We are proud to present our second annual form guide for the 'LIC Cup'. This race is even bigger than the Melbourne Cup! There is approximately $35 billion of gamblers' (investors') money at stake in this sector, so the stakes are certainly a lot higher!

To win the real Melbourne Cup requires a horse that is well trained, has a great jockey, and importantly hasn’t been hit too hard with a weight handicap from the stewards. 

To win the Affluence LIC Cup, an LIC requires many of the same attributes.  They require a great trainer (the investment manager), an opportunistic jockey (the individual portfolio manager responsible for investment decisions), and a favourable handicap (starting discount or premium to NTA).

We would hasten to mention that training conditions in the last month have been more difficult than usual. We believe a 7%-10% equity market correction is similar to a month’s solid rain on the track for the real Melbourne Cup, and conditions are a little soggy. This has made the field a little trickier to pick this year!

Affluence LIC Cup form guide

We have analysed the field of over 100 LICs, and here, in no particular order, are our 24 starters for the “Race that Stops the Investing Nation”...

Who would fill the top 3 places?

Like the Melbourne Cup, the field is wide open and we should always expect the unexpected. But we realise everybody loves a hot tip so here are our picks. We’ve gone with one consistent performer and a couple of roughies.

Antipodes Global Investment (ASX code: APL)

We believe the manager of this LIC, Antipodes Partners led by Jacob Mitchell, to be one of the best global equity managers in Australia. Prior to establishing Antipodes, Jacob was a long-term senior investment executive at Platinum Asset Management.    

Since listing in October 2016, performance at the portfolio level has slightly underperformed their benchmark. The manager has a value bias and the strategy is long/short, so this slight underperformance is to be expected given the very strong market conditions over this period. As at September 2018 the portfolio had a gross exposure of 122% and was net long 62%. The portfolio appears to have performed substantially better than the global market during October, which is what we would expect from this strategy when markets get turbulent.

We believe there is an additional opportunity presently as the LIC is trading at a greater than average discount to NTA. The discount is currently approximately 7%, which we believe is larger than deserved. Options issued at the IPO expired in October. The majority of options were exercised, which translated into some dilution to NTA. This is a common pattern for LICs, when the discount increases leading up to the option expiry date. What quite often follows is a narrowing of the discount, as investors know the dilutionary impact is over. 

Blue Sky Alternatives Access Fund (ASX code: BAF)

This might be controversial, but hear us out. The LIC is currently managed by Blue Sky Limited. It provides exposure to a range of alternative assets including private equity, real assets (water rights and agriculture investments), and real estate. It historically traded in a range around NTA, but that all changed in early 2018 when Blue Sky Limited was targeted by short sellers. This triggered a massive sell-off in the manager, and BAF was caught in the downdraft. There has been limited impact on the underlying assets in the portfolio, with the NTA holding relatively steady. Nonetheless, BAF is now trading at approximately a 25% discount to NTA.

This in itself looks to be an opportunity. However, during October Blue Sky announced they had signed agreements with a subsidiary of Pinnacle Investments to transition the management of BAF under a new investment mandate. BAF would effectively evolve to be a fund-of-funds for the Pinnacle stable (pun intended). Then in late October, there was an announcement that Wilson Asset Management had put forward a proposal for them to take over management of the fund and implement a new investment mandate.

At this point, it is very difficult to know what will happen. However, Blue Sky is obviously agreeable to let go of the management rights, and it would appear likely either Pinnacle or WAM will take the reins (pun intended). Under either of the new managers, we believe the discount to NTA is likely to close significantly. But there are risks. There is no certainty who the new manager will be, or even if there will be a new manager. It is likely that large parts of the existing BAF portfolio will need to be sold for cash. There are some liquidity challenges with some of these assets, actual realisations may be below current carrying values and there may be tax to pay on any gains.

Notwithstanding the above risks, we believe a starting discount to NTA of 25% allows a reasonable margin of safety for the opportunity to generate uncorrelated returns.

Bailador Technology Investments (ASX code: BTI)

Bailador aim to provide investors with exposure to expansion-stage technology companies with global addressable markets and a high growth trajectory. It is managed by David Kirk and Paul Wilson who both have very impressive resumes and are well experienced in private equity. The portfolio currently comprises 10 investments, with 9 unlisted companies and 1 recently listed.

BTI has been listed for almost four years. During this period, it has traded at between a 30% discount and 10% premium. It got off to a fantastic start with the NTA increasing from $1.00 to $1.26 per share within 16 months. However, through dilution from options exercising and some valuation write downs, the NTA decreased back to $1.06.  The NTA has since increased to $1.16 per share, however the discount to NTA is now approximately 30% and the share price is languishing around $0.80.

We believe that part of the increase in the discount is due to investors lack of patience. Investors may have expected that as BTI invests in private equity, they should be generating 30% returns every year. Given the portfolio is invested in expansion stage companies, it often takes time for the underlying businesses to mature and realise value. BTI has partially realised one of their investments this month through an IPO (Straker Translations ASX: STG). The IPO was at a premium to BTI’s previous carrying value and it is currently trading at a slight premium to the listing price. It is likely a few of these realisation events will occur in the next 1-2 years. If realisations occur at premiums to carrying values, this may well be the catalyst for the discount to NTA to close. The key risk is that any major correction in listed tech shares is likely to affect both values and realisation prospects for the BTI portfolio.

Before you invest, read this!

We encourage you to do your own research before investing in any LIC. Remember, a great LIC and a great manager is only part of the story. We also like to make sure they’re trading at the right price and that the assets they are investing in are not themselves overvalued. We explain how we do this in our LIC Guide, but in the end it’s up to you to make the investment decision that’s right for you, in conjunction with your financial advisor if you have one.

Take care and all the best with your investing.

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Disclaimer:  This article is prepared by Affluence Funds Management Limited ABN 68 604 406 297 AFS licence no. 475940 (Affluence) to enable investors in Affluence Funds to understand the underlying investments of the funds in more detail. It is not an investment recommendation. Prospective investors are not to construe the contents of this article as tax, legal or investment advice. Neither the information nor any opinion expressed constitutes an offer by Affluence, its subsidiaries, associates or any of their respective officers, employees, agents or advisers to buy or sell any financial products nor the provision of any financial product advice or service. The content has been prepared without considering your objectives, financial situation or needs. In deciding whether to acquire or continue to hold an investment in any financial product, you should consider the relevant disclosure documents for that product which are available from the product provider. Affluence recommends you consult your professional adviser to determine whether a financial product meets your objectives, financial situation or needs before making any decision to invest.