Listed Investment Companies (LICs) have not escaped the Coronavirus crash. After recovering some discounts to NAV over recent months, market crashes have brought deep discounts back. We take a look at who is trading at the deepest discounts.
Listed Investment Companies have an obligation to report their fund’s underlying Net Asset Values on a monthly basis. They must do this within 2 weeks of the end of the month. The latest updates landed on Friday and have now been loaded into the ETF Watch Fund Database.
If ever there was a case for more frequent NAV reporting, a crisis of this magnitude highlights the problems of monthly reporting. The end of February feels like a lifetime ago where share markets had fallen ‘just’ 15%. They’re now down over twice that, with Australia and most of the Western world moving from general complacency to outright fear in the last 2 weeks.
To their credit, some LICs have increased their frequency of reporting, others already report at least weekly or even daily and have done so for some time, however the vast majority of LICs only report their NAV once a month.
Prior to the Coronavirus crisis unfolding, LIC discounts to NAV were beginning to recover from the lows seen last year. We covered LIC discounts a few times, with many LICs moving to a deep discount before the Federal Election, due to concerns the Labor Opposition would scrap refundable franking credits if they gained office. Poor performance of many LICs saw them stay at a discount.
However, a general change in sentiment and an effort by most managers to narrow the gap through buy backs, takeovers and fund wind-downs saw discounts fall late in 2019.
That changed in February, as fear gripped markets, sellers outnumbered buyers pushing many LICs to deep discounts to NAV. Below we show the average pre and post tax NAV for all LICs we follow:
Average discounts have moved to around 10.5% pre tax and 8.5% post tax, to a level that exceeds the discounts seen in May last year around Federal Election time.
Predictably, it is the equity LICs that are trading at the deepest discounts to NAV, with the Fixed Income focused LICs so far spared from the falls (although that may change if we see a GFC style bond market crash). Also, smaller, less liquid LICs are suffering more, as there simply is not the liquidity available for sellers to find buyers.
Below we look at those funds at the deepest discounts to NAV:
NGE Capital (NGE): 28% pre tax discount
Little known NGE Capital has been one of the best performing LICs over the last couple of years, mainly due to their successful bet of Vacuum retailer Godfreys, which got taken over by Private Equity not long after they purchased it. NGE has long traded at a large discount to its NAV at around 20% and with a market capitalisation of $16m is suffering badly from lack of liquidity.
Blue Sky Alternatives Access Fund (BAF): 27% pre tax discount
BAF has been in the headlines for all the wrong reasons over the last couple of years, with manager Blue Sky Alternative Investments collapsing last year. Popular LIC manager Wilson Asset Manager have won the rights to manage BAF going forward which may put this sorry period behind BAF, where they went from a 10% premium to a 20% discount to NAV almost overnight, and have not been able to close the discount since.
The biggest challenge with BAF is the valuation of its assets, which tend to be unlisted and therefore very difficult to value, particularly in times like the current, however according to their latest report, 26% of their portfolio is in Water assets which tend to act more like a utility, and 26% in cash, so Wilson may be in a position to make the most of the current weakness in markets.
Aurora Global Income Trust (AIB): 26% pre tax discount
Another fund that suffers from low liquidity, AIB is tiny at only $1m and can go for weeks without trading due to its lack of liquidity.
Bailador Technology Investments (BTI): 26% pre tax discount
Despite having a reasonable market cap of $100m, Bailador has consistently traded at discounts to NAV in the 10-20% range. We expect this is due to their investments in early stage tech companies which are very difficult to value. They’ve performed well during the tech boom of the last couple of years but have been punished over the last few weeks, down over 40%. According to their latest monthly update, Bailador believe they are well placed to weather the storm
Cadence Capital (CDM): 24% pre tax discount
Once one of the LIC market darlings, CDM have fell from grace over the last few years due to consistent underperformance. In 2006 they had a pre tax NAV at a 24% premium to NTA, now its at a 24% discount, and a whopping 37% post tax discount. More pain looks set to follow with their latest Weekly NAV showing a further 16% fall in underlying NAV since February. CDM are sitting on 32% cash holdings so are well placed to benefit from the current weakness if they can turn around their chronic underperformance.
Future Generation Global Investment Company (FGG): 23% pre tax discount
A ‘fund of funds’ FGG provides investors with access to a diversified portfolio of international managed funds. It has a dual purpose, with the managers all donating their portions of management fees to mental health charities. Investors in FGG get access to some well known managers such as Magellan, Antipodes, VGI Partners and Paradice. The current discount is the deepest discount we’ve seen of FGG.
The other funds with a Pre tax discount to NAV of greater than 20% include:
When many investors think LICs, they think of the old, large LICs including Argo and AFIC. The grandfather LICs also include AUI, CIN, MLT and WHF, who are all over 40 years old. We had a look at the Grandfather LICs a few years ago.
Whilst all have seen share price falls and some movement of their NAV discounts or premiums, the average pre-tax discount is just 4%, with AFI and ARG actually still at a very slight pre tax premium to NAV. The liquidity and conservative nature of these LICs sees them not prone to the wild swings of much of the market.
For investors looking for a bargain on one of Australia’s most popular LICs, the almost $1.5 Billion WAM Capital (WAM), you’re in for disappointment, with the 15-30% premium to NAV that has been the norm for some time continuing to persist at the end of February, with a pre-tax premium of almost 19% and post tax premium of 15%. The price of WAM is well down since then, but not by as much as the broader market. Some of Wilson’s other funds, WAA, WAX and WMI are also trading at premiums to NAV.
According to Wilson’s latest monthly update, many of the WAM funds currently hold over 30% cash, so are well placed to capitalise on the coming investment opportunities, whenever they see the right time to buy.
If March continues on its current trajectory we’ve got no doubt deeper discounts are coming across the sector. However, for cashed up investors there are no doubt bargains to be had at some point. We’ll keep following how the LIC sector goes as the crisis plays out.