For a number of years I have taken a strong interest in the Listed Investment Company sector otherwise known as LICs.
LICs can provide a strong level of diversification for investors that don’t have the inclination to create their own diversified portfolio. I use them in my portfolios to give weight to sectors and investment styles that I don’t currently provide.
I follow about 50 different listed investment companies and keep track of their progress from month to month. This allows me to gain insight into their current investments, where they are seeing opportunities, their returns and how their share price is trading in relation to their net current assets (NTA). This analysis will often create short term trading opportunities whereby large discounts can occur in the share price in comparison to the NTA. On a number of occasions I have identified positive momentum and strong investment returns in LICs that have large discounts to their NTA’s only for the share price to appreciate and the discount shrink into parity. The outcome here is a double benefit, if there is a 20% discount to the NTA and the company has a strong investment focus in resources and the view is that the mining sector is improving there is good possibility that the company will achieve a 20% return for the year, the LIC will come into favor and the discount will improve to parity and you will pick up a return of 35%. This is currently my view for a LIC called Westoz Ltd.
Whilst this strategy can take a year or two to play out it is a relatively low risk strategy, especially if you diversify into a few different LICs that all have different strategies.
One of my favorite LICs is Watermark Asset Management (WMK). It is a long short fund which means that half the portfolio is short and half is long. The outcome from this is that if the stock market has a crash and falls 50%, half of WMK’s portfolio (the long portfolio) will most likely be down by 50% and the other half (the short portfolio) will be up by around 50%. The only way that gains are achieved in the portfolio is through stock selection.
When I began investing in WMK in late 2014 the shares were trading around $1 and the NTA was at $1.04. In mid 2015 the share price was 81c and the NTA was 99c. A fall of 5% had resulted in a 20% fall in the share price. This was an excellent buying opportunity which resulted in many of my clients achieving an average price of around 90c. The share price is now $1.05 and the NTA is $1.05. The company paid a 5.5c of fully franked dividends in 2016. WMK has achieved 8.5% after fees since inception which isn’t the highest return but it has been achieved without the level of market volatility and with an added level of safety that the returns aren’t market correlated.
After meeting with the head fund manager Justin Braitling last week I understand that he is planning an international long short fund in the coming months that will give investors a wider universe for the fund to invest in. Justin has a strong history of outperforming the market with his other fund Australian Leaders Fund which has achieved 13.9% p.a since 2004.
If you wish to discuss the various opportunities in the Listed Investment Company space please give me a call on 82368838.