Australia, Funds Management, Personal Finance - Written by on Monday, December 1, 2008 20:22 - 0 Comments

Trading global stocks the LIC way

Australian Financial Review, December 2008

For those who think it might be time to venture back into world equity markets – and that’s a big call – there are more ways of doing so than just buying a managed fund or trying your hand with direct shares. Australia hosts a number of listed investment companies that specialise in international equities.

A listed investment company, or LIC, trades on the ASX and is bought or sold just like any other stock. But when you buy a LIC, you are buying a professionally managed portfolio, just like a managed fund. They represent an alternative to managed funds with some advantages and some disadvantages.

On the positive side, you can get in and out of them very quickly just like any other shares. They have historically had a lower management fee than managed funds, although this varies from case to case. And they bring exposure to a diversified portfolio through a single investment.

Probably the biggest negative about LICs is that they don’t always trade at a level that reflects the assets they hold. This is known as trading at a discount or premium to net tangible assets, or NTA. That’s fine if the fund is trading at a premium to NTA, but in recent years that’s rarely been the experience of most LICs. Across all the LICs tracked by the ASX, the average LIC is trading at a 15.8% discount to the value of the assets it owns (although it’s worth noting that the older, bigger LICs tend to be the ones that trade at a premium – names like Argo Investments, Australian Foundation (AFIC), Djerriwarrh Investments and Milton). In an extreme case the fund’s trading value can be less than half the value of what it owns, as is the case with Wallace Absolute Return (-65.69% as of October 31).

The ASX tracks 10 international LICs, covering a range of approaches. Some take a general global shares mandate: Platinum Capital, Magellan Flagship Fund, Templeton Global Growth and Peters Macgregor Investments are examples. Others focus more clearly on a distinct market: the AMP Capital China Growth fund is one of the few ways of getting exposure to local Chinese shares, while the India Equities Fund also has a single-country focus. The biggest, Ellerston GEMS Fund, was a vehicle to invest in other global equity managers – but its unitholders voted to delist the fund, and did so in November, so that’s no longer an option.

Nine of the 10 international funds trade at a discount (the Asian Masters Fund is the exception), and that presents a quandary for the investor. On one hand, it’s a bargain – you’re buying a dollar of assets for less than a dollar. On the other hand, though, there is no hard and fast rule that just because something trades at a discount today it will necessarily come to reflect its true value in due course. It could, in fact, get worse.

Nevertheless, LICs are worth considering as a method of getting international equity exposure. Here’s a guide to the four largest by market cap, plus the one that trades at a premium to NTA. All data is as of October 31; discounts are expressed relative to pre-tax NTA. Disclosure: the author owns shares in the AMP Capital China Growth fund.

AMP CAPITAL CHINA GROWTH

SIZE: $213 million DISCOUNT TO NTA: 30%

You won’t find many funds anywhere in the world that look like this fund. It invests in Chinese A-shares – that is, the shares that ordinary Chinese individuals buy on the markets of Shanghai and Shenzhen. This is very different from what most people who invest in China are exposed to: the more common route is to buy so-called H-shares, which are listed in Hong Kong and subject to the requirements of the Hong Kong regulator. Most of us couldn’t buy A-shares if we wanted too.

AMP managed this through a program called QFII, or qualified foreign institutional investor. Through this, China has gradually allowed foreign participation in its local markets in a carefully regulated manner, allowing those institutional investors to come in with set amounts of assets. Most institutions that have been granted QFII have used it for themselves or private clients, but AMP is one of the rare examples who set up a fund with it.

Lately, that hasn’t looked so good, as the Chinese market has been the worst performer of them all (which is saying something): the CBN 600 index lost 64% of its value between January 1 and November 27 this year. But one day it’s going to bounce, and return to the fundamentals of economic growth and rising consumer spending that everyone got so excited about in the first place, and when it does the AMP fund is likely to look an attractive entry point.

HUNTER HALL GLOBAL VALUE

SIZE: $203 million DISCOUNT TO NTA: 21.33%

Hunter Hall is an international fund manager whose main presences are Sydney and London, probably best known for its Global Value Trust. It also has a global equities LIC, called Hunter Hall Global Value, following the manager’s established value-style methodology in global stock markets.

