of WMI (WAM Microcap) has to be topped up mostly from trading profits and the franking credits have to be generated mostly by tax paid by WMI on those trading profits.

Oscar Oberg, the lead PM (portfolio manager) of WMI (and WAX and WAM and WAA) has done a really good job with WMI to date and they have managed to pay an increasing stream of fully franked dividends, except for the final dividend in 2022 which had to be rebased to a lower level, as shown below.


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The dive in early 2020 was that Covid crash that affected everybody. Other than that, you can see that their SP was rising strongly through until around March 2021 where it was moving more sideways as their NTA began to fall. The WMI SP went into a downtrend in 2022 which continues today, and my view is that much of that change of sentiment was prompted by that reduction in the full year dividend in 2022, something that was foreshadowed in their shareholder communications (monthly reports) during the first half of the 2022 calendar year. The downtrend moderated in 2023 - or became less steep - as they started to gradually raise those dividends again.

Obviously their NTA movement from month to month also plays a big part, but I do think that many of the investors in these funds are more focused on the income generated by the fund than the actual underlying asset value.

The big advantage of WMI over WAM and WAX is that WMI still has a healthy profit reserve with franking credits. WAM has very little in their PR and while WAX has multiple years worth of dividends in their PR, they recently ran out of franking credits, so their last div was only 60% franked. I do note however that the premium in the share price of all three of those LICs has been reducing over the past 6 months. And there's good reason for that. I think that premium reduction continues from here, unless the funds can start performing really well and building up their respective profit reserves, which will allow them to raise their dividends.


Note: Most of the posts in this particular forum thread below this one are going to be at least 2 years old, and some of them are replying to posts that have been removed by the system because the members who posted them are no longer members of Strawman.com (or else they are no longer Premium members), so there's some context. The stuff above this post is from the past few days but below this post - in this thread - not so much...

16

Bradbury
2 months ago

@Bear77 it seems that Oscar and the WAM team are aware of the potential outflow risk and are trying to bump up the profit reserve for WAM. The profit reserve has now increased to 11.2c from 6.5c. This is still not enough to cover a full year of dividends, but at least gives them some breathing room to make the next payment without having to cut from 7.75c

November

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December

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I still agree with general sentiment that the NTA premium will continue to diminish and potentially switch to a discount, but in my mind this helps maintain sentiment for a bit longer.

8

Bear77
2 months ago

Good pickup there @Bradbury - and this appears to be WAM Capital's MO - to just scrape by in this way without reducing the dividend, but I wonder if that means selling down positions which they are in the green on to generate profits when they would otherwise have preferred to let those winners run. So what I am suggesting is that with such a low PR, perhaps they are becoming forced sellers at times just to generate the profits that they need to maintain their dividends. If that is the case, it could be a contributing factor to their underperformance over recent years as demonstrated by their reducing NTA.

6
Bear77
2 years ago

29-Sep-2021:  https://www.livewiremarkets.com/wires/how-to-use-lics-lits-for-income-and-3-we-like

That link will take you to a 27-Sep-2021 Livewire Markets article (wire) by DARYL WILSON of Affluence Funds Management titled, "How to use LICs/LITs for income (and 3 we like)".

The three they (Affluence FM) like are SNC, DJW and WMA.  Their two introductory paragraphs are as follows:

"Many investors look to ASX Listed Investment Companies (LICs) for their ability to pay regular income. Given the incredibly strong market since April 2020, many LICs have banked huge profit reserves that can cover dividends for many years. Over the past couple of months, we have seen increased dividends, and some LICs increase the frequency of dividend payments. This can help to attract new investors, and, where LICs are trading at below their net asset value, to close those discount gaps."

"The result of this recent positive performance is that the sector is starting to look healthy again. Investors are returning in droves, and many LICs are yielding 4%, 5% or even more. This can make LICs an attractive proposition for those looking for income. But let us give you a word of warning up front. We don’t believe anyone should buy an LIC based just on its dividend yield. There are many other attributes we look for before purchasing, and in our view some of them are much more important than today’s yield."

--- end of excerpt ---

Some of the topics covered in the article include:

  • LICs vs LITs and smoothing income
  • The differences between a Listed Investment Company and a Listed Investment Trust (LIT).
  • Assessing income levels
  • How often they pay
  • Profit Reserves and Franking
  • Can the dividend grow?
  • What else really matters?
  • Manager Quality
  • Discount/Premium to NTA

Also, in this wire from a few months ago, they took a look at which LIC managers added value during the Covid market correction and this wire from Livewire’s Glenn Freeman includes 10 LICs that they think can grow dividends over the next few years.

