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Monthly Listed Investment Trust Report – Nov 2019

FYI | Nov 26 2019

Download related file: Monthly-LIC-Report-25-November-2019

A Listed Investment Company (LIC) is a listed investment vehicle that offers investors access to a diversified portfolio of shares in other companies also listed on the stock market.

Note: For comprehensive comparative data tables for LICs and ETFs please see attached.

Pengana Private Equity Foreshadows Capital Raising

Pengana Capital will offer unitholders in its Pengana Private Equity Trust ((PE1)) a "loyalty benefit" as part of an offer of new units in the ASX-listed trust. Pengana announced that it would offer additional units in PE1 via an entitlement offer to existing unitholders as well as a placement. The entitlement offer is to provide additional liquidity and attract new investors. Full details of the offer will be announced at a later stage with the offer to take place in the first quarter of calendar 2020. PE1 listed in April 2019, after raising $205 million. To launch the Trust, Pengana Capital partnered with US firm Grosvenor Capital Management, which in turn invests with a number of specialist private equity managers on behalf of PE1.

Under the proposed offer, PE1 unitholders will be eligible for loyalty units equal to 1 per cent of their pre-capital raising unitholding per $100m raised. By way of example, if a unitholder has 1,000 units and $200m is raised in the offer, then the unitholder would receive an additional 20 units. The loyalty units will be paid for by Pengana Capital and provided to eligible unitholders at no cost. The loyalty units will be available to investors who hold units in PE1 at the closing date of the offer, regardless of whether they participate in the offer. If an eligible investor retains their pre-offer unitholding for four months after the closing date of the offer, they will receive the additional units. Pengana's loyalty benefits offer is similar to "partnership benefits" offered by Magellan Financial Group, which has been building an "investor partnership" over the past few years.

Ellerston Global to Convert to a Trust Structure

Ellerston Global Investments ((EGI)) recently wrote to its shareholders saying it was considering its options for closing the discount to NTA with a proposed solution to convert to a trust structure. EGI shares have been trading at a discount to NTA for some time despite good underlying portfolio performance. At the end of October the shares were at a discount of 14.9% to pre-tax NTA. The discount has narrowed to around 6% since the letter to shareholders.

EGI has not announced specific details of the proposed trust structure but has said it will update shareholders further at a later date. In considering its options the Board said it is looking to "eliminate the discount and deliver to those shareholders who desire liquidity at a price more closely approximate to underlying asset value with a clear pathway to redeem at NTA, while also providing other shareholders the option to remain invested in the strategy." In our view, this could potentially involve conversion to an Active ETF structure, but we will await further announcements from the company.

In our LMI Monthly Update of 11 September we last wrote about the persistence of discounts across the LMI sector and discussed the need for managers to come up with strategies to address the discounts. We have already seen a number of mergers, wind ups and potential conversions announced over the past 18 months and expect further action to address discounts over coming months.

Gryphon Capital Income Trust Capital Raising

Gryphon Capital Income Trust ((GCI)) announced a 1 for 3 non-renounceable entitlement offer and shortfall offer with the aim of raising up to an additional $103.6m. As the offer is non-renounceable new investors can subscribe for entitlements not taken up by existing GCI unitholders. The offer price of $2.01 is in line with current NTA of GCI and at slight discount to its prevailing share price.

The raising is being conducted to improve liquidity and reduce operating costs of the trust through increased scale. The increased scale will also allow greater participation by GCI in the RMBS/ABS market thereby enhancing the diversification of the GCI investment portfolio.

The shortfall offer closed early on 14 November due to strong demand with the final close of the entitlement offer set for 25 November.

Two Cordish Dixon Private Equity Funds to Wind Up

Walsh & Company Investments Limited, the responsible entity (RE) for both Cordish Dixon Private Equity Fund 1 ((CD1)) and Cordish Dixon Private Equity Fund 2 ((CD2)), has announced it is seeking to realise the assets in both funds and subsequently return these funds to shareholders through an orderly wind up. The RE is proposing a sale of all the assets to Canadian Private Equity firm Whitehorse Liquidity Partners Inc. The proposed sale prices are around the current security prices of the vehicles but a discount to the most recent NTA. A notice of meeting has been dispatched to both sets of investors where approval will be sought at the respective meetings on the 26th of November. Assuming approval, security holders are expected to receive interim distributions representing 90% of the estimated net proceeds for CD1 and 85% for CD2 in December. Final distributions and wind up are expected to take place in September 2020.