The fund’s recent numbers look utterly horrible, recording a 32.1% loss in the year to September 30, which is an underperformance of the MSCI benchmark by 15.1%. It’s still in positive territory since its 2004 inception, by just over 3% a year, but it has suffered even more than most in the recent market turmoil. Lately, it has been particularly badly hit by some of its energy stocks, including US onshore driller Key Energy Services and Canadian oil and gas explorer Oilexco, both down 30% in September alone. Still, Hunter Hall has done very well over the long run by doing things differently, and the fund continues to take out-of-the-ordinary bets: almost all of its exposure to the financial sector comes in a handful of Indian banks with loan to deposit ratios of lower than 70%, and they actually went up in September.

As of September 30 the fund had 29% of its assets in Australian and New Zealand equities, 14% in Europe, 31% in Asia, 7% in North America, and 19% in other liquid assets. Seeing its share price decline, it has been buying back shares, and took out 2.6 million of them in September alone.

MAGELLAN FLAGSHIP FUND

SIZE: $227 million DISCOUNT TO NTA: 25.93%

Magellan Financial was formed by two hot-shot investment bankers, Chris Mackay of UBS and Hamish Douglass of Deutsche, in 2006. It has a global equity fund and a listed investment company, both using an approach of buying what Douglass calls: “Outstanding businesses of the world. Businesses that give very high returns on capital and have long term sustainable competitive advantages. And we want to buy them cheap.”

Magellan focuses on consumer stocks, financial services and infrastructure, but lately it’s been the consumer stocks that have demonstrated the attributes the manager looks for. Typical Magellan holdings are Yum! Brands (which includes KFC, Pizza Hut and Taco Bell), Procter & Gamble, Nestle and Tesco.

The Magellan managed fund has been doing very well – it was the only fund in the monthly Mercer survey to have generated a positive return in the year to September 30 – but the listed fund trades at a 26% discount to NTA and at the time of writing had lost almost half of its share price value since launch.

PLATINUM CAPITAL

SIZE: $135 million DISCOUNT TO NTA: 18.12%

Platinum Asset Management is arguably the boutique manager that proved you can run successful global equity portfolios from Australia. Alongside its many successful funds, it has a LIC, Platinum Capital, running a global equity strategy on a value basis.

Going by the value of the portfolio, Platinum has been doing relatively well recently. It was up 6.1% pre-tax in the September quarter and, although it’s down 10.5% for the 12 months to September 30, that’s better than the 18% drop in the MSCI. Platinum has been around long enough to be able to boast some reassuring long-term numbers too: over 10 years it has grown by almost 13.5% compound per year, compared to 1.4% for the MSCI.

For a long time Platinum Capital used to be the stand-out example of a LIC trading at a premium to NTA. It isn’t any more, but its 18.12% discount is still less acute than many others.

Platinum has been helped in being one of the few international LICs that can take short positions, meaning it benefits from a fall in the value of something rather than a climb. Its recent short positions on cyclical stocks and emerging markets helped considerably. An example of the sort of contrarian position the manager sometimes takes was when it bought a stake in China Mengnui Dairy Company, one of China’s leading milk companies, right in the middle of a milk contamination crisis. “We estimated that sales will take 12 to 18 months to get back on track and that the withdrawal of contaminated stock…may well deplete the company’s coffers but will not put the whole business at risk,” notes Platinum in a recent note to clients. “It could then resume expanding its product range and network, and quite probably…its historic growth rate of 20% pa.” Platinum has also long argued for a fair assessment of Japan; an example of a contrarian position there is Denso, part of the Toyota group.

Platinum is in the middle of a share purchase plan for existing shareholders, offering them the right to subscribe to up to $5000 of shares at a 5% discount to the weighted aver share price over the five trading days before December 5.

ASIAN MASTERS FUND

SIZE: $56 million PREMIUM TO NTA: 3.28%

The Asian Masters Fund was launched in November 2007. It is a fund of funds – meaning one investment gets you exposure to a range of other funds – designed to allow Australians to get access to top Asia-based fund managers.

As of September 30, it had invested in 10 of them, some from international names like Invesco, Aberdeen and HSBC, some from locals like Lion Capital and the Vietnam-based Dragon Capital. Fund of fund structures are a good way of diversifying risk within a single asset class but they do tend to incur two layers of fees.

November was not a great time to launch an investment product focusing on emerging markets, and the share price has gone from $1.15 on the day of launch down to 93 cents by late November – although that’s considerably better than many Asian markets themselves have done. Its claim to fame, though, is in being the only international LIC sold in Australia to be trading at a premium to NTA, of 3.28%.

The fund has made two new share placements in the last six months.



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