12-Oct-2023: Forager Australian Shares Fund (FASF, FOR.asx): Update Regarding FOR Discount to NAV

The main part is inside the orange, and the part in the blue is probably true across the board for most LICs (Listed Investment Companies) and LITs (Listed Investment Trusts). On the back of this announcement, the FOR SP (share price) rose +9% today to close at $1.33, some 11 cents higher than yesterday's $1.22 close. FOR actually disclose their NAV (Net Asset Value) every trading day via the ASX announcements platform, and their NAV per Unit of the Forager Australian Shares Fund as at close of business yesterday (11/10/2023) was $1.47, so even after today's +9% SP rise, they're still trading today at around -9.5% below their NAV yesterday, and were trading at around a -17% discount to their NAV yesterday.

This sort of thing (converting a closed-end fund to an open-ended fund that trades at NAV) is becoming more common lately, and is only accelerated by funds such as Geoff Wilson's WAR (WAM Strategic Value) which takes stakes in other listed closed-end funds that are trading at significant discounts to their respective NAVs/NTAs and then tries to agitate for increased action from the managers of those funds to close the gaps between the share price (or unit price) and the NAV/NTA. Sometimes Geoff attempts to takeover some of those closed-end funds or at least the management of them - and roll them into his Wilson Asset Management stable - which is now up to 8 managed LICs - WAM, WAX, WAA, WMI, WLE, WGB, WMA and WAR. Sometimes he succeeds (such as with TGG - the Templeton Global Growth Fund more recently) - and sometimes he doesn't, but whatever the outcome it tends to increase the focus of the management of those funds on closing the gaps between the share/unit prices and the NTAs/NAVs - and on shareholder returns in general. Which is a good thing!

Of those 8 LICs that Wilson Asset Management manage, half (4) are trading at discounts to their NTA, and the other half (also 4) are trading at premiums to their NTA. I've highlighted the premiums in green and the discounts in red below (and WAR in orange).

Note those NTAs are all as at 31 August 2023, and the share prices are all as at 13 September 2023, so there's about two weeks between the numbers. However it is still indicative of the way those funds tend to trade. WAM Capital (WAM), WAM Research (WAX) and WAM Microcap (WMI) usually trade at significant premiums to their respective NTAs, and WAM Leaders (WLE) often does as well, although not as often as the other three (WLE can fluctuate between premiums and discounts).

WAM Global (WGB) usually trades at a discount to NTA, as all globally focused closed-end funds that are listed on the ASX seem to do. WAM Alternative Assets has always traded at a discount and one of the main reasons is that people can struggle to get comfort around the accuracy of their respective asset valuations, so punters tend to want to have a margin of safety in the WMA share price because of that uncertainty - it's typical of funds holding assets that are alternative in nature, such as water entitlements.

WAM Active (WAA) is their smallest fund and hasn't been overly succesful, as their "Active" strategy investments have always tended to underperform their "Research-driven" strategy investments, so the discount to NTA in WAA is more to do with lack of demand - there's little reason to own any WAA for most people.

WAA and WAX (Active and Research) are chalk and cheese. WAA has less than 2 years worth of dividends in their PR (profits reserve) and WAX has a bee's whisker under 4 years worth of dividends in their PR - and WAX has a better record of regularly increasing their dividends as well, and better TSRs due to WAX's share price moving higher over time along with their increased dividends.

Although it's also worth noting that the share prices of both WAA and WAX are now well below their early 2022 highs:

WAM Capital (WAM) holds everything that WAX and WAA does, but in larger quantities - because it's a larger fund - and it's also well off its highs, although their SP has started to recover over the last 3.5 months (since late June):

Chart Source: Commsec.

The technical rubbish (from Commsec) at the end of each graph only refers to the most recent three months or so, which on the WAM chart (above) means that tiny uptick at the end - as those are all 10-year charts - for some perspective.

Here's a little more info on WAR:

Their top 20 holdings - in alphabetical order - not weighting order - are there in the bottom right corner of that slide.

Source: WAM-Funds-August-2023-Investment-Update.PDF

FOR (the Forager Australian Shares Fund LIT) is NOT one of those top 20 WAR positions and indeed FOR does not appear to have ANY substantial shareholders (holding 5% or more), but my point was that funds like WAR and activist investors like Geoff Wilson at Wilson Asset Management and Gabriel Radzyminski at Sandon Capital (SNC) are only accelerating this move to either wind up funds that are trading at persistent substantial discounts to their net asset value (NAV, also known as net tangible assets or NTA) or else convert back from a closed-end structure to an open ended fund that trades at or very close to NAV.