 

Disclosure:  The LICs/LITs that I currently hold are WQG, MGF and FGX.  I usually hold more than that, but I'm finding a lot of additional opportunities for direct investing at the current time, rather than indirect investing via a fund or LIC/LIT.  I also hold shares in IFT (Infratil) who are not strictly a LIC although they are an investment company that is listed.  IFT operate more as a PE (private equity) company, but you can buy shares in them on the ASX and also on the NZ stock exchange (they are based in NZ).  I also currently own shares in one fund management company, being MFG (Magellan Financial Group), on a valuation basis - I think they look relatively cheap here, yet are very well managed and should do very well over the next 10 years.  However, owning shares in a fund manager like MFG is a completely different investment proposition to owning shares or units in one of their funds.  Owning shares in the manager is really about getting exposure to the fees that they can generate rather than their investment returns, although their fees are usually highly dependent on positive investment returns, but the caveat is that no matter how good their returns are, it's all relative, and the relativity is to their benchmark, so they have to outperform their benchmark index to generate performance fees, and the big money for a funds management company is in those performance fees.  MFG have underperformed their benchmarks over the past 12 months in some cases, and they've also invested a lot of additional money in new ventures such as Barrenjoey and Guzman Y Gomez, so they are being dumped by many investors because they are unlikely to be earning much this year in terms of profits to distribute to their shareholders.  That (IMO) presents an opportunity.  MFG often trade at levels I consider to be expensive, however not so much currently.  Really good companies don't usually look cheap when things are all going really well for them, so if you want to get on board it often pays to wait for times like these when things don't look so rosy.  Hamish is a legend and MFG is the best global funds management company in Australia by a country mile, so I'm happy to jump back in now when things look gloomy, because I know that's temporary and that he's investing now for outsized positive future returns.  However, don't buy shares in a funds management company without understanding the important differences between investing in a fund manager vs investing in one of their funds.

21
Bear77
3 years ago

15-Aug-2021:  I'm just going to copy the NAOS stuff over here from that other forum thread...

2 days ago:  OUTSIDECapital:  Nice Bear, i receive this weekly email as a holder of NCC. I like Naos as a manager & i get exposure to small cap industrials. A sector i like but dont have the skills etc to play in. You hold any Naos funds? the divy's are quality, one of best on the ASX.

Today (15-Aug-2021) - from Bear77:  To OUTSIDEcapital, no I do not hold any of the NAOS LICs, but I have in prior years, and I used to attend their roadshows when they presented in Adelaide, however I was not impressed by Sebastian Evans, and his lack of knowledge about the structure of the NAOS Small Cap Opportunity Fund after they took over the management of it - it was formerly the Contango Microcap LIC - in particular when asked what his intentions were regarding their convertible notes, he could not answer and said it wasn't really his area.  However he was the PM (portfolio manager) of all of their LICs, and more importantly was and still is the Managing Director of NAOS as well as their CIO (Chief Investment Officer), so he should have certainly known the structure of each of the three LICs that they manage.  My sense was that Sebastian's father, Warwick Evans, is the steady hand on the rudder at NAOS, and the real brains behind the company.  Warwick has over 35 years of equity markets experience, most notably as Managing Director for Macquarie Equities (Globally) from 1991 to 2001 as well as being an Executive Director for Macquarie Group.  He was the founding Chairman and CEO of the Newcastle Stock Exchange (NSX), and was also the Chairman of the Australian Stockbrokers Association.  He is well respected in the funds management industry, however he takes a backseat in terms of meetings and presentations (and roadshows) and lets Sebastian front the public and answer the questions.  Despite having been at NAOS for 15 odd years, according to LinkedIn, Sebastian still looks like he's in his early twenties, which he clearly isn't, but he looks mighty young to be running three LICs.  If you look at their Board, there is experience there - old and wise heads, but the guys and gals who run NAOS on a day-to-day basis are all relatively young, and possible lack a huge amount of experience.  See here.

I feel this lack of experience is demonstrated in their very concentrated portfolios and the fact that they will always (it seems to me) continue to double down on businesses that do NOT live up to their initial expectations.  They appear to have a bit of trouble admitting when they have made the wrong call.  Possible there is an element of "Thesis Creep" there where you adapt or ammend your investment thesis to suit the company's progress (or lack of progress) rather than admit that the thesis is broken.  

