Listed managed investments - restructures on the menu

November 02, 2023 13:22

Independent Investment Research

In October there were a number of LICs and LITs that announced they were seeking to restructure from a closed-ended to an open-ended structure in response to the continued discount at which some vehicles have traded. Among these included Magellan Global Fund (ASX: MGF), NB Global Corporate Income Trust (ASX: NBI) and Forager Australian Shares Fund (ASX: FOR). In the attached report we take a look at the key news flow for October as well as reviewing the dividend coverage of LICs based on the reserves and/or retained earnings as at 30 June 2023.

For the most part, LICs have a healthy level of dividend coverage with the LIC universe having an average dividend coverage of 5.5 years. This should see many LICs being able to at least maintain their dividends for the FY24 period and weather any market weakness.

There are a few LICs however where we see risks to the dividends being maintained. In FY23 we saw a number of LICs having a depleted franking credit account due to the difficult market conditions for some LICs in recent years. In addition to the level of dividend coverage, investors should keep an eye on the franking credit account and the dividend policy of each LIC as dividends may be cut to ensure the company can maintain a fully franked dividend. Some LICs may however determine to maintain the dividend and pay an unfranked or partially franked dividend.

The key news items for the month included:

Magellan fight to keep closed-ended global fund structure until after options expire: On 16 October 2023, Magellan Global Fund (ASX: MGF) announced the Board of Magellan would consider a conversion of MGF to open class units to address the discount to NAV while providing unitholders with a means to still transact on the exchange. The trust outlined that it would update unitholders once details regarding a conversion proposal is developed with a unitholder meeting targeted for 1H’CY24, subject to market conditions and the determination that the conversion proposal is in the best interests of unitholders. On the same day, the trust announced that Keybridge Capital Limited together with other members of the Fund had submitted a request to convene a meeting of unitholders to consider and vote on a special resolution to remove the units from the ASX and redeem all closed class units at a redemption price that is determined in accordance with the Fund’s constitution.

Subsequent to the announcement, the trust announced that the Responsible Entity (RE) had filed a summons with the Supreme Court of New South Wales seeking advice and direction with regards to the justification in declining the call to arrange of meeting of MGF unitholders and treating the meeting request as invalid and ineffective. MGF has stated it believes the meeting request received from unitholders was not made in accordance with the constitution with unitholders carrying less than 5% of votes.

The events that have unfolded have made the position of Magellan clear: (1) They do not want to wind up the trust and repay the capital to unitholders. They would prefer to restructure the units as open class units; and (2) Magellan want to retain control of the timing of the proposal to unitholders to restructure to open class units. The timing in the announcement indicates a meeting will not be held until after the options have expired. As we discussed in our previous monthly report, Magellan have a liability with regards to making up the 7.5% discount for options exercised. A liability they would likely prefer to avoid given the current state of the business.

NBI Loses Patience: On 24 October 2023 NB Global Corporate Income Trust (ASX: NBI) announced its intent de-list from the ASX and operate the fund as an unlisted registered managed investment scheme with daily applications and redemptions based on the NAV. In the event the trust receives the ASX’s approval an Extraordinary General Meeting (EGM) will be scheduled to be held in the 1Q’CY24 seeking unitholder approval.

NBI has traded at a discount to NAV for a prolonged period of time as demand for fixed rate high yield bonds softened in the increasing interest rate environment. NBI have implemented a number of initiatives in an attempt to narrow the discount however have been unsuccessful. Given closed-ended structures are typically oversold during periods of asset class underperformance, it is IIR’s view that the discount would have narrowed when the cycle became more favourable for the asset class, however NBI and likely its unitholders have lost patience.

The Manager will be proposing to apply a transitional 12-month exit fee which is designed to benefit the remaining unitholders in the trust. This fee will not be paid to the Manager or the Responsible Entity. During the 12-month transitional period, redemption requests are proposed to be subject to a gating mechanism with ongoing liquidity for redemptions being provided by either using NBI’s cash balances or selling its assets. Further information will be provided to the market in due course.

