Most of the recent innovation in LICs has involved issuers of new LICs covering the costs of the listings, rather than passing these costs on to investors as they did in the past. That’s changed today, with PM Capital’s launch of “PTrackERS” (Portfolio Tracking Echangeable Redeemable Security). Today we take a look at the offer and see what investing in this innovative new LIC means for investors.
The PTrackERS product will be trading on the ASX under the ticker code P25PA and is called PM Capital GO 2025 Limited. All of these acronyms are a little confusing, but the principles behind the fund are actually quite simple, more below.
PM Capital have identified one of the key issues of LICs is their risk of trading away from their underlying Net Asset Value (NAV). We’ve covered this many times before, but essentially, a ‘feature’ of a LIC is the fact that the share price doesn’t always match the underlying value of the investments held. We report on LIC discounts and premiums to NAV in our fund database. PM Capital have experience with wild variations in LIC Net Asset Value with their flagship PM Capital Global Opportunities Fund (PGF) trading at an almost 20% discount to its Net Asset Value in recent times as demonstrated in the diagram below:
Source: PGF Fund Details (ETF Watch)
These variations of share price to NAV can of course be exploited by investors. An investment in PGF two years ago has paid of handsomely, as the share price has returned to its NAV during a period of strong performance, however some funds simply trade at discounts or premiums to their NAV for seemingly no apparent reason, and it is this uncertainty that adds another level of ‘risk’ to LICs.
Go 2025 helps to remove the risks associated with LICs trading away from their NAV by offering a 7 year maturity period (2025). At the end of the 7 year period (30 June 2025), investors can either have their cash returned to them at the underlying Net Asset Value OR have their GO 2025 units converted into PM Capital Global Opportunities Fund (PGF) units without triggering a capital gains tax event.
This essentially removes the risk of the LIC’s share price vs NAV for investors who hold shares at the 2025 maturity date.
PM Capital will be funding all listing costs and are targeting an annual distribution yield between 3-4% per annum. As GO 2025 will be a Company structure, we expect distributions to be mostly franked dividends.
PM Capital could have simply raised more capital for the PGF fund, however this is problematic for LIC issuers as it can dilute the capital for existing investors. By launching GO 2025 as a new LIC, PM Capital can raise more money without impacting existing PGF investors. By launching their product with the innovative ‘PTrackERS’ structure, the risk of the fund trading at a discount to Net Asset Value that has plagued PGF at times is removed for long term investors, providing a further incentive to invest in the new offer.
PM Capital have a long history managing global equities, with their unlisted Global Companies Fund dating coming up to its 20 year anniversary. According to their website, the fund has returned 9% per annum over that period, significantly outperforming the benchmark of 4.6%. Their global equities Listed Investment Company that GO 2025 has beenmodelled off, PGF has been listed since 2013 and has $450m funds under management.
P25PA and PGF will be managed separately, however GO 2025 will be invested in the same allocation as PGF, so performance is likely to be quite similar. One key difference is the fees to be charged, with the new P25PA having a 1.5% per annum management fee, but the older PGF having a 1% management fee and 15% performance fee of outperformance beyond the benchmark.
Because of these differences in fees we don’t expect P25PA to move directly in step with PGF, and strong outperformance relative to the benchmark will likely see P25PA outperform PGF, but performance in line or below the benchmark will see PGF outperform.
At the maturity date of 30 June 2025, investors in P25PA will be granted a pro-rata amount of PGF shares based on the underlying NAVs of the two funds.
Given the close relationship of P25PA and PGF, there is likely to be some interesting arbitrage opportunities that present themselves closer to 2025.