Gabriel R. at SNC has recently taken on Magellan Financial Group (MFG) - see here: Sandon Capital | Campaigns: Magellan Financial Group ASX:(MFG)

And Nick Bolton - through his company Keybridge - is currently taking on Magellan as well but more specifically Nick is targeting the persistent discount between the NAV of MGF (the Magellan Global Fund closed-end LIT) and the unit prices it trades at on the ASX, and even more specifically he has been accumulating millions of MFGO options which are due to expire worthless on March 1st (2024) if the discount persists. He's betting on an alternative outcome.

Nick Bolton acquired BrisConnections options for 1 cent in 2006 and forced a $4.5 million settlement. Bolton's current plan is to force Magellan to pay him the discount or change the structure of MGF to realise the NTA (or NAV) value. According to a Graham Hand article for Morningstar - see here: https://www.morningstar.com.au/insights/funds/239916/the-fascinating-battle-between-nick-bolton-and-magellan ...based on the current share price of $1.68 and NTA of $1.89, Bolton could exercise into MGF at a price of $1.75 (that is, $1.89 X 92.5%) and sell for around $1.89. In other words, his 143 million options could buy $270 million worth of MGF on which 7.5% is over $20 million.

That was written by Graham on October 1st (eleven days ago) and MFG closed at $1.685 today and their most recently disclosed NAV/NTA (as at end-of-day on Friday 6th October) was $1.91, so not much has changed.

Interesting times!

Disclosure: I currently hold MGF shares in a portfolio for our two children and I own a reasonable position in SNC in two larger portfolios. I do not currently hold any of the 8 WAM Funds' LICs although I have in the past. If I was to own shares in any of those eight LICs now, it would be WAM Global (WGB) - because it's well run, has a good profits reserve, and is trading at a decent discount to their NTA. I have held FOR on and off over the years but I'm not currently holding any FOR shares. I have held MFG shares in the past but I sold out a few months ago. They've only gone lower since due to their most recent monthly FUM announcement (Funds-Under-Management---September-2023.PDF) showing $2 Billion less Funds Under Management (FUM) due to net outflows (people withdrawing money from the funds) as well as another $2 Billion of share price declines and trading losses on their investments, for a total of $4 Billon less FUM over a single month - $39 B down to $35 B; they had around $115 Billion of FUM this time two years ago but they aint going back there any time soon! Damn basket case!

I'm always interested in the LIC/LIT space, but I'm not often heavily exposed to it. But I do like opportunities - and they do come along in this area - some of you may remember that I spelled out my thesis here around the Blue Sky Alternative Investments Fund when it was confirmed that Geoff Wilson's WAM Funds were set to takeover the management of that fund; they did and renamed it WAM Alternative Assets; I rode that one up and sold out at a reasonable profit once the fund had been appropriately positively re-rated by the market. LICs and LITs are not always good for a long time, but they can be great for a short time - if you buy low with a positive catalyst approaching and then sell out at higher levels once the catalyst has occurred.

I'm not sure whether the required positive catalyst will eventuate or not with either MFG or MGF, because Magellan is still a BIG company and MFG is still a very big fund by Australian standards - Graham Hand noted on Oct 1st that the Magellan Global Fund includes an open-ended class comprising about $7 billion and the closed-ended trust (MGF.asx) worth about $2.8 billion. And that there are over 1 billion MGFO options on issue with a potential exercise value of about $1.8 billion. In that light you may be able to see why I feel that it's likely harder to push either MGF or their managers (MFG) into doing something that they really don't want to do compared to dealing with much smaller funds or companies.

So it's interesting to note that Forager are doing to their closed-ended Australian Shares Fund (FOR.asx) exactly what many activists are pushing other funds to do, but Forager are doing it on their own, without any obvious pressure from any large shareholders or prominent activist(s).

I've always had time for Steve Johnson at Forager. He has integrity and he's a smart cookie too. Always worth listening to what he has to say, and watching what he does too.

Further Reading/Listening: The Rules Of Investing - Steve Johnson (Forager Funds) - YouTube (20 January 2023)

00:00 - Intro

1:10 - Lessons learned from 2022

2:30 - The right time to sell

3:40 - Preserving capital

5:00 - Managing risk through weightings

6:30 - Managing investor expectations

8:40 - Inflation, rates and the Aussie consumer

13:00 - Earnings downgrades and small caps

16:00 - Are quality companies crowded?

21:20 - Forager's shopping list

33:00 - Forget about picking the bottom

35:00 - Biggest wins, deepest losses

39:00 - The Big Tech stock for the bottom drawer