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Investor support heralds return of LICs

Anthony Fensom  |  15 Mar 2019Text size  Decrease  Increase  |  
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Sentiment towards listed investment companies may be on the mend, with upcoming initial public offerings set to test investor appetite. Are the boom times back for LICs?

Investor support for the sector led to a doubling of funds over the five years to 2018 and a resulting surge in market value.

As at January 2019, the sector boasted 108 funds with total market capitalisation exceeding $40 billion, up nearly 9 per cent on the prior year, with a range of asset classes including Australian and international shares, property, infrastructure and absolute return.

However, investor confidence suffered last year after the $1.35 billion L1 Capital offer, the L1 Long Short Fund (ASX: LSF), failed to meet high expectations, reportedly leading to the postponement of planned IPOs by fund managers Firetrail and Regal Funds Management.

A large number of LICs were trading at discounts to their pre-tax net tangible asset (NTA) backing at the end of January 2019, reflecting the broader market downturn in late 2018 and investor concerns over the impact of proposed changes to dividend imputation credits by the opposition Labor party.

“There is certainly more caution in the market,” says Morningstar’s senior analyst, manager research, Michael Malseed.

“Firetrail shelved their plans for a LIC in October 2018 due to insufficient demand. Volatility in global equity markets has also likely dampened investor appetite more recently.”

IPOs spell change of fortunes

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Yet two upcoming IPOs could signal a change of fortunes.

Fund manager Pengana Capital has a 30 April listing date proposed for its Pengana Private Equity Trust (ASX: PE1), which according to the manager offers investors exposure to “a globally diversified portfolio of private equity funds and direct private equity investments”.

It says that despite strong growth in private equity assets, currently worth more than US$3 trillion globally, most Australian retail, high net worth and superannuation investors have little exposure to the asset class.

The fund aims to raise up to $600 million from its offer, which includes “alignment shares” in Pengana Capital Group (ASX: PCG), as well as targeting income distributions of 4 per cent annually along with capital growth.

Chicago-based Grosvenor Capital Management has been appointed as investment manager, with investors gaining exposure to potentially up to 600 underlying companies in the generally illiquid private equity sector.

"The word we received from the market is it is a tough time to launch a listed equities LIC," Pengana Capital Group chief executive Russel Pillemer told the Australian Financial Review in late January.

"But alternative products are in more demand than they were six months ago”.

Commenting on the IPO, Morningstar’s Malseed noted the “limited options” for retail investors to invest in private equity assets.

“The main appeal of these investments is they are long term and exhibit lower volatility than the market,” he says.

“However, having a listed vehicle providing daily liquidity will create its own volatility. Investors need to be aware that the LIC may trade at meaningful premiums or discounts over time, depending on prevailing supply and demand, which will impact their ultimate returns.”

Meanwhile, the sector’s apparent upturn has also seen Regal Funds Management dust off plans to raise up to $500 million via a LIC, targeting a minimum of $100 million.

Regal plans to apply the funds to various investment strategies, comprising market neutral, emerging companies, small companies, a global stock-picking strategy and long-short.

Current LICs favoured by Morningstar include the silver-rated Magellan Capital Trust (ASX: MGG), which earned praise for offering a “global strategy with predictable income”.

Mirrabooka Investments (ASX: MIR) was also awarded a silver rating in October 2018, thanks to its relatively low cost and value-oriented approach among small to mid-cap Australian equities.

For investors considering the new IPOs, Malseed points to Morningstar’s traditional methodology of evaluating the “5 Ps” of “people, process, parent, price and performance”.

Yet while fund managers are tapping investors again, Malseed expresses caution.

“Investors need to be aware that LICs are riskier than the underlying investment because of the tendency for their share prices to trade away from NTA,” he says.

“If investors want a listed vehicle, our preference is to access strategies via an exchange-traded managed fund, which use a market maker to ensure pricing is closer to NTA.”

is a Morningstar contributor.

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