I haven't had a good look at their funds for a couple of years, but when I was last following them closely - up to about 2 years ago - they were performing woefully.  As CTN (Contango Microcap) that fund was going sideways and trading at between $1 and $1.20 per share for most of the 2012 to 2016 period (inclusive, so 5 years), and then after NAOS took the fund over, NSC just headed down for 2.5 years - so from $1.12/share at the end of 2016 to bottom at around 37 cents per share in March 2020 (their Covid-low).  I note it's been all up since then, but I've been focussed elsewhere to be honest.  Today the NSC share price is 95 cps, so still below $1, so those old Contango shareholders - those few who have persisted with NAOS while the NSC share price kept heading south for over 2 years after they took over the fund - would still not be too happy I would imagine, as they might only be at breakeven or a little ahead if you include the dividends and franking credits paid over that period.  In share price terms, they are still underwater.

NAC also went backwards and underperformed the wider market in 2017, 2018 and the first half of 2019.  NCC did the same in 2018 and 2019.  All three LICs have performed well since their March 2020 Covid-lows, however almost every other fund has too.  NAC has taken five and a half years - until June 2021 - to get back to their 2016 highs, while NSC are still today well below their 2016 highs and NCC are also today well below their 2017 highs. 

The other issue I have with these funds is that despite their promotional material showing that each of these funds is supposed to hold shares that fall into distinct market capitalisation bands, with minimal overlap, there is actually a surprisingly high amount of overlap in these 3 LICs.  Most of the companies they hold as larger positions are held in two of the three funds, so when one of those investee companies that NAOS hold has a bad year, as they have tended to do, particularly in that 2017 to 2019 period, it drags down the performance of two of their three LICs, which is made worse because each of their 3 LICs only holds a small number of positions (each of their portfolios is highly concentrated) compared to most of their industry peers.

Anyway, just my 2c.  At the time I was attending a number of roadshows by various fund managers including WAM Funds, FGX & FGG, Miles Staude's GVF, NAOS, Templeton (TGG), Contango (WQG), Pengana (PIA), etc., and held shares in a number of those funds, and I found that the NAOS roadshows tended to be the least impressive out of all of them.  Likewise the performance of their LICS at that time was equally unimpressive.  They look different now of course, but I've moved on.  It's a management thing.  If I'm going to invest in a LIC, I want to have a great deal of faith in the portfolio managers and the management team there to invest my money wisely and achieve market beating returns.  Many LICs pay good dividends, however I still don't rate NAOS as among the best LIC fund managers we have to choose from here in Australia.

They do provide decent quotes from company CEOs every Friday however...

 

Also today:  From PeregrineCapital:  

For what it's worth I agree with Bear regardng the NAOS LICs and dislike almost everything about them except their concentrated portfolios which I think have merit and give them a point of difference. They seem to be decent stock pickers as well but that doesn't count for much because of the below....

They are small, have excessive fees and a poor capital structure that will put a drag on positive perfromance going forward.

I've been watching closely in recent times from a value perspective but they really need to be traing at a substantial discount to their fully diluted discounted NTA to be worth looking at.

In a market downturn this will get absolutely crushed due to the nature of the portfolio and the leverage created because on the convertible notes. Maybe then I will revisit.

 

From Bear77:  

Yes PeregrineCapital, I did forget to mention that their LICs are relatively small and the fees are higher than industry average.  Because they're so concentrated (8 to 15 positions in each fund, and some positions being held in more than 1 fund), they do tend to take relatively large positions in smaller companies - I've provided some examples below:

  • BSA (held in NSC and NCC), NAOS own 31.4%
  • COG (NSC, NCC), 30.23%
  • BRI (NSC), 30.76%
  • WNR (NCC), 29.84%
  • CGA (NCC), 24.9%
  • SND (NCC), 24.9%
  • BTC (NCC), 29.48%
  • EXP (NAC), 19.93%
  • EGH (NSC), 19.89%
  • OTW (NSC, NAC), 17.8%
  • GTK (NSC), 16.5%
  • UBN (NAC), 9.04%
  • TOT (NSC), 8%
  • URF (NCC), 5.07%

The three funds (LICs) are:

  1. NCC - NAOS Emerging Opportunities Company/Fund (Microcaps), targeting companies with market caps between $25m and $250m. (Current Size of NCC: $82.8m)
  2. NSC - NAOS Small Caps Opportunities Company/Fund, targeting companies with $100m to $1b m/caps. (Size of NSC: $145.1m)
  3. NAC - NAOS Ex-50 Opportunities Company/Fund, $250m to $6 billion m/cap companies. (Size of NAC: $54.4m, very small for a fund that is supposed to hold larger companies outside of the S&P/ASX50).

As you can see, based on their stated m/cap targets, there SHOULD be minimal overlap between NCC and NAC positions, however there is overlap between positions held by NCC and NSC, and also between NSC and NAC.