K2 to Wind Up its Global Equities Active ETF

K2 Asset Management has decided to wind up the Global Equities Fund (Hedge Fund) ((KII)), the listed version of its global investment strategy. The unlisted version, the K2 Global High Alpha Fund will remain in place and investors in KII are being offered the opportunity to transfer to the unlisted fund with the buy/sell spread waived. KII securities have been suspended from trading as it pursues an orderly wind up of the vehicle. KII had a market cap of circa $4m at the time of the announcement. Given the size the vehicle at the time of the announcement it was sub scale. It will be interesting to see if this is the first of a few wind up processes in the Active ETF space. There have a been a substantial number of listings in the Active ETF arena over the last three years but quite a few have thus far have struggled to grow their market capitalisation to any reasonable level. This is a space we will be watching closely to see if a concerted delisting trend does emerge for Active ETFs similar to the corporate activity with respect to smaller LICs over the course of the last 18 months.

NBI Announces Prospective New Offer

Credit focused listed investment trust, NB Global Corporate Income Trust ((NBI)), announced its intention to issue new NBI units in late January 2020 via an entitlement offer to existing shareholders and a shortfall offer to new investors. The Manager said it is continuing to see strong demand for alternative form of income in a low interest rate environment. NBI was listed on the ASX in September 2018 following an initial public offer and invests in a portfolio of high yield corporate bonds issued by large, liquid global companies. It has already raised additional capital since the IPO and at 31 October 2019 had an investment portfolio of around $900m. NBI pays monthly distributions and for FY2019 paid an annualised distribution of 6.24%

Wilson Asset Management Likely to Take Over Blue Sky Management Rights

Wilson Asset Management appears to be close to taking over the management rights of alternatives LIC, Blue Sky Alternatives Access Fund ((BAF)). An announcement by BAF indicated a consensus has been reached between BAF and its current Manager to facilitate a consensual transition of BAF's management rights to Wilson Asset Management. The consensus is not final and remains subject to further negotiation and conditions.

If the transfer does proceed this will hopefully bring some stability and certainty for long-suffering BAF shareholders who have seen the issues surrounding its manager and the potential transfer of the management rights drag on for some time. BAF shares have traded at a large discount to NTA for some time and are currently at a 21% discount to the 31 October pre-tax NTA. A successful transfer of the management rights could potentially see the discount narrow over time.

Small Caps Have A Strong Quarter

We have now completed the first quarter of FY20 and of LMIs tracked by IIR the Small Cap focused LICs were the standout. The Small Cap focused LICs managed to return an average of 7.6% during the September 2019 quarter. This is more than double the performance of the S&P/ASX Small Ordinaries Accumulation Index which returned 3.1% for the quarter. The aforementioned Small Cap benchmark also outperformed the ASX large benchmark. This was a reverse of a trend where we have seen large cap generally outperform small cap for most of the last 3 years and especially in the 12 months up to June 30 2019.

The standout manager by a long shot was NAOS. Its three LICs produced stellar portfolio returns for the quarter. These returns helped recover some of the underperformance the NAOS group of LICs has experienced in more recent times. To recap the portfolio performance of the three NAOS LICs NAOS Small Cap Opportunities Company ((NSC)) returned 25.7% for the quarter, NAOS Emerging Opportunities Company ((NCC)) returned 17.0% for the quarter and NAOS Ex-50 Opportunities Company ((NAC)) returned 13.9% for quarter. All three comfortably beat the benchmark and majority of their peers in their benchmark. We don't cover the NAOS LICs and so do not publish ratings for them. Of the small cap focused LICs in our coverage, the four best performers were Westoz Investment Company ((WIC)) up 10.5% (Recommended), WAM Research ((WAX)) up 9.5% (Highly Recommended), WAM Microcap ((WMI)) up 9.0% (Recommended Plus) and Barrack St Investments ((BST)) up 9.0% (Recommended).

