By Anthony Macdonald
Rockstar fund managers’ listed funds are dropping like flies, but the vanishing act is more overdue clean-up job than the death of a sector that has served financial planners and retirees for decades.
On Wednesday, it was Investors Mutual’s QV Equities – a listed investment company that has about $240 million in ex-ASX20 stocks – in the firing line.
LIC monster Geoff Wilson’s Wilson Asset Management has turned up with an all-scrip to lure QV Equities investors into a bigger, healthier vehicle that trades more in line with its asset backing.
A fortnight ago, it was Spheria Emerging Companies, a small caps LIC managed by another well-regarded Sydney funds manager, Spheria Asset Management. The listed Spheria’s board gave its manager one year to close the LIC’s discount to its net asset backing, or it will be gone from the ASX boards for good.
Both managers rode the wave of support for LICs last decade, a boom time for new listed fund initial public offerings. Regulatory changes had made it less attractive for brokers and planners to put clients into managed funds, putting LICs back in favour for the first time in a decade.
Brokers made good money listing new LICs, while they promised headache-free permanent capital for managers. There were 10 or more LIC IPOs in each of 2014, 2015, 2017 and 2018, as even blue-blood managers who normally don’t go anywhere near retail investors lined up.
Investors Mutual’s QV Equities was in that IPO class of 2014. It sold 185 million shares at $1 a pop via a big syndicate of retail brokers, and promised investors access to Anton Tagliaferro’s “multi-award winning and experienced investment management” firm Investors Mutual, as chairman Don Stammer said in the prospectus.
Fast-forward nearly a decade and QV Equities’ investment performance has been solid – it did 8.8 per cent last year versus its benchmark at 9.9 per cent – and has paid 39¢ in franked dividends since listing.
But QV Equities is sub-scale, has largely fallen off planners and retirees’ radars and buybacks have not closed the gap between its share price (91¢) and net tangible assets ($1.06 post tax).
Unfortunately, there are dozens of LICs like it. The cycle has turned, activists are on their backs and that permanent capital is no longer headache-free; keeping investors happy and the LIC’s unit price strong requires extensive and costly marketing.
So, LICs are on the nose again. There were no new LIC listings last year and the whole sector has hit reverse; Spheria, Magellan, Bennelong, Antipodes Partners, Monash and other managers have pulled or are considering pulling listed funds.
The number of LICs on the bourse has shrunk to less than 90, from 113 five years ago.
But does that mean the LIC sector dead?
Not even close – this is a cyclical clean-out, not a death knell, just look who is trying to buy QV Equities and why.
Wily Geoff Wilson’s Wilson Asset Management has about $5 billion across a stable of LICs, and if LICs really were dead he would also be on the retreat.
Instead, he is trying to do his 11th acquisition of a smaller fragile rival, trying to mop up more investors for his own bulging network and more money for his fund managers to trade and invest.
In times like these, LICs are a scale game. The healthiest listings are the biggest and most liquid ones – things like $9 billion AFIC and $7 billion Argo Investments, which are big enough for a planner to buy a $5 million parcel for a client without getting stuck in an illiquid stock.
At these big LICs, there are no signs of pesky activists, no protest votes and no grumbling. Their size, liquidity and focus has seen them all survive the removal of stamping fees, threats to franking credits and the rise of exchange-traded funds, while they have the marketing smarts and scale required to keep investors and planners interested.
So, the spate of delistings and corporate activity looks to us more like the sort of clean-out that is typical when an industry falls on tougher times. It is no different to oil and gas, for example, where bigger groups globally and in Australia are mopping up beaten-up rivals with bigger-is-better pitches, or consolidation that happened in print, television and radio media in the past decade.
It is also worth remembering that the LIC sector has been here before; the same thing happened at the start of the century. Nearly 30 LICs listed in the early 2000s in the lead-up to the financial crisis, before the market froze over. Only six of that vintage still trade on the ASX today.
Will Wilson’s latest move work? History says he will not go away without a fight. He has his foot on the throats of a lot of LICs including QV Equities, where his entities already own a 15.8 per cent stake. He has a whole LIC dedicated to taking strategic stakes in struggling rivals.
WAM’s announcement on Wednesday morning indicates Wilson and his team tried going through the front door, before turning the campaign up a notch with a hostile off-market takeover bid. He is one fund manager not scared of putting a few noses out of joint.
Should the QV Equities board turn it into a proper stoush, it will be just another chapter in Australia’s funds management wars.
At the heart of the wars is making money; there is a huge Australian savings pool to invest, plenty of fees up for grabs and no shortage of smart types to fight for it.
The fundie wars have constantly raged in Australia in the past 20 years. They have raged particularly strongly in the past two years as active managers come under even stronger pressure from passive funds.
The biggest battle in town is Perpetual versus Washington H Soul Pattinson, but it is not the only one likely to take place this year. Bankers are crawling over listed groups Magellan, Platinum Asset Management and Regal Partners, while the number of battling LICs promises more action too.
Does it matter? It does in the competitive Australian capital markets bubble, where the fight for funds and fees is a mix of business and personal.
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