Of the three, NSC is the only one that has underperformed their benchmark since inception.  NSC's benchmark is the S&P/ASX Small Ords Accumulation index.  In NSC's case, "inception" refers to when NSC took over the management of the fund in late 2017 and sold all of the Contango Microcap positions, replacing them with their own picks.

As at June 30th, NCC and NAC both had 14 positions in their respective portfolios, while NSC held shares in 15 companies.

Here are some of the companies that each fund currently hold:

  • NCC:  SND, CGA, BTC, URF, WNR, COG, BSA
  • NSC:  BSA, COG, GTK, BRI, OTW, EGH, EGG
  • NAC:  OTW, UBN, TOT, EXP, OCL

Another company that they were big supporters of was MNF, which they held in both NSC and NAC, however NAOS ceased being substantial shareholders of MNF in early January this year when MNF were trading at $4.41/share (on 5-Jan-21, the day NAOS went under 5% or sold out entirely, MNF are currently trading at over $5.70/sh).  NAOS did feature MNF as a "Core Investment Portfolio Example" in their January and February 2021 monthly reports for NSC, but haven't mentioned them since.

I do not currently have any direct exposure to any of those positions (any of the companies whose ticker codes are mentioned in this post).  I am not convinced that NAOS are good stock pickers to be honest.  They do not choose ALL bad companies, but they make enough poor choices and then hold them for too long - if not forever - to allow them to underperform most of their peers, and even their own benchmark index since inception in the case of NSC.

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Industry norm is around 1% + 20% of out perfromance subject to a high water mark (which I think is still too much). NAOS on the two smaller funds charge 1.75% off gross assets + 20%. Meaning they charge fees the debt they issued which is absolute garbage. As an investor you'd end up paying over 2% of NTA p.a just for them to run it and that's before the other expenses they would incur in the ordinary course of business as well as perfromance fees.

 

8

ArrowTrades
3 years ago

Hey OUTSIDEcapital, 

You say you like the concentration, which I agree with. NCC seem to average around 10 large holdings in Illiquid names of which you can pretty much find all of them.

If it were me and even If I liked them there is no way I would ever buy this fund. I would just replicate their fund and buy the stocks directly. This would take less than an hour to figure out and would be surprising low maitanence. Paying no fees would see you with a significantly better return. Of course you won't replicate it perfectly but it would be close enough and whatever downside there is from that would be more than compensated by the advantages, which are if one of the stocks has a serious issue as an individual there is enough liquidity for you to get out where as NAOS is stuck in there in the lobster pot.

Hey Perigine, last time I checked NAC charged 1.75% but NSC was 1.15%.

14

Good advice Arrow trades and yes sorry you are right. Still crap IMO, the MER is still obscenely high for all of the funds, especially NAC.

9

Yes sorry Outside, the only fund that charges 1.75% is NAC.

The funds also pay CGT on their gains and don't get a discount either. This means you end up paying more tax longrun unless you have a 0% tax rate so that part doesn't add up to me.

The rest I can agree with. Nonetheless I stand by NAOS' funds being of poor quality for reasons previously highlighted and to be avoided unless you have a thesis where a liquidity event or major capital management inititative will happen.

8

Bear77
3 years ago

Not trying to talk anyone out of any existing positions because if an investment is working for you and suits your needs and circumstances then that's a good thing.  However, I believe that anything over a 1% management fee is excessive, and I'm not a fan of performance fees when they come on top of management fees.  I believe the future of managed funds is the performance-fee-only type that is being advanced by Tony Hansen of EGP Capital, who was mentioned by Gerard Dyson of Spectur in our August meeting as being a supporter of Spectur and Tony has provided a line of credit to SP3 that they have not used yet, however it's there as a source of low cost funding should they need it.  Tony's Concentrated Value Fund (CVF) charges zero management fees, and only a performance fee, so when he does not provide a superior return to his benchmark, you pay no fees at all.  This is a concept that Tony is very passionate about and I believe that is going to be the future of boutique funds management.  It will not suit the big funds management players, but there will eventually be enough fund managers using Tony's model that people are going to have a real choice.

Another model I like is the one adopted by FGX and FGG where they charge a 1% management fee and zero performance fees, and they then donate that 1% to charities, because everybody involved in FGX and FGG, including all of the fund managers who manage the funds, the ASX, the brokers, all of them provide their services for free to those two funds.  Again, that won't work for most fund managers, but it's an option that's available now.

Getting back to NAOS, whether it's 1.25% or 1.75%, it's high, and when combined with a performance fee of 15% or more, it's one of the more expensive fee structures out there.  If they outperform their benchmarks AFTER all fees and charges, then I don't have trouble with high fees, because they're still adding value, but if you look at their history, as PC has pointed out, they have not performed very well, and NSC's performance in particular has been dismal.  

