LIC raisings run hot: where to from here?

by Greg Bright

Fat Prophets and Switzer are the latest LIC successes to beat their target raisings. Now, Morphic Asset Management’s ‘ethical equities fund’ and Plato Investment Management’s ‘income’ fund were launched last week. Are LICs a funds management bubble?

The market, dominated by individual – and mainly unadvised – investors, is hard to pick. For instance, the best performing LICs in terms of returns don’t necessarily trade at a premium. And it is an exaggeration to say that most or all trade at a discount. It is more complicated than that.

The latest quarterly report from Independent Investment Research on ‘Listed Managed Investments’ shows that the best-performing portfolio, pre-tax NTA plus dividends, was Global Master Fund Ltd, which invests mainly in Warren Buffet’s Berkshire Hathaway. This had a 15.5 per cent increase in the December quarter.

But from a shareholder perspective, the best performer was Westoz Investment Company, whose share price including dividends increased by 8.1 per cent. This meant that the share price discount to its NTA moved down from 16.8 per cent to 9.4 per cent as at December 31.

Of the 34 LICs covered by the research firm’s report, 12 were trading at a premium to pre-tax NTA. Mirabooka Investments had the largest premium at the end of December – at 25.8 per cent – followed by two Wilson Asset Management LICs, WAM Capital and WAM Research – both trading at a premium of 20.7 per cent.

Independent Investment Research upgraded WAM Research to ‘highly recommended’ this month and downgraded Hunter Hall Global Value, of which WAM is a big and disgruntled shareholder, as well as Contango Micro-Cap, placing them ‘under review’ because of their corporate events.

The report says that the continued discount for the Global Master Fund, which is the largest discount in its research universe, is surprising given that it is largely a “look-through” into Berkshire Hathaway shares. The average discount for the stock over the past three years has been 14.4 per cent.

There were 96 LICs and listed investment trusts as at December 31, so this number will soon pass the 100 mark.

Apart from Fat Prophets, Switzer, Morphic and Plato, there is also URB Investments and a Contango Global Growth fund in the pipeline. And Geoff Wilson has indicated his intention to launch another WAM LIC, which will be his seventh, in May or June, which will concentrate on microcaps.

Wilson is also a supporter of Morphic, which is an affiliate manager of Westpac’s Ascalon Capital Managers. With the troubles at Hunter Hall surrounding the departure of its founder Peter Hall and subsequent stoush with Wilson and proposed merger with Pengana, Jack Lowenstein, the Morphic joint-CIO, believes the ethical space for LICs now presents an opportunistic investment as well as a solid long-term one.

Lowenstein, who founded Morphic, was previously a leading figure in establishing the Hunter Hall Global Value LIC. The Morphic co-founder, Chad Slater, was a portfolio manager at Hunter Hall for five years until 2012.

Morphic’s target raising is a big one – a minimum of $38.5 million and maximum of $220 million, with a right to accept another $55 million in over-subscriptions.

Institutional investors tend not invest in specific ESG funds (they adopt an integrated approach for their portfolios) and neither do they invest in LICs, so the Morphic offer will be an interesting test of retail demand for “ethical” investments.

One thing is apparent: there is no sign of weakening demand for LICs. Nor is there for ETFs and actively managed ETFs, a number of which are also in the pipeline.

The growth reflects the preferences of SMSF trustees and other individual investors for listed vehicles over traditional managed funds. While the demand is there, the supply will continue to be provided.

For managers, the lure of “permanent capital” in an LIC is a strong one. Whether or not the shares trade at a discount, they are able to invest for a longer term than with a fund that allows capital withdrawals.

So, the “bubble” analogy with other sectors of the share market is probably inappropriate for LICs.