Recently I was checking out Morphic Ethical Equities Fund (MEC) and observed how fickle the premium / discount to NTA can behave. This type of pattern I see quite often in new LICs. I take a look at some recent global LIC IPO performance.
This is a guest post from Steve Green. Steve is a full-time investor with a focus on LICs, event-driven and activist investing. You can follow some of his ideas at his investment blog at www.valueinvestingforaliving.com
Author’s note: In compiling this article I have used data as at 25th April, 2018.
Recently I was checking out Morphic Ethical Equities Fund (MEC) and observed how fickle the premium / discount to NTA can behave. It is almost one year since listing and this type of pattern I see quite often in new LICs. Below is the relevant chart for MEC. The interesting thing is that the first 6 months the fund’s performance was relatively flat. They have actually improved performance in the last 6 months.
Source: ETF Watch
This discount widening appears to be a theme across other recent global LIC floats in 2018. I have emphasised on my blog in the past to be very cautious about participating in LIC IPOs.
Whilst this was a little cynical and tongue in cheek, I tried to point out some of the risks in this article here.
In August last year I wrote an article for ETF Watch that discussed some of the merits of examining global LICs that had been around for a longer time. This was around the same time the market was quite excited about large new floats. A couple of prominent floats at the time were VGI Partners Global Investments (VG1) & Magellan Global Trust (MGG).
Now that a few of the new global LICs are around the one-year mark, and some others are approaching that stage, I thought it is worth taking a look back. Will it be a happy first birthday for investors who have participated in these IPOs? Let’s not forget that despite increased market volatility in 2018, global share markets have been strong in the last 12 months.
As I write this on April 26th I have tried crunching the numbers for how some of the new global LIC floats have performed. Where possible, I shall also include any value of associated options that are still trading or any dividends that have been received along the way. Below is what I have found for approximate total shareholder returns since IPO. I have not adjusted to take into account the better returns some Magellan investors may have effectively got from the “loyalty units”, as this would have varying impacts. It could mean that certain MGG investors have done better than below, and that the investment gets closer to a pass mark like VG1 at this stage.
|Contango Global Growth (CQG)||-10%|
|Fat Prophets Global Contrarian Fund (FPC)||-7%|
|Morphic Ethical Equities Fund (MEC)||-7%|
|Evans & Partners Global Disruption Fund (EGD)||+17%|
|VGI Partners Global Investments (VG1)||+8%|
|Magellan Global Trus (MGG)||+1%|
Now bear in mind these all have different starting points ranging from early 2017 until October in the case of the Magellan listing. As a group though they haven’t been too great for investors in the IPO. This is in the context of global share markets being in a broad uptrend since they all listed. The exception above is the Evans & Partners Global Disruption Fund (EGD).
Contrast this with some of the global LICs I mentioned in my article in August that had already boasted solid track records. Perhaps this was being forgotten as the media focused on the slick marketing contained in the prospectuses of those mentioned above. We can cut a bit more slack with VG1 & MGG who listed in September & October respectively. Yet some IPO investors may have set aside money in August in preparation and missed other opportunities.
Since August 24th when the ETF Watch article was posted I calculated the following approximate shareholder returns of those LICs discussed.
|Ellerston Global Investments (EGI)||+9%|
|Ellerston Asian Investments (EAI)||+19%|
|PM Capital Global Opportunities Fund (PGF)||+15%|
|PM Capital Global Asian Opportunities Fund (PAF)||+20%|
|Platinum Asia Investments (PAI)||+27%|
|Future Generation Global Investments (FGG)||+16%|
Admittedly the specialist Asia funds here have had a large tailwind as this region of the world has been a standout. Having said that though there are some very solid numbers from the likes of EGI, PGF & FGG who have broader global mandates.
I also thought this article may be topical now that the WAM Global (WGB) IPO is just being launched. I personally think it has a better chance of being successful in the first year than the floats I discussed earlier. One thing going for it at least in the early stages, is the size is being capped at $550 million. Wilson does have a very large loyal following of retail investors. When they restricted the size of their WAM Microcap (WMI) float last year (and also not issuing “free” options), that helped in seeing the shares trade well. Obviously though the very good early investment performance was the main contributing factor. WMI was restricted at $154 million though, whereas the $550 million for WAM Global is one of the larger LICs you will see.
VGI Partners however were able to raise about $550 million, close to this maximum amount set for WAM Global. Also in the back half of last year, we saw Magellan raise almost 3 times this amount! I know this is a totally different mandate, but I note that the recent L1 Capital (LSF) IPO doubled earlier expectations and went to way over a $1 billion raising. There does appear to be plenty of cheap money still sloshing around.
With these demand / supply dynamics in mind, I think WAM Global can perhaps have a better first year than many of those previous new global LICs discussed. Last year I made mention of having a rule of thumb that I never invest in a LIC at IPO stage, but WAM Microcap was an exception. I haven’t yet made up my mind on WAM Global but appreciate that the maximum raising amount it has put in place adds to temptations to invest. I could once again break my rule of thumb here, hoping to make some shorter-term gains with WAM Global like I did with WAM Microcap last year. It doesn’t look to be as clear cut though this time around. I do also wish to point out that such short-term thinking has its risks. It could still easily trade at a discount to NTA in the future, but I do have some faith in the Wilson team being able to replicate their success with a global mandate.
If someone participated in this IPO and the shares were to soon trade at a premium to NTA of 10 -20% then if it was me I would likely exit. This is merely a hypothetical and not a prediction. As I said some of the global LICs with longer histories that have broad mandates may still be better alternatives. The likes of EGI, PGF & FGG still regularly trade at discounts.
Please don’t view the above as financial advice as I am not qualified and don’t know your personal circumstances. In light of the news in recent weeks, also be very careful if you do seek professional financial advice! Hopefully though it does give some investors a more open mind when trying to evaluate the global LIC IPOs that come along. It can also pay not to forget about existing similar LICs that are out there in the market.
For disclosure purposes, I should note that at the time of writing I own shares in EAI, FGG & PAI, of those mentioned above.