Other things to look out for are very low benchmarks.  There are other funds out there (not NAOS) who have benchmarks like the bank cash swap rate - basically the cash rate, so they are trying to outperform leaving your money in the bank, which is a bar so low as to be laughable.  The benchmark index that each fund uses is important, and should be suitable for the type of fund that they are - i.e. the types of investments they usually make within their fund, so a microcap fund should not be benchmarked against the ASX200 for instance, it should be benchmarked against the Small Ords Index.  That sort of thing.  Anyway, I have a 9am appointment, so have to go now - I may add more here later.

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Bear77
3 years ago

To ShangriLa, I've started this "LIC discussion forum" to get that LIC discussion out of the CEO Insights ("How Company CEOs are seeing things") forum, and make it easier to locate in the future for people interested in LICs.  I'll answer your query on WAR in a bit.  Have to have a late lunch now.  I skipped breakfast this morning.

9

Hi Bear, 

Good idea to make a forum for this topic.

In reference to the performance of the NAOS funds, it's worth noting how they report these figures, taken straight from their reports below:

Investment portfolio performance is post all operating expenses, before fees, interest, taxes, initial IPO commissions and all subsequent capital raising costs. Performance has not been grossed up for franking credits received by shareholders. 

Given they charge 1.75% of gross assets PLUS perfromance of 20% of outperfromance these figures are very misleading. Not to mention the impact of options and convertible preference shares..

For instance NAC was floated at $1.00 in around December 2014.

Since floating it has paid $0.317 per share in fully franked dividends. It's current shareprice was around $1.20 at the end of July.

Gross the dividends up for franking credits and I get total dividends of $0.453 per share

Add the two above and you get $1.653 per share which is a 65.3% cumulative return which is actually below their benchmark.

Even if you assumed intrinsic value of the fund was the Fully diluted Pre Tax NTA of $1.30 you only get perfromance of 75.3% which very narrowly beats its benchmark. Haven't run the numbers on NCC but I think it's outperfromance is also eroded once you do the math and NSC speaks for itself.

Outside capital - I'm not a fan of Wilson's funds but he does know how to make money and keep shareholders onside. WMA is good value at current prices regardless of what you think of the manager (there is margin for error).

If there is one I hate it is reporting performance on a pre fees basis, which both Wilson and NAOS do.

My favourites are FGX and FGG which have decent performance and at least donate fees to charity.

9

Bear77
3 years ago

I feel LICs can be superior to passive ETFs in many cases as they provide active management which can certainly add value, as do active ETFs or other active funds - such as FEMX - the Fidelity Global Emerging Markets Fund.  Sometimes LICs do not manage to beat their own benchmark index, such as PAI for many years and EAI in recent years where you would probably have been better off investing instead in their benchmark, the MSCI All Country Asia ex-Japan Net Index.  You need to see evidence that the active management has provided superior returns, AFTER fees.  Of course the fee structure is important, but in my opinion what is even more important is the net returns after fees.

LICs do provide some other advantages/disadvantages  over ETFs and other managed funds.

