Unlocking global markets through local LICs

There are a few standout performers for international exposure – here’s what to look for.

Summary: There are more options for international exposure in the LIC space than ever before, but a few key players in particular have been providing good results. Magellan Flagship Fund (MFF) has had a strong track record of choosing high quality stocks. New operation Future Generation Global (FGG) also stands out and is much more liquid than other “funds of funds” out there.

Key take out: There’s no need to walk out into the unknown when looking for LICs with international exposure – for newer funds, watch by the sidelines until you are comfortable with the investment process.

Key beneficiaries: General investors. Category: Shares.

The investment world is opening up and there are now many options for investors to gain access to previously inaccessible markets. If you’ve read anything about international investing, or attended a presentation recently, you would have heard that Australia makes up just 2 per cent of the global market. That’s real opportunity cost.

There are a lot of moving parts in international investing. The practice has become simpler with most brokers now offering clients access to international markets, meaning the process is not as daunting as it was before. What does remain daunting is the prospect of currency movements, foreign markets, unknown companies and unknown competitors. It all presents a risk. That said, you might still think you should have (or have been told by numerous market commentators over the last 24 months that you need) international exposure.

I think one of the best approaches to international markets for the vast majority of individual investors out there is the growing managed investment space and the LIC sector. Investors are spoiled for choice when it comes to LIC options in international markets. Let’s take a look at what is currently on offer, which ones stand out and why.

The easiest way to think about the options is to break them down into the old, the new and the “funds of funds” categories.  I’ve chosen these categories because when I was sitting back looking at each one, they naturally fell into these categories. All of the LICs with a specific Asian focus are brand new except for one – the rest were either globally focused, or LICs made up of managed funds.

The stalwarts

These LICs are the familiar names. They are the ones that have been around for more than five years. The portfolios are set and we can get a feel for the investment style and see a track record. These are the international LICs that existed before it became trendy.

Below I have broken the LICs down into a table showing a few details. The market cap is important because the smaller the LIC, typically the harder it is to buy it. I have included the premium or discount the share price is trading at compared to the last reported net tangible assets (NTA) and I have (for the ones old enough), included the five-year total shareholder return figures (TSR) per annum. This is the return from share price appreciation or depreciation including the reinvestment of dividends.

CODE

NAME

MARKET CAP

NTA P/D

5YR TSR PA

AGF

AMP Capital China Growth

$330m

-47%

15.29%

HHV

Hunter Hall Global

$268m

-13.85%

10.34%

MFF

Magellan Flagship Fund

$863m

-5.53%

22.38%

PMC

Platinum Capital

$422m

20.18%

10.80%

TGG

Templeton Global

$278m

-18.22%

10.56%

Two years ago, there was not too much choice out there for LIC investors when it came to international exposure. In the list of stalwarts here you have the choice between an index style fund (TGG), an ethical manager which has a third of its investments in Australia (HHV), a fund on one of the most volatile and immature exchanges in the world (AGF) and two stock picking funds – one concentrated to the team’s very best ideas (MFF) and one that’s a great deal more diversified (PMC).

All portfolios actively manage their currency exposure and they all (except AGF which is strictly China) have a global focus. To my mind, one is head and shoulders above the rest and I have written about it at length previously. MFF takes a well-measured approach to selecting high quality investments, and with the recent pull back it is starting to look attractive again.

Two themes have started to emerge in early 2016:

1. This year is going to be a stock picker's market, and

2. In times of volatility, stick to high quality, fundamentally strong stocks. They will get hit with the rest of them but it is the high quality stocks that come back quicker when normality resumes.

When it comes to the group listed above, MFF is the stand out if you are living by these two rules for 2016. For a detailed look at MFF go here: Our first LIC call: Magellan’s MFF, July 15, 2015.

AGF is interesting, but the immaturity of the China A-share market combined with the attacks by shareholders, which forced a strategic review late 2015, mean I am happy to let the dust settle here first. As a number of managers will point out, you can get China exposure without having to invest directly. The attacks from shareholders were based around the LIC never once trading at or near its NTA. Not once has the LIC beaten or matched its benchmark (despite good performance anyway). Finally, the board was made up of 100 per cent AMP related parties. The largest shareholder was an AMP offshoot, and of course, the LIC is managed by AMP.

The newcomers

The newcomers are LICs that have listed in the last two years. It takes some time for an LIC to become fully invested or trading in line with the designated strategy and this is why I have separated them from the herd.

