Appetite not slowing for listed investment companies

Tim Boreham

The skittish market has done little to quell the appetite for LICs — at least on the part of the fund managers keenly promoting them.

According to Independent Investment Research (IIR) there were 65 lies as of June 30, with a collective market capitalisation of $27.4 billion (up almost 10 per cent on the year). There were nine new listings in the period and several more since. The biggest newbie, the $300 million Future Generation Global Investment Company (FGG, $1.05) debuted on Thursday.

Argo Investments (ARG, $7.76), itself an LIC, hived off the $286m Argo Global Listed Infrastructure (ALI, $1.99) on July 1.

Platinum Asset Management (PTM, $6.67) is lining up its ducks for its IPO of Platinum Asia Investments, which draws on Platinum’s 20-year record of investing in the region. Platinum last month said it had secured the minimum $150m, but attracting the maximum $500m may be overly ambitious in this market.

At the minnow end, the $21m Glennon Small Companies (GC1, 98c) listed last month with a charter of finding small-cap gems that might be undervalued because of “pricing inefficiencies’’.

While lies are convenient one-stop shops, they need to justify their management fees (generally modest at the base level but with steep performance fees). In some cases, investors might do better by buying the listed manager (such as Platinum and Argo) and reaping the fees with little market risk.

According to IRR, returns (share price appreciation plus dividends) ranged from 62 per cent (NAOS Emerging Opportunities) to -24 per cent (Westoz Investment) during the year. The lesson? A manager might have a better track record than Phar Lap but there’s no guarantee they will fare better than a chimp with a dartboard.

Wealth Defender Equities (WDE) 96c

Among the slew of new LICs, this Perennial offshoot is notable for its use of derivatives to partly protect holders from a market downturn. Such as the one we are just experiencing.

On early evidence, the “airbag” strategy is paying off.

Wealth Defender this week said its net asset valuation declined 4.7 per cent, compared with the 7.7 per loss for the ASX 300 accumulation index.

Since its May 21 IPO the fund has lost 4.1 per cent compared with the index’s 6.1 per cent retraction. Wealth Defender holds the usual rota of bank-heavy blue-chip investments but uses derivatives to partly cushion the downside. The cost of the protection also blunts the upside in a buoyant market. Wealth Defender is an option for nervous investors, bearing in mind the limitations

BPS Ltd (BPS) 85c

Bartering sounds like a cottage industry rather than a trading system worthy of a listed entity: think of The Good Life’s Tom and Barbara trading chickens for mulled wine under the disdainful sneer of snooty neighbour Margo.

BPS (business payment systems) has achieved mainstream recognition with its Bartercard, with which SMEs offload excess inventory in return for trade dollars with which they can buy other goods.

A second mobile-based consumer loyalty and rewards platform, Bucqi, is in gestation.

BPS hasn’t exactly been an overnight success, given Bartercard was founded by a Gold Coast trio in 1991. Trevor Dietz, BPS CEO who led the $25m management buyout in 2007, joined in 1995 as the 14th employee and his car still bears the numberplate BCA14.

The three principals — Dietz, Brian Hall and Antony Wiese bought the international franchise in 2012, before listing BPS and raising $28m in September last year.

Dietz says while the owners were diluted to 58 per cent, no one sold down. “We have spent the year doing everything we said we would in the prospectus.”

Bucqi is based on the notion that consumers’ wallets are already stuffed with loyalty cards and they crave a single, portable arrangement. Bartercard, which remains the core business, boasts 54,000 members. Dietz says Bartercard’s member numbers soared 60 per cent in July and August after the company abolished its model of charging upfront membership fees of $1550 to $2500, plus $39 a month. Now it’s free to join, with a $99 a month fee, which Dietz says is a more profitable model.

After the change, sales lead conversion improved from one in five to 2.5 out of every five SMEs solicited. BPS last week reported a full-year net profit of $7.9m, 22 per cent ahead of the official forecast, on revenue of $48m. However the total dividend of 5.5c a share fell shy of the projected 7.25c, the result of franchise repurchasing.

The top line was affected by a decision to delay the Bucqi rollout by up to nine months, but Dietz says the platform should be available locally and in NZ this financial year.

Broker Patersons expects recurrent earnings to grow to $7.1m this year from $7m previously, rising to $8.2m in 2016-2017. The current year number implies an earnings multiple of 6.8 times — well below the market average of about 14 times — and a handsome 7 per cent yield. The danger of course is that Bucqi fails to find traction with loyalty weary consumers.

The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not own any of the shares mentioned.

Source: The australian –  September 12, 2015 12:00am.