  1. LICs and LITs (Listed Investment Companies and Listed Investment Trusts) are Closed End Funds (CEFs), meaning that there is a fixed pool of capital, and to buy units (shares in the case of LICs), an existing owner needs to sell theirs to you.  They do not create additional units on demand like an ETF does, or a standard managed fund.  CEFs can therefore trade above or below their NTA (net tangible assets), a.k.a. NAV (net asset value), sometimes substantially above or below, like over 10%, and sometimes as much as 30% to 40%.  This is due to demand versus limited supply.  If the LIC is not well liked and sentiment is poor, they will often trade at a discount to their NTA, and that also applies to classes of LICs.  For instance, currently, globally focussed LICs - that is LICs that are ASX-listed but invest in shares traded on exchanges globally rather than ASX-listed companies - have almost all been trading at significant discounts to their respective NTAs.  This is not uncommon.  Also, niche LICs, such as those who focus on miners, or microcap companies, or a particular sector that is not currently "in vogue", will usually trade at a NTA-discount.  There are exceptions, and WGB (WAM Global) and WMI (WAM Microcap) are two that often buck the trend and trade at premiums to their NTAs.  However, the fact that these LICs can trade away from the value of their underlying assets (their NTA) can provide opportunities that are not available with ETFs and other managed funds. Regarding the fixed pool of capital, they can increase the size of that pool, usually by acquiring other LICs/funds, or by doing SPPs (share purchase plans), Rights Issues (RIs), a.k.a. Entitlement Offers (EOs), issuing options and having those options exercised, having a DRP (dividend/distribution reinvestment plan), and/or underwriting their dividends/distributions.  However, in the absence of that type of activity, the number of shares on issue for a LIC will usually stay exactly the same, which is what creates the SP-to-NTA variance (due to varying demand).
  2. LICs have the ability to establish and build up a "dividend profit reserve", often referred to as a profit reserve or a dividend reserve.  This allows LICs to "smooth" their dividends from year to year.  For example, in years where they do not make much of a profit or actually lose money, they can still maintain dividend payments due to the money they have sitting in that dividend/profit reserve.  The flip side is that during years when they do shoot the lights out, they will NOT pay all of their profits out to shareholders, but instead use some of those profits to build up that reserve in preparation for future leaner years.  This enables many LICs to provide a fairly steady stream of dividends to their shareholders, which is often a key feature of the LIC sector.  It then becomes obvious why it's usually a good idea to keep an eye on their reserves so that you can remain confident that they CAN maintain their current dividends and hopefully raise them over time.  This was a concern I had over WAM Capital (WAM), Wilson's flagship fund, which ran their profit reserve very low in 2019 and 2020, but have started building it up again now.  It certainly looked like were going to have to start reducing their dividends there because they didn't have enough for the next one, but they scraped through.  I like to invest in LICs that have decent profit reserves, are trading at an NTA-discount, are invested in companies I am comfortable having exposure to, and have management (particularly their PMs - portfolio managers) who have demonstrated track records of outperformance and good positive total shareholder returns - after fees.  It's also why I am wary of LICs that do NOT provide details of their reserves to their shareholders - particularly those who have had a period of underperformance where it is likely that they have not added much to their reserve(s) - those are companies where it's fair to be concerned about the sustainability of their dividends.  I should also note that LITs (trusts) are usually bound to distribute ALL of their profits to shareholders EVERY year, and so do not usually have the ability to use dividend/profit reserves to smooth their dividends, however there are a few LITs, notably those run by Magellan (MFG) who have found ways of getting around those rules.  LICs on the other hand are companies (not trusts) and therefore have no such rules - and can distribute profits as they please.

So that, in a nutshell, is why I have been attracted to the LIC sector for almost as long as I have been involved with shares (a few decades now), but I got REALLY interested in LICs when I had to set up a portfolio for some relatives about 15 years ago that was designed to provide not only capital growth but a steady and reliable income stream from dividends and distributions.  I was initially attracted to the big 3 - AFI (Australian Foundation Investment Company, or AFIC), ARG (Argo Investments) and MLT (Milton Corporation).  They did the job for a few years for me, however I then started to focus on buying LICs at discounts and why some traded at huge premiums, particularly WAM (WAM Capital) and WAX (WAM Research).  I then realised how much the big 3 (AFI, ARG & MLT) tended to hug the ASX100 index, particularly the ASX50, and how similar their top 20 were, particularly the top positions of ARG & AFI.  I then realised that Rob Millner's influence on MLT was reflected in their larger than everybody else positions in SOL and BKW, which was not necessarily a good thing unless you were bullish on SOL & BKW, in which case why not hold them directly?  I was attracted to the higher dividends that Geoff Wilson was paying with WAM and WAX, and managed to buy both at reasonable premiums instead of rediculous premiums to NTA.  I then started following him closely, attending all of his Roadshows, and participating in each of his IPOs, including when he launched FGX and FGG, so I held those two, plus WAM, WAX, WMI, WLE and WGB at various times - on and off - and I also held BAF (the Blue Sky Alternatives Access Fund) before Wilson (WAM Funds) took over as their fund manager and they were renamed WMA (WAM Alternative Assets), and I then took profits and sold out.  I do not currently hold any of Wilson's (WAM Funds') LICs.  I did not participate in the IPO of WAR.

WAR is a strategy that Geoff has been pursuing for many years, using WAA (WAM Active) and WAM (WAM Capital), and frankly the results of that strategy have been very mixed, and in recent years have provided a drag on the performance of both of those LICs.  This is evidenced by the outperformance of WAX, which contains none of the WAR-type discount-capture opportunities in LICs, compared to WAA and WAM.  I won't go into it any further here other than to suggest people who are interested have a look at the relative share price graphs and dividend histories of those three LICs (WAX, WAA & WAM) over the past 5 years.  It is clear that WAX provided far superior total shareholder returns on the back of their investment portfolio performing much better.  

Now that WAA and WAM do NOT hold LICs, and WAR hold all of the LICs that WAA and WAM previously held (AUI, NSC, PIA, TGG, etc.), we shall see if the performance of WAA and WAM improve from here - compared to the past 4 to 5 years - I expect WAA and WAM's respective performances to improve without those LICs that they were previously holding.

