The LIC IPOs keep on coming. This time it is Contango Asset Management, ASX listed manager of Contango MicroCap (CTN) and Contango Income Generator (CIE), as well as a number of wholesale funds. Contango are aiming to raise up to $330m for their new Global Growth LIC (CQG), with the offer closing on 8 June 2017. We take a look below at the interesting structure employed by Contango for this LIC, with the investment management decisions outsourced to US based fund management WCM Investment Management.
According to the prospectus, the investment approach is as follows:
The Adviser uses rigorous bottom-up research that seeks to identify companies with attractive fundamentals, such as long-term historical growth in revenue and earnings, and strong potential for future growth.
The Adviser’s investment process seeks companies that are industry leaders with rising competitive advantages; corporate cultures emphasising strong, quality and experienced management, low or no debt; and attractive relative valuations. The Adviser also considers other factors including political risk, monetary policy risk, and regulatory risk in selecting securities.
The investment strategy has no geographic limitations (other than excluding Australia) or industry limitations and does not focus on any specific developed or emerging market. The Adviser will not seek to replicate or have regard to the Benchmark in the construction of the Portfolio and will build the Portfolio through its investment process.
This gives the company a fairly broad mandate, with a focus on quality global large caps, as well as an ability to invest in any global markets, depending on where the opportunities lie. The company will aim to remain fully invested at all times, with cash holding limits of 7%, can employ derivatives to provide indirect exposure to the share market (at a maximum of 10% of the portfolio), and will not employ leverage. The manager expects to hold a portfolio of 20-40 shares at any one time.
You will see in the investment strategy above, reference to ‘the adviser’. This is because the Contango themselves won’t be employing their own team of analysts to be making the buy & sell calls, but rather are outsourcing this to WCM Investment Management. WCM Investment Management are based out of California and manage $21B of assets. Investors in the Contango Global Growth LIC are really investors in a Contango branded WCM Investment Management fund.
Contango are packaging up one of WCM Investment Management’s managed funds and offering it to investors. The advantage of this approach, is this fund has almost 10 years worth of history, allowing investors to assess the relative merits of the investment. Pages 64 – 70 of the prospectus provide a number of tables and charts on the attributes of the strategy, including country makeup, sector makeup and the current top 10 holdings. The one chart that everyone wants to see is performance, and below is the relative performance of the strategy against the benchmark gross of fees:
As it can be seen, performance, in Australian dollars has exceeded the benchmark quite materially. However, performance has been expressed gross of fees (meaning the impact of fees have not been included). Once the 1.25% management fee and the 10% performance fee for outperformance beyond the benchmark (capped at 0.75%pa) is accounted for, we’d expect to see the two lines above move closer together. It is a shame that Contango have not been more transparent and included a chart in the prospectus that includes performance inclusive of these hypothetical fees.
The global LIC space, starting from almost a standing start a few of years ago, has fast become a very crowded space. We now count 19 LICs with global focus in the ETF Watch Fund Database, including some from big names such as Magellan, Platinum, Antipodes, PM Capital and Watermark. Contango Global doesn't differentiate itself materially from many of the options currently available, other than offering access to the investment expertise of WCM Investment Management.
As per the usual LIC IPO process, investors in the IPO will be gifted a free option for every share they purchase. These options have an expiry date of around 2 years after listing. Shares will be listed at $1.10, with Net Asset Value of between $1.067 to $1.075. Investors in the IPO should be aware of the above 2 facts, as exercise of options in the future will result in dilution of capital, and for every $1.10 invested, the investor will actually receive between $1.067 and $1.075 worth of shares.
This post was prepared with publicly available information available from Contango Asset Management. ETF Watch did not receive any payment from Contango for this post.