FOR looks to transition back to an open-ended trust: On 12 October 2023, Forager Australian Shares Fund (ASX: FOR) announced that it will be seeking to transition back to an open-ended trust. The decision was a result of the vehicle continuing to trade at a discount to NAV despite initiatives implemented by the Fund to improve the trading price of FOR units. FOR was an open-ended trust for the first seven years before transitioning to a closed-ended trust. The Manager has considered a range of additional measures to improve the trading price of FOR however it is the Manager’s view that smaller, less liquid closed-ended vehicles are unlikely to trade at NAV for the foreseeable future.

FOR will seek to finalise a delisting proposal in the coming months with further details and a unitholder meeting expected in the 1H’CY24. The Manager currently intends to propose a transition period of up to 12 months where investors who wish to redeem their units pay a redemption fee that declines throughout the transition period which would accrue to the remaining investors in the Fund and there may be restrictions on monthly redemptions. The details of any restrictions have not yet been determined.

MEC discount narrows, however, board continues to explore mechanisms to eliminate the discount: In a letter to shareholders, the Chair of Morphic Ethical Equities Fund Limited (ASX: MEC) noted the narrowing of the discount which the Company attributed to the initiatives implemented by the Company including the share buyback and increased dividend through the policy to pay out the entire amount of profits reserve of the Company as dividends before the expiry of the initial term of the Investment Management Agreement, which is due to expire in May 2027.

The Company has bought back 9.4% of the shares on issue since the launch of the buyback. At the AGM, shareholders approved the resolution to buy back a further 20% of shares on issue.

The Chair also stated that the Company continues to explore potential mechanisms to effect a reasonable priced restructure of the Company that would eliminate the discount. The Company have agreed to seek senior counsel’s opinion on the viability of a potential solution that may eliminate the discount. At the AGM, shareholders approved the resolution to amend the constitution to provide the Company the ability to make in specie distributions of shares and units in a trust or managed investment scheme, which highlights the Boards intention to explore a restructure as an open-ended trust.

QVE intends to maintain quarterly dividend of 1.3 cents per share for remainder of FY24: During the month, QVE Equities Limited declared an interim quarterly dividend for the September quarter of 1.3 cents per share in line with the previous quarterly dividend. The Company announced its intention to maintain a quarterly dividend of 1.3 cents per share for the remainder of the FY24 period, subject to the Company maintaining profit reserves and there being no material impacts, change or unforeseen events. The announcement would see a FY24 annual dividend of 5.2 cents per share, in line with the annual dividend for FY22. Based on the share price as at 31 October 2023, the FY24 annual dividend represents a yield of 6.1% (8.7% grossed up).

LSX announce dividend of 1.5 Cents per Share: On 18 October 2023, Lion Selection Group Limited (ASX: LSX) announced the payment of an unfranked dividend of 1.5 cents per share scheduled to be paid on 10 November 2023.

Post exiting the Pani investment, the Company has $75 million in cash and cash equivalents to deploy. The Company stated that under the current market conditions, in which the prices of investment opportunities in the micro cap resources sector have weakened, the use of capital for new investments is favourable over dividend payments. The Company is actively seeking to deploy capital in investment opportunities identified in the junior resources market. During 2022 and 2023, the Company has made investments in Saturn Metals (ASX: STN), Plutonic Limited, Alto Metals (ASX: AME), Sunshine Metals (ASX: SHN) and Great Boulder Resources (ASX: GBR).

VG1 updates target dividend policy: VGI Partners Global Investments Limited (ASX: VG1) announced the Company will be seeking to pay a semi-annual dividend of at least 5 cents per share, up from the previous target of at least 4.5 cents per share. The new target will result in an annual dividend of at least 10 cents per share, up from the FY23 annual dividend of 9.5 cents per share. Dividends will be franked to the maximum extent possible.