I'm not saying that the strategy is flawed, I'm just saying it had very mixed results prior to the creation of WAM Strategic Value (WAR).  What has changed is that there is now a lot more market focus on what WAR is doing, and their strategy, and people are following WAR into these LICs expecting a share price increase and getting it, mostly because of people like themselves following WAR into those LICs, a sort-of self-fulfilling prophecy if you like.

GVF (the Global Value Fund) is a fund that has been doing this on a global scale for a number of years now, and it has Geoff Wilson as a board director.  GVF don't generally get involved in ASX-listed CEFs, but they made an exception for BAF, and GVF's Miles Staude ended up as a director of BAF for a while (until WAM Funds took over as managers of the fund) as a result of GVF's large position in BAF.  Of course, Miles and Geoff are mates as well as collegues, and Geoff's company now manages BAF, now renamed as WAM Alternative Assets (WMA). 

The market has also seen the recent announcement that TGG (the Templeton Global Growth fund, which has actually been a value fund, not a growth fund) have agreed to allow Geoff's WAM Funds to takeover the management of TGG via a merger of TGG and WGB (WAM Global).  This comes on the back of a number of mergers and acquisitions by WAM Funds over the past few years, including CYA (Century Australia Investments, merged with WLE - WAM Leaders - in March 2019), and CLF (Concentrated Leaders Fund, taken over by WAM in April this year).  There have been other takeover attempts by WAM Funds that have not gone through, but have nonetheless provided superior outcomes for shareholders in those companies than what they were looking at before Geoff's companies got involved. 

What we are seeing now is that a lot of these large discounts-to-NTA are closing, as either WAR gets involved or else there is speculation that WAR may well get involved, due to the large discount, so people buy in anticipation of that which helps close the gap and reduce the discount.  There is also the aspect that a lot of PMs and boards are trying to close the discounts (the large gaps between their NTAs and SPs) and to communicate some solid plans to achieve this to their respective shareholders, because if they don't, they are very likely to end up being targeted by WAR, and they know it.  

So my view is that there will likely be a strong sugar-hit in terms of up-front positive results for WAR as they embark on this strategy at scale, so I expect they'll certainly perform well in the first few months since IPO.  Remember - they've only been a listed company for 1.5 months - around 7 weeks so far.  They IPOd at the end of June 2021.  However, they will soon run out of targets with such juicy discounts (-to-NTA in their share prices), and we're already seeing these NTA discounts narrow across the LIC spectrum here in Australia.  In short, I believe the more successful they are initially, the harder it is going to be to maintain that sort of success rate - and performance.  They will soon become victims of their own success, having scared the cr@p out of the boards and management teams of underperforming LICs - who stand to lose their own jobs if WAR ultimately takes them over or has their board rolled, which is a tactic that Geoff Wilson has certainly employed in the past.  I think it could be a good period in the next little while for LICs as a sector, particularly those who have underperformed the most in recent years, but having followed GVF for a number of years - who are doing exactly what WAR is doing on a global scale - I think the returns are going to be lumpy for WAR itself, after that initial sugar hit where they do very well for the first few months. 

To give you an idea of what I think may happen, have a look at WAR's share price graph.  IPO'd at $1.25 at the end of June, shot up to $1.36 during the first week of July, and have been mostly falling since July 5th, to now be trading at $1.28 to $1.30/share, very close to their $1.29/share July 31st NTA.  I think there will be the odd spike up, followed by weeks of South-East movement.  A lot will depend on their dividend yield, however I feel that they are likely to start off paying low dividends and trying to build a profit reserve, as they have done with their other LICs, and then try to gradually increase those dividends over subsequent years once they have a decent amount in that profit reserve.  This might not suit many of the investors who have jumped on WAR, and there may be some selling pressure once people realise that there are unlikely to be a number of big dividends or capital returns on the back of regular big wins.  I think WAR will be a decent investment over 5 to 10 years, but certainly not one of the best opportunities available to me, which is why I'm not invested in WAR.  It's a good idea, but not one of the best available.

Some people have commented to me that they think that Geoff might be spreading himself a bit thin lately, or might be milking his loyal shareholder base a little too much, now with 8 (eight) LICs under management (WAM, WLE, WGB, WMI, WMA, WAR, WAX & WAA), and that's a fair point (or two), but Geoff is relatively hands-off now with all of those LICs except WAR - which is his baby.  He has dedicated lead portfolio managers backed up by capable teams running the other 7 LICs, and he leaves the day-to-day running and investment decisions up to them mostly for those LICs. 

