The fact that many investment companies listed on the Australian Securities Exchange trade at a discount to their asset backing has become a chronic problem for investors and turned many off the sector. But for fund manager Daryl Wilson, LIC discounts are an opportunity.
Wilson is the chief executive and portfolio manager at Affluence Funds Management, which opened the Affluence LIC Fund to all investors in Australia and New Zealand after previously being available to high net worth investors.
The fund holds a diversified portfolio of 20 to 30 ASX LICs, at an average discount of to net tangible assets (NTA) of 15 per cent.
Wilson says: “Most investors concentrate their holdings in a few of the largest LICs. But the real opportunities, the places where we’re finding bargains right now, are outside that group.”
The fund strategy has not worked in the way that it was intended to, so far, and has underperformed the S&P/ASX 200 benchmark consistently since inception.
Since it was launched in May 2016, the Affluence LIC Fund has produced an average return of 9.1 per cent a year, compared with average growth 11.9 per cent a year in the S&P/ASX 200 over the same period. Over the 12 months to the end of August the fund was up 0.3 per cent, compared with the benchmark return of 9 per cent.
According to Wilson, the underperformance can be attributed to the speculation that franking credits were going to be abolished, which scared off buyers for the first six months of the year. He says that buyers are starting to return.
“We have not published our July results yet but we have had a 10 per cent return per annum,” Wilson says.
The fund has three strategies when it comes to its LICs: alpha generators that can outperform the market; discount capture – those trading at attractive discounts to net tangible assets; and event driven – which is largely based on the expectation of corporate activities.
Wilson says: “It’s a very unusual situation, where you can access a wide range of very good LIC managers with impressive long-term track records, at discounts averaging around 15 per cent.”
Over time, the discount an LIC trades at can move higher or lower and has the opportunity to trade at a price above its NTA, otherwise known as a premium.
Affluence Funds Management is not an activist investor but thinks the level of discount is putting pressure on some LICs to take action to reduce the NTA discounts. The fund will reap the benefits if this occurs.
Wilson says: “We prefer for managers to do the right thing but we do come across circumstances where managers need a prod and we start down that path but we don’t specialist in that.”
The fund remains open until it reaches capacity, which Wilson is carefully managing so he can invest in opportunities that larger fund managers do not have.
Wilson says: “Contrary to what most people think, one of the best advantages a fund manager can have is to be managing less money, not more.”
The fund’s minimum investment is $20,000 and has a performance fee of 12.5 per cent of positive returns and carries no fixed management fees.