Listed managed investments - fixed income LITs continue to raise capital and global equity LMIs shine bright

There was plenty happening in February with reporting season wrapping up for the half-year results for those LMIs with a June year-end and full year results for those with a December year-end. The strong finish to 2023 saw better than expected returns with some dividend increases and some dividend cuts across the LIC/LIT sector. We will provide a review of the results in the next edition of the monthly update.    

Below, we take a look at the newsflow and observations for February 2024 with the attached report providing full details as well as pricing and returns for the LMI market as of 31 January 2024. We also take a look at the premium/discount of the LIC/LIT market with a focus on the widening discounts of Mid/Small Cap LICs/LITs.

NBI Unitholders Approve Transition to Unlisted Fund: At a meeting in February, NB Global Corporate Income Trust (ASX: NBI) unitholders voted overwhelmingly in favour of the Trust to de-list from the ASX and operate as an unlisted fund. Trading is scheduled to be suspended on 10 May 2024. Unitholders also voted in favour of a transition fee and a limit on the monthly redemptions at 5% of the Fund’s NAV at the end of the preceding month. The Transition Fee will apply to redemptions from the Fund within 12-months from the cessation of trading of the Fund on the ASX. The Transition Fee seeks to facilitate the transition from a closed-ended fund to an open-ended fund with daily liquidity. Unitholders that do not sell on market prior to the suspension of trading, will be subject to the transition fee and redemption limitations if they seek to exit within 12-months after delisting. For investors seeking long-term exposure to the investment strategy, units can still be picked up at a discount to NAV.  

Is WAM Doing the Right Thing Maintaining the Dividend? After acquiring a number of listed and unlisted vehicles to grow the Company, WAM Capital Limited (ASX: WAM) is in a situation where the Company is paying out in excess of $100 million in dividends at the current rate, with the Profits Reserve under constant strain and a depleted franking credit account. The Chairman, Geoff Wilson, has previously stated that the Company will continue to maintain the dividend until the Profits Reserve is depleted to a point where the Board are forced to cut dividends. Is this the right approach? The answer to that question will be different for everyone. In IIR’s view, we believe prudent management of the Profits Reserve to ensure long-term sustainability and growth of dividends is optimal. This may mean having to cut dividends at times when there is prolonged market weakness however resetting dividends to more sustainable levels when the opportunity arises is what IIR believes is in the best interests of shareholders long-term. Some shareholders however, may be reliant on the dividend stream and do not want to see the dividend cut. Those shareholders that are not concerned with the share price on a day-to-day basis may want the Board to continue to maintain the dividend as long as possible, even if this compromises the ability of the portfolio to generate capital growth. 

TGF Board Have a Lot to Answer For: Tribeca Global Natural Resources Limited (ASX: TGF) released their 1H’FY24 results on 27 February 2024, reporting a $10.6 million loss and not being able to pay a dividend for the period.

In its AGM Investment Management Presentation in November 2023, the Company stated it was committed to closing the NTA discount believing one of the key drivers to be providing consistent dividends to shareholders. At this time, given the performance of the portfolio it was becoming difficult to see how the Company was going to be able to pay an interim dividend. IIR views the retained earnings and reserves position of the Company as well as the communication to shareholders regrading dividends to have been poorly managed.

SWTZ seeks to provide investors with an above market yield while maximising franking where possible and deliver capital growth over the long-term. The Fund seeks to achieve this through a portfolio of ASX-listed equities and do so with lower volatility and capital preservation relative to the S&P/ASX 200 Accumulation Index. 

There will be no change to the management fee payable, however the change in the investment manager will be accompanied by two changes to the investment strategy for the Fund: 1) the benchmark will change from the S&P/ASX 200 to the S&P/ASX 100 Index with the Fund now seeking to provide an income return that exceeds the S&P/ASX 100 Accumulation Index over rolling 12-month periods, franked to a material extent, while also maintaining a lower level of volatility; and 2) the Fund will be able to use derivatives up to a maximum of 10% of the Fund, providing an efficient way to manage market exposure and allow the Fund to maximise option income. 

The Responsible Entity (RE) believes the change in the investment manager provides an opportunity to improve the performance of the Fund, both from an income and capital growth perspective. The change comes after a comprehensive review by the Board of the existing arrangements. 

GCI Raises $97 million through Entitlement Offer: In February, Gryphon Capital Income Trust (ASX: GCI) raised $97.3 million through the entitlement offer and shortfall offer, achieving the maximum potential raise under the offer. 48.63 million new units will be issued under the offer. Following the offer, the Trust announced an additional placement to wholesale and sophisticated investors, which raised a further $37.7 million through the issue of 18.87 million new units. All new units under the offer and placement were issued at $2.00 per unit.

PAI and PMC Options Expiring on 28 March: The bonus options issued by Platinum Asia Investments Limited (ASX: PAI) and Platinum Capital Limited (ASX: PMC) in April 2023 expire on 28 March 2024. The bonus options were issued to provide shareholders the opportunity to participate in any upturn in markets during the bonus option exercise period with the exercise of options increasing the size of the company’s providing the potential for enhanced liquidity. The bonus options were assessed as a fair and equitable way to potentially increase the size of the company’s given both companies have traded at persistent discounts in recent years.

Strong US Market Sees Global Funds Dominate Top Performers

The below tables show the LMIs with the best performing portfolios over the 12-months to 31 January 2024. Included in the top LIC/LIT performers is GFL, which provides exposure predominantly to Berskshire Hathaway shares.

Widening Discounts of Small Cap Focused LICs/LITs Provides Opportunities 

Small cap stocks have underperformed large cap stocks in recent years, with the ASX Small Ordinaries Accumulation Index significantly underperforming S&P/ASX 100 Accumulation Index in CY2022 as the macroeconomic environment led to a rotation out of this part of the market with investors preferring to focus on large and more liquid companies. Small Industrials were hit the hardest with the S&P/ASX Small Industrials Accumulation Index down 21.8% in 2022 compared to the S&P/ASX Small Resources Accumulation Index decline of 6.4%. Small Industrials however finished 2023 strongly and have outperformed the ASX Small Ordinaries Accumulation Index and the S&P/ASX 100 Accumulation Index in the first few months of the new year.

The market cap weighted average discount of the LIC/LIT market has been expanding since late 2022 with the market cap weighted average discount of the market trading around the lows experienced in 2020. The primary driver for the expanding discount over this period stems from the increasing interest rate environment which provided uncertainty around equity market valuations and alternative investments to equities are now providing attractive risk-adjusted returns.

LICs/LITs trade at discounts for various reasons, some related to broader market sentiment and some related to the individual vehicles, such as performance, dividend volatility, liquidity or changes to the portfolio manager. Investors should be cognisant of what’s happening with regards to an individual vehicle, however should note LICs/LITs are often oversold during periods of market weakness which can provide investors opportunities to invest at the discount and take advantage of the improvement in the discount as markets improve.