I was interested to see what sort of changes we would see when Chris Stott left WAM Funds to start up his own funds management company, 1851 Capital, but we haven't seen too much in the way of changes - not that I could detect anyway.  Stotty was the CIO (Chief Investment Officer) at WAM Funds, and ran a tight ship, with particular emphasis on adhering to their investment rules, particularly around selling out of companies very promptly when they identified they'd made a mistake (their investment thesis was impaired or broken) and only buying into companies when at least one positive upcoming catalyst had been identified that should theoretically provide a positive market re-rating of the company.  I didn't really see much of a change when he left to be honest. 

There was a bigger change when Martin Hickson also left WAM Funds (in September 2019) to go and work with Chris Stott at 1851 Capital - they had both worked at Challenger (CGF) prior to working for WAM Funds.  At WAM Funds, Martin had been the PM of WAA and co-PM (co-portfolio-manager) of WAM (the big flagship fund that holds everything that WAX and WAA hold except in larger quantities because WAM is a much larger fund than both WAA and WAX) and also the co-PM of WMI.  After Martin left after almost 10 years at WAM Funds, Oscar Oberg became the lead-PM of WAX, WAM, WAA and WMI, so Oscar is in charge of half (4) of the 8 LICs that WAM Funds currently manages.  WAA performed poorly during that period, and so did WAM, but WAX and WMI both did brilliantly most of the time.  My thoughts on that are that Oscar is far better suited to research-driven investment, rather than the market-driven style of Martin Hickson.  Remember that WAA is 100% market-driven, WAX is 100% research driven.  WMI and WAM are both a mix of the two investment strategies, but WMI is more research driven clearly than market-driven.  Prior to Martin leaving, Oscar was only responsible for research-driven investments, because Martin was responsible for all of the market-driven investments, the arbitrage opportunities, the momentum plays, the quick in-and-out plays, the M&A plays, the discount-capture strategies - except for the LICs discount capture - investing in other LICs - that was all Geoff.  Oscar only had to worry about investments based on fundamental analysis - research.  But when Martin left, Oscar took on all of the stuff that Martin had previously done, and didn't do so well at it, however he kept performing well at the research-driven stuff that he had always been good at.  Which bring me to key personnel risk.

  • WAM, WAX, WMI: If Oscar Oberg left, I think that would be a reason to rethink involvement in WAX, WAM and WMI, if I had any (I currently do not).
  • WLE: If Matt Haupt left, I think that would seriously reduced the positive outlook for WLE.
  • WGB: If Catriona Burns left, and I held WGB shares, I would likely sell out, because she is very good.
  • WMA: I don't have a sense of how good Dania Zinurova is, so not sure how her moving on would affect WMA - she hasn't been there long enough to establish a track record IMO.
  • WAA: I'm not interested in WAA.
  • WAR: If something serious happened to Geoff Wilson, I think that would severely reduce the effectiveness and success of his strategy with WAR.  WAM Strategic Value all hinges on Geoff and his execution, as well as his track record of activism, such as seeking to have underperforming LIC boards removed and replaced, and making takeover bids for underperforming LICs, which is scaring the management and boards of a number of underperforming LICs I reckon at this point.

Probably enough from me about WAM Funds at this point - I do not currently hold any of them, but have been involved with most of them over the years (except WAR clearly).

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Bear77
3 years ago

MattB, I'm a fan of both types of fasting, but on this occasion it was intentional and intermittent. 

Good points made there PC, I also was not a fan when WAM Funds changed to presenting their results pre-fees some years ago, and then started listing their top positions in alphabetical order more recently instead of in order of weighting within the portfolio.  I think they were aware of people trying to copy their portfolios, but that would only help lift the share prices of their investee companies - but I guess the alphabetical order thing gives them a little more mystery and perhaps causes more people to invest in companies that are only their 19th or 20th largest positions - coz we don't know the order.  

OC - I haven't looked at BTI in any detail recently, so I'll decline to comment on them.  

PC - FGX and FGG are also favourites of mine, although I'm not currently invested in them.  I usually am invested in one or both.  I love the concept and the amount they've donated to those charities to date already is very impressive.  Edit:  Correction:  FGX is in a small portfolio I run for my 2 children.

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Bear77
2 months ago

Just to update this - most of these posts above in this forum thread are at least 2 years old, and I no longer hold FGX or any other LIC or LIT, as I have more recently disclosed. My thoughts on the advantages of LICs have also evolved somewhat - and I'm no longer a fan, hence choosing to get out of them altogether. I now watch the space with interest, but I'm not directly invested in it. That could always change in the future should an opportunity with enough potential upside come into view.

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