Eureka Correspondence

Options expiry, non-bank large caps and the difference between LICs and managed funds.

Options expiry

Thanks for starting up an LIC portfolio, it gels with my requirements. On Cadence Capital I notice that options expire in 5 weeks and wonder whether this is likely to affect the share price which is now slightly above NTA.


Mitchell Sneddon's response: Thanks for your letter. Regarding the options and CDM, typically when an LIC has options on issue it weighs on the head stock and you see the head stock trading at a discount to NTA. Once they shake off the over hang of the options you would expect to see the LIC trade closer to its NTA or even at a premium, that is of course if that's its usual pattern. Some LICs very rarely trade towards their NTA with or without options on issue.  

Non-bank large caps

Can you point out a LIC which invests predominantly in large stocks at the exclusion of banks and mining companies?


Mitchell Sneddon's response: Thanks for your letter. One to take a look at would be QV Equities (QVE). It invests in ASX 300 companies excluding the top 20. So naturally this would exclude the major miners and the big four banks. I haven't had a chance to speak with them yet so I am not 100% up to speed with their investment philosophy other than they invest outside of the top 20. I also cannot comment on their performance either so I cannot vouch for the quality of the LIC.

The only other large cap investor I can think of that does not include mining stocks is Whitefield Limited (WHF) but it does include banks.

I am planning on having a close look at both of these and speaking with management in the not too distant future. 

The difference between LICs and managed funds

Listed Investment Companies (LIC) are doing essentially the same thing as managed funds (buying shares), my experience and many other investors are
not to buy/trust managed funds, so why should I buy LICs?


Mitchell Sneddon's response: Thanks for your letter. You are quite right saying most managers don't add a great deal of value but there have been quite a number as well who have and consistently do add value. There are many reasons why people choose managed funds as part or all of their investment approach, be it their lack of time, experience or they just plain well couldn't be bothered. 

LIC's are the same. There are a number out there that have not added value to shareholders and there are a number out there that have. People who lack experience, time and interest but want the benefit of share ownership should look into LIC's but of course take the initial time to select ones that have provided value to over time. You can't argue with the likes of an AFIC and Argo doing 10% pa for decades. 

I prefer LICs over managed funds because of the transparency that comes with being listed. I know what they hold and I know what they are worth on a monthly basis at a minimum (the new Perpetual LIC gives you daily NTA updates). Additionally I have the liquidity of being able to sell and have the funds within three days. I don't have to send in a redemption request, wait for a unit price to be audited and have a sales person call me up and ask for "feedback" as to why I am redeeming funds. 

Additionally, another problem managed funds have is generally speaking the time they want investors to put money into the fund (in a market downturn/correction) investors are usually taking money out so the fund is a forced seller to keep up with redemptions at a the exact time they would prefer to be buying. On the reverse side of that investors will come flooding into a fund with new money at the time managers can't invest it, when the market has run 20%. I have sat in investment team meetings with managers shaking their head as new cash piles up and they have nowhere to put it. Those same investors will them complain they don't get the same returns as the market and take their funds out at the slightest hint of a downturn ironically when they should have given the manager the money. 

With an LIC you don't have this problem as it is a locked in pool of capital. There is no new cash coming in when the manager doesn't want it and there are no redemptions. So the manager can take a longer term view. Yes investors will buy and sell stock and occasionally bid it up above value or below but that is none of the managers business. And a savvy LIC investor with a long term view and some cash squirreled away can take advantage of these moments and add to their holding when others are selling.

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