Capital Continues to Flow Into LMIs Through April and May we have seen three more listed managed investment vehicles (LMIs) start trading on the ASX including two fixed income focused listed investment trusts (LITs), Perpetual Credit Income Trust (ASX:PCI) and MCP Wholesale Income Opportunities Trust (ASX:MOT). Refer to our LMI Monthly Update of 18 March 2019 for more details on these LITs. Pengana Private Equity Trust (ASX:PE1) units listed in April after it raised $205m, at the lower end of its $100m to $600m target range. PE1 is a unique offering in that it is the only LMI that will provide exposure to a well-diversified portfolio of global private equity investments. Although the PE1 raising was towards the lower end of expectations we remain comfortable that it will still be able to achieve its objective of building a well-diversified portfolio and maintain our Recommended Plus rating. The listing of PCI and MOT continues the recent trend of fixed income managers tapping the LMI sector for funds. Given the domestic and global low interest rate environment and the potential for further interest rate cuts, it is not hard to see why these offerings are attracting strong demand. These fixed income trusts are offering investors higher yields than available on bank deposits, which are the traditional avenue for retail investors looking for a reliable income stream. However, with rates now so low and even negative factoring in inflation, yield hungry investors have gone in search of yield in alternative fixed income products which were once on the periphery of the retail market and only generally accessed by institutional investors. These products are now being increasingly accessed by retail investors through LMI products and unlisted unit trust structures. However, investors need to be aware that while the underlying assets can produce a higher yield and pay regular, stable income, the risks are higher than traditional bank deposits. Investors should always ensure that they understand the risks associated with any new fixed income offerings and are comfortable including these in their portfolios. These products don’t come with any guarantees, unlike bank deposits, and a significant deterioration in global credit conditions could have an impact on returns. The addition of PCI and MOT takes the total number of fixed income LMIs to six and we are aware of two more offerings in the pipeline, including one from Partners Group, a global private markets investment manager which is planning to launch a listed investment trust later this year. The Partners Group LMI will invest in a portfolio of global debt instruments in a segment of the market that is not generally accessible to retail investors. We will provide more information on the proposed LMIs as it comes to hand. In addition to funds flowing into new LMIs, there have also been a number of secondary market raisings in recent months. In May/ June VGI Partners Global Investments (ASX:VG1) successfully raised $300m via a placement and entitlements offer. VG1 shareholders also stumped up $75m for shares in the Manager as part of an IPO offer for VGI Partners (ASX:VGI). There have also been a number of secondary market raisings by fixed income LMIs with NBI Global Corporate Income Trust (ASX:NBI) raising $476m via entitlement and shortfall offers. This was the maximum under the offer and funds will be invested in accordance with NBI’s strategy to invest in global, high yield, liquid corporate bonds. In June, Qualitas Real Estate Income Fund (ASX:QRI) raised $34.7m via a placement to wholesale investors and in July Gryphon Capital Income Trust (ASX:GCI) announced entitlement and shortfall offers to raise up to $108m. These offers show that the fixed income LMIs are having no trouble finding new assets for their investment portfolios and there is no shortage of investors willing to provide the funds. This sector had a market cap of $3bn at the end of May and with the new offerings yet to come to market and secondary market raisings we expect this to be well over $4bn by the end of 2019. Spotlight on DUI and Rating Upgrade Diversified United Investment (ASX:DUI) is one of the older style internally managed LICs. Listed on the ASX in 1991, the company invests in a portfolio of ASX-listed securities to generate income and capital appreciation over the long-term. Whilst the portfolio is predominantly invested in Australian large caps, up to 5% can be held in small-caps via an allocation to small cap fund managers and up to 20% (currently 15%) can be held in international shares via ETFs and international fund managers. The portfolio has performed well with DUI at the top of our performance table (see above) for LICs with an Australian shares focus. It has outperformed the S&P/ASX 200 Accumulation Index over 1, 3, 5 & 10-year periods. The outperformance can perhaps partly be attributable to the small international holding, but individual Australian stocks, such as an overweight position in CSL, have played a large part. The portfolio is managed by the Board which meets on a monthly basis to review the portfolio. All four directors have significant market experience. Like the other internally managed LICs, DUI is low cost with a management expense ratio of just 0.12% p.a. The fully franked dividend yield of around 3.5% is a little lower than some other Australian share focused LICs. Given the strong and consistent portfolio performance we are upgrading our rating for DUI from Recommended to Recommended Plus. At the time of writing the shares are trading at a 6.5% discount to pre-tax NTA. We believe this is a good entry point for long-term investors seeking exposure to a well-managed portfolio of Australian shares with some modest international exposure. Bailador has a Good Year Technology focused LIC, Bailador Technology Investments (ASX:BTI) had a good FY2019 with pre-tax NTA per share at 30 June 2019 up 18.2% for the 12 months. The increase in NTA was driven by sizable upwards revaluations in a number of its key portfolio companies including SiteMinder (+30.4%), DocsCorp (+19.3%) and Straker Translations (+25.7%). We shone the spotlight on BTI 12 months ago in our June 2018 Monthly LMI Update when the shares were trading at $0.74. This was after write-downs in a couple of its portfolio companies, including iPRO which was completely written off in 2017. At the time we wrote “Overall, the portfolio now appears to be in relatively good shape and with the underlying portfolio of businesses growing revenue at an annual rate of 35% there appears to be good valuation upside. At current prices we think BTI probably offers good value given the large discount to pre-tax NTA and the potential for valuation uplifts over coming months.” We did remind investors that “private equity style investing is more suited to higher risk, patient investors and that it should form only a relatively small portion of a well-diversified portfolio.” We note that returns from this style of investment can be lumpy and take time to emerge. Investors who acquired BTI at the time have done well with the shares now trading at $1.07. Despite the strong share price performance the shares are still at a discount to the June 2019 pre-tax NTA of $1.31 per share and also the post-tax NTA of $1.21 per share. We will take a closer look at BTI and its prospects in our next Monthly LMI Update. Our rating for BTI is Recommended Plus.
17 Jul 2019