There’s a lot to like about Perpetual’s (ASX code: PPT) new listed investment company (LIC), but it’s not enough to overcome the fundamental problems with investing in an LIC at launch.
The new LIC, to be called Perpetual Equity Investment Company (ASX code: PIC), plans to raise between $150m and $600m in an offer that closes on 28 November. The money will be invested mostly in Australian equities, ‘with a mid-cap bias’, with up to 25% in global equities and up to 25% in cash. The portfolio may also hold up to 10% in unlisted securities and may borrow up to 10% of its net asset value.
First the good stuff. The annual management fee of 1% is pretty reasonable, and it reduces to 0.85% once the fund passes $1bn. It’s also good to see that there’s no performance fee (while we don’t mind the idea of rewarding a manager for good performance, managers are often pretty well rewarded for doing badly, with the performance fee just providing a potential cherry on top).
Perhaps the most attractive feature, though, is that the money will be managed by Perpetual, and over time we’d expect to see it outperform like most of the rest of its funds. The fund will be managed by Vince Pezzulo, who has 20 years investment experience, with seven at Perpetual. Pezzulo is co-manager of the Industrial Share Fund and the new fund will be managed along similar lines to this fund, as well as the Wholesale Australian Fund and the Concentrated Equity Fund, all of which have similar approaches.
In fact, it’s well worth reading the section in the prospectus on investment process. It would make a good starting point for most investors and goes a long way to explaining why the three funds mentioned above are all in the first quartile of performance over three, five, seven and ten years (with the exception of the Industrial Fund over ten years, where it’s in the second quartile).
So where’s the catch? Well the problem is a simple one, and it applies to all LIC floats. For every dollar that goes into the fund, there will only be about 98.4 cents left when the manager starts investing the money, with the rest being paid out to the brokers involved in promoting the offer. Furthermore, we’d argue that the right price for any LIC is one that discounts its ongoing fees. If you expect a return of 10% a year and the fees are 1%, then you’d need a 10% discount to net asset value. You could perhaps reduce this a little because of the anticipated outperformance, but paying a dollar for a dollar of net assets would be a major leap of faith, let alone paying a dollar for 98.4 cents.
In an attempt to overcome this problem, as is common with LIC offerings, subscribers will be given a free option to subscribe for an extra share at $1 by June 2016. But however you package it up, you can’t escape the fact that for every $1 put in, there will only be 98.4 cents of value when the fund lists – so any value that you ascribe to the options has to detract from the value of the shares (ultimately because of the risk of them being diluted when the options are exercised).
All of which is to say that this new LIC is a welcome addition to the sector and there may come a time to invest in it – but that time is not the initial float.
This article contains general investment advice only (under AFSL 282288).