The outlier on the other side of the scales in the small cap group was ((GC1)) it returned -1.0% for the quarter. This lagged the benchmark and in a quarter where active LIC & LIT managers produced both solid absolute and relative performance it lagged badly behind peers. Indeed GC1 was the only LIC out of the 25 LIC/ LIT in our Small Cap group to record a negative absolute return for the quarter. Indeed on a longer time frame GC1 is lagging both the benchmark and peers on both a 1 year and 3 year time frame.

Fixed Income LMIs Still At A Premium

It is fair to say that the fixed income, or credit focused, LMIs remain popular. In late September Partners Group Global Income Fund ((PGG)) listed on the ASX followed by KKR Credit Income Fund ((KKC)) in late November. This brings to eight the number of LMIs in our fixed income LMI universe. All eight have listed in the last 2 years. The eight have a combined market capitalisation of over $5.0bn, a significant increase in the last 12 months. In addition to the new listings, several fixed income LMIs have successfully raised additional capital through secondary raisings despite only being listed for a relatively short period of time.

The fixed income LMIs have generally traded at small premiums to their NTA, in stark contrast to the LMI space in general where very few LMI's trade at premiums to their NTA and certainly not an entire cohort of LMI's trading at a premium. Some of the factors we believe are contributing to both the capital inflows into the fixed income LMI sector and its constituents trading at premiums are as follows;

(1) A low interest rate environment means retail investors are searching for alternative sources of yield in order to secure some form of income or a higher yield than current bank deposit rates are offering.

(2) Fixed income is a new asset class for the ASX LMI space. It is only in the last two years investors have been given access to a range of ASX LMI credit related products which are diversified across currency, debt types, maturities and ratings. There is potential substitution from unlisted managed funds which have previously been an option in accessing these types of fixed income exposures.

(3) The ageing demographic in Australia which is seeing growing numbers of people move from the accumulation phase of superannuation phase into the pension phase which requires replacing income previously earned.

In our view the above factors are helping in some way to fuel the growth of the fixed income asset class within ASX LMI's over the last 2 years and this looks set to continue in early 2020 at least. We remind investors that the risks in this sector are different to bank risk and potential investors in the space should ensure they understand the risks associated with individual LMIs before investing.

Spotlight on QV Equities

QV Equities ((QVE)) listed in August 2014 and thus celebrated it 5 year anniversary. Its primary objective is to provide both long term capital growth and income, through a diversified portfolio of ASX listed entities outside of the S&P/ASX 20 Index. The investment portfolio is managed by Investors Mutual Limited (IML), an experienced investment management company, with a long track record of managing Australian equities.

QVE has a five-year plus investment horizon and aims to generate higher returns than the S&P/ASX 300 Accumulation Index excluding the S&P/ASX20 Accumulation Index (the top 20 stocks). It seeks to achieve this through a diversified portfolio of quality, undervalued ASX listed equities and other investment securities.

As well as long term capital growth, the Manager is focused on long term income growth, seeking investment opportunities that pay sustainable and growing dividends with franking credits. The Manager believes the Ex 20 segment provides a much broader and diversified range of investment opportunities. All portfolio positions are intended to capitalise on the Manager's disciplined quality and value based investment approach and intensive research and review process and will seek to invest capital wherever the Manager considers the greatest opportunities exist. The portfolio generally consists of between 20-50 securities and is underweight financials, with no exposure to the big four banks, and overweight industrials.

At 30 September 2019 QVE was trading at a 9.3% discount to its pre-tax NTA compared with its three year average premium of 0.5%. The discount is just below the IIR LMI small and midcap shares peer group of 10.3%. In our view the current discount provides a possible attractive entry point for investors seeking exposure to a diversified portfolio of small and midcap industrial stocks with a value bias. If QVE can improve on the recent performance, this may lead to a narrowing of the discount back to historical norms. An on-market share buyback is active as part of capital management initiative to try and narrow the discount. Our rating for QVE is Recommended Plus.

QVE also provides investors with a circa 4.3% fully franked dividend yield. This is higher than the S&P/ASX 300 index yield which is circa 4.0 %. We note however if you factor out the ASX Top 20, this yield would drop materially as would the franking component. So the QVE yield looks even more attractive when compared to its investable universe. QVE has been a steady dividend payer since listing with semi-annual fully franked dividends which have grown over time.

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