Investors tread warily in the listed investment company (LIC) market because of the tendency of LICs to trade at discount to their net tangible asset backing, making it difficult for shareholders to realise the full value of their investments.
According to the latest Australian Securities Exchange update, 56 of the LICs on the ASX were trading at a discount to NTA at the end of April, while only 31 per cent were trading at a premium.
One fund manager that has a good track record in the LIC market is Wilson Asset Management. Its listed investment companies include WAM Capital, WAM Leaders, WAM Research and WAM Active.
WAM Capital and WAM Leaders are among the top five ASX LICs (measured by value traded).
At the end of April, WAM Capital, WAM Research and WAM Active were all trading at premiums to the net asset values, while WAM Leaders was trading at a 1.6 per cent discount to its NTA.
WAM has launched a prospectus for a new listed investment company, WAM Microcap Ltd, offering up to 140 million shares at a price of $1.10 a share.
The company will invest in a portfolio of undervalued growth companies listed on the Australian Securities Exchange. Companies must have a market capitalisation of less than $300 million at the time WAM invests.
In addition to its LICs, WAM manages a wholesale Australian equities fund, Wilson Asset Management Equity Fund. And last month it was appointed manager of LIC Century Australia Investments.
WAM Microcap’s investment style is in line with the focus on WAM’s other LICs – investing in undervalued growth companies, with a significant exposure to small and medium sized companies.
According to the prospectus: “The research-driven investment process involves extensive research focusing on free cash flow, return on equity and the quality of the potential investee company. Each potential investment is rated with respect to management, earnings growth potential, valuation and industry position.”
The investment strategy may include short selling but there will be no leverage.
WAM will charge a management fee of one per cent of the portfolio value and a performance fee of 20 per cent of returns above the S&P/ASX Small Ordinaries Accumulation Index.
The offer is expected to close on June 14 and start trading on the ASX on June 28.