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Monthly Listed Investment Trust Report – Dec 2019

FYI | Dec 18 2019

Download related file: Monthly-LIC-Report-16-December-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.

Hearts & Minds Raises More Capital

Hearts and Minds Investments Limited ((HM1)) announced a renounceable pro-rata entitlement offer at $2.50 per share to raise up to a maximum of $62.5m. Shareholders will be entitled to 1 new HM1 share for every 8 HM1 shares they currently own. The raising is being done at a 20% discount to the HM1 closing price prior to the announcement. The $2.50 offer price also represents an 18% discount to the most recent HM1 NTA (before tax on unrealised gains) prior to the announcement. We are generally not in favour of LMIs raising capital at a discount to NTA given the dilutive effect. However, we note that this is a pro rata offer to all existing shareholders with shareholders able to sell their entitlement if they do not wish to take up new shares. This means all existing shareholders are being treated equally. Still, HM1 has generally traded at small premiums or discounts to NTA since listing, so we are unsure as to why it chose to undertake a raising at such a large discount.

The proceeds of the offer will be allocated primarily to HM1's new Core Fund Manager, TDM Growth Partners. As with the other Core Fund Managers in the HM1 stable the funds allocated to TDM Growth Partners will be invested in the manager's top three highest conviction ideas. As a result of TDM Growth Partners joining the Core Fund Managers group, HM1 has also announced that it is slightly altering the asset allocations between its two groups of fund managers. The allocation to the Conference Fund Managers will drop from 40% to 35% and subsequently the allocation to the Core Fund Managers will increase to 65% from 60%.

The final results of the offer will be known on the 19th of the December 2019. The directors of HM1 have already announced that they will be taking up their entitlements under the offer in full.

HM1 has performed well since listing and over the 12 months to 30 November the portfolio delivered an investment performance of 30.1% before expenses and taxes, well above the benchmark return of 23.6%. Our rating for HM1 is Recommended Plus.

ASIC Investigates Regal Funds Management

Regal Funds Management, the investment manager for the Regal Investment Fund ((RF1)), announced a preliminary investigation that it is part of a preliminary investigation by ASIC by way of a search warrant, in relation to its trading in certain securities. Australian Federal Police executed a search warrant at the offices of Regal Funds Management on behalf of ASIC at the end of November. Trading in RF1's securities was halted ahead of the announcement, but recommenced after the announcement.

Regal Funds Management is working with the regulator and notes that the investigation is preliminary in nature but has not disclosed what the investigation specifically relates to. At this stage we await further information. Regal Funds Management continues to manage the assets of RF1 and it says the investigation does not impact its ability to provide fund management services to its clients.

At this stage we see no reason to change our Recommended Plus rating for RF1. The portfolio continues to be managed in accordance with the original mandate. However, news of the ASIC investigation does seem to have contributed somewhat to a fall in the security price of RF1 and to a widening of the discount to RF1's underlying NTA. We will continue to watch closely.

CD1 & CD2 Wind up Motions Defeated

In our last LMI Monthly Update we wrote about the proposal by Walsh & Company Investments Limited to wind up both Cordish Dixon Private Equity Fund 1 (( CD1)) and Cordish Dixon Private Equity Fund 2 ((CD2)). The proposal was to realise the assets in both funds and subsequently return those funds to shareholders through an orderly wind up.

However, at the respective shareholder meetings on the 26th of November, both sale proposals were roundly defeated with over 90% of shareholders voting against the sale proposals. Following the defeat of the proposals the funds will continue to operate in line with their investment strategies. With both funds in the harvest phase there will continue to be a gradual realisation of the underlying investments.

Barrack St Changes its Name and Announces Distribu­tion Partnership

Following shareholder approval at its recent AGM, listed investment company Barrack St Investments has changed its name to ECP Emerging Growth Limited ((ECP)). It also announced that its manager, ECP Asset Management, has signed a distribution partnership with Copia Investment Partners which will provide exclusive distribution and marketing support for ECP. ECP remains a small LIC with a market cap of just $17.6m. At the end of October it was trading at a 27.3% discount to pre-tax NTA. The discount has narrowed since the announcement of the partnership with Copia but remains significant. Whether the relationship leads to a substantial and sustained narrowing of the discount over time remains to be seen.

Spotlight on Global Masters Fund Limited

Global Masters Fund Limited ((GFL)), commenced trading on the ASX on 27 November 2006. Its primary objective is to participate in long term capital growth by investing in quality global assets. GFL has one major investment with its primary portfolio holding being in the New York Stock Exchange listed investment company, Berkshire Hathaway Inc. Notwithstanding the strong past performance of its investment in Berkshire Hathaway, GFL believes this company has the potential to continue to enjoy positive returns into the future.

The primary source of value creation for GFL shareholders is the capital appreciation of their shares, since Berkshire Hathaway does not pay a dividend and any excess cash received by the Company after paying expenses is reinvested.

The GFL Board takes the view that international investments provide currency diversification to investors and so any underlying foreign currency exposure is not hedged. The two major underlying currency exposures in GFL are USD and GBP.

GFL's holding in Berkshire Hathaway represents 64.27% of the portfolio, invested in both Class A and Class B shares. It also has a 3.12% weighting to Athelney Trust Plc, an investment company listed in the UK that has a focus on UK listed small cap investments. GFL also invests directly in UK shares, predominantly mid and small-caps. This currently constitutes 18.50% of its portfolio. A more recent addition has seen GFL invest 5.14% in the BIP BCI Worldwide Flexible Fund Class B listed on the Johannesburg Stock Exchange. To help generate cash to pay costs, GFL also has a 8.25% weighting to Australian LIC, Flagship Investments Limited ((FSI)).

As at 31 October 2019 GFL was trading at a 25.1% discount to its pre-tax NTA, well above its three year average discount of 8.3%. The discount is well above the IIR LMI International Specialist shares peer group which trades currently at an average discount of 12.2%. The current discount also represents one of largest discounts to NTA across the entire IIR LMI universe. In our view the current discount provides an attractive entry point for investors who are seeking exposure to some high quality underlying investments. Potential investors should be aware that there is a large difference between the pre-tax and post-tax NTA for GFL given some significant unrealised gains on its portfolio. However, even after the provision for tax on these unrealised gains its shares are still at a sizable discount. GFL currently holds a Recommended Plus rating from IIR.

GFL is not a yield stock as its largest investment does not pay dividends. It is suited more to investors seeking long-term capital growth.

Seasons Greetings

This will be our last LMI Monthly Update for 2019. We wish all our readers a safe and happy festive season and continued health, wealth and happiness in 2020.

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GFL HM1