CODE

COMPANY

MARKET CAP

NTA P/D

EAI

Ellerston Asian Investments

$98m

 -14.47%

EGI

Ellerston Global Investments

$68m

 -15.44%

FGG

Future Generation Global Investment Company

$316m

  8.21%

PAF

PM Capital Asian Opportunities Fund

$48m

 -17.4%

PAI

Platinum Asia Investments

$276m

 -0.83%

PGF

PM Capital Global Opportunities Fund

$320m

 -14.81%

It is difficult to assess brand new funds. You do not have a track record to go off, you do not have a real sense of what companies they will be targeting, and the uncertainty of the options issued to shareholders when the LIC listed will generally weigh on the stock. Typically during the first two years of most new LICs, you will get a large discount to NTA with no notice of when that will close or if it ever will. Therefore, my first comment regarding brand new LICs is that there is no harm in waiting for them to mature and the price to NTA gap to close.

Spectate from the sidelines until you are comfortable with them. They are not like a normal operating business. You are not going to miss the growth phase and future potential returns do not diminish the older they get. I would argue perhaps they would diminish the larger they became because they cannot be as nimble or invest in smaller companies, but on a global scale no ASX listed international LIC is near that ceiling yet.

The LICs that stand out are the ones that are or are planning to be almost a carbon copy of an unlisted counterpart. The PM Capital funds LICs and the Platinum Asian Investments LIC are exactly that.

With these three LICs, you have the exact same portfolio managers who manage successful unlisted funds running the same strategies with the same teams. Hopefully they can get the similar results over time.

Platinum’s unlisted Asian fund has been operating since 2003 and has returned investors 15.7 per cent per annum. Joseph Lai is the portfolio manager of that fund and he is also at the helm of PAI. PAI focuses on Asia ex Japan and follows Lai’s fundamental stock picking approach. PAI has only recently listed but given the timing of when it listed and the global pullback you would have to think it has given Lai a very good opportunity to come close to getting the equities he is after at a reasonable price

PGF is a listed version of PM Capital’s Global Companies Fund. The unlisted unit trust has returned investors 8.8 per cent pa since inception back in 1998, compared to the benchmark of the MSCI World Index, which has returned 3.7 per cent pa. PAF is the listed version of the Asian Companies Fund. Since inception in 2008 the unlisted fund has returned investors 17.4 per cent pa compared to the benchmark MSCI AC Asian Index at 6.7 per cent pa. Click here for our full write up on PAF http://www.eurekareport.com.au/article/2015/7/27/shares/pm-capital-asian-opportunity-fund-looks-beyond-china

Both PM Capital LICs are trading at substantial discounts. What will be interesting to see over time is how management go about attempting to close these gaps. Do not expect either to pay hefty dividends. Capital growth is the focus of both funds.

The funds of funds

The last category is a bit like a babushka doll of the LIC world. They are LICs made up of other managed funds.

CODE

COMPANY

MARKET CAP

NTA P/D

AUF

Asian Master Fund

$156m

-5.22%

EMF

Emerging Masters Fund

$146m

-5.52%

FGG

Future Generation Global

$316m

8.21%

GFL

Global Masters Fund

$12m

-20.15%

GVF

Global Value Fund

$74m

-12.07%

USF

US Private Fund

$98m

11%

USG

US Private Fund II

$142m

11.26%

These funds are relatively small in market cap and are quite tightly held as well, with the exception of Future Generation Global (FGG). The Dixon Advisory group manages four of these funds. With these LICs the investor is starting on the back foot due to the fee structure. The management fee on the Dixon Advisory funds EMF, AUF, USF and USG are all approximately 1 per cent, but then the underlying funds will charge their fees as well. Before looking to buy into these examine the underlying managers.

In this category, FGG stands out above the rest despite it being new – and also as a plus, you can buy it! It is much more liquid than the other “fund of funds” LICs which appear to be set up primarily for the sake of the underlying advisories and their clients’ benefit.

Reviewing the “fund of funds” list also threw up Global Masters Fund (GFL). For those who want to buy the most famous LIC in the world, Berkshire Hathaway, GFL is 80 per cent Berkshire stock. Once again, the only issue is buying GFL with a market cap of $12m is that it’s not exactly what you would call liquid. Additionally you are basically buying Berkshire and these days it is far easier to purchase it directly then it was before.

The international LIC space is growing but outside of a few key names there isn’t a great deal to hang your hat on for now. It is great more names have come into the space but these will take time to mature. Once again, there is no need to go walking off into the unknown.

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