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#Bull Case
Added 2 weeks ago

Opportunites are ripe in the LIC space at the moment. The Covid pandemic has seen already wide discounts to NTAs (Net tangible assets) blow out to extreme levels.

I have very recently built a large position in NSC which is managed by NAOS. It is a microcap fund that takes a high conviction approach, usually holding 8-12 stocks. It’s most recent update was released to the ASX on July 9. It showed that at the end of June NSC was trading at a 34% discount to NTA and a 38.5% discount to post tax NTA. This discount is now at an all-time high for the fund.

Below I have listed the recent end of month discounts for the fund.

Dec 19             -11.20%

Jan 20             -20.7%

Feb 20             -21.30%

Mar 20            -28.50%

Apr 20             -14.00%

May 20            -15.87%

Jun-20             -33.82%   (post tax 38.5%)

The first thing you may notice is that like many funds, The discount on NSC blew out during the Covid period in March reaching 28.5% and also like many funds then began to quickly recover. However out of nowhere this month the discount had a massive spike from 16% to 34% and is now even higher than where it was in March when the market was in a state of absolute peak panic!

There are a pertinent points that I believe make this a great investment here and should see it rerate fairly quickly.

-Naos run three LIC funds and of those three NSC is by far the best. It has the lowest management fee (1.15%) and importantly is over twice the size of the other two funds NAC and NSC which sees much it enjoy much better liquidity and a lower ratio for fixed expenses. Yet the other two funds are trading at smaller discounts -NSC 11.5% and NAC at -25.5%. 

If I am a new investor looking to buy into a Naos fund I am clearly going to look to choose NSC, but also and very importantly if I am already currently invested in one of Naos other two LICs, I would be crazy to not at least consider selling and buying into NSC where I get all the benefits of better liquidity, lower fees, a much bigger discount, some overlapping stock holdings and the exact same portfolio manager.

-I have had a good look through their portfolio of 12 current stocks and I actually really like it for the period we are currently in. They are holding solid companies like MNF and OTW which are in the telco space and BSA which is in NBN. These are Sectors that should prove very defensive during this covid period and are exactly the type of companies I have been looking to buy in my own portfolio anyway.

They have an on-market buyback which has been in place for over a year. They seem to use the buyback more liberally when the stock trades at a bigger discount, so I expect them to be more aggressive buying back stock and support the Share price at these levels.

In summary you are getting a very solid portfolio of companies that should do well along with the added bonus of a potential 15%+ boost when the fund returns to a more sustainable discount level and as you saw in the change between March and April where it went from 28.5% to 14% in a month, this can happen very fast!

I have attached their most recent monthly update for those interested.


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