Platinum Asset Management is one of our preferred fund managers having invested in the Platinum International Fund for the past 15years and recently adding the Platinum European Fund to clients’ portfolios.
Platinum has recently announced a new Listed Investment Company (LIC) that will invest in Asian (ex Japan) equities. While we are ongoing supporters of Platinum and their various funds and continue to explore the potential for Asian (ex Japan) investment opportunities, we are not recommending participation in this opportunity.
Providence has an ongoing stance against the structure of LIC’s, predominantly regarding the issue of options alongside the initial equity investment.
LIC’s issue options to appease investors regarding the issue price being above the net asset value (NAV) of the fund. Generally, the price is above the NAV given the transaction costs associated with listing an LIC; for example, listing fees and distribution fees paid to brokers.
While these options do have an inherent value, investors are forced into holding the right to buy the fund at some date in the future. In other words, a $10,000 investment in the LIC is accompanied with the right to buy an additional $10,000 worth of shares at some time in the future at the issue price. While this is marketed as a positive, our view is outlined below:
- Upside Scenario – should your shareholding increase in value to $15,000 you would likely exercise your option and receive an additional $10,000 worth of shares at the issue price, however the exercise of these options by all investors will result in a 50% dilution in the returns on a NAV basis. Ie the NAV prior to exercise would be $1.50 per security however a doubling of the amount of securities on offer at the issue price $1.00 would reduce the NAV to $1.25.
- Downside Scenario – Should your shareholding reduce in value to $7,500 your options would expire worthless given the exercise price is above the prevailing share price. Therefore you have lost 25% of your investment and the option has been worthless all along.
With that in mind, it is our view that the structure of LIC’s with associated options limits your investment upside but also leaves you entirely exposed to the downside.
When investing in LIC’s we recommend waiting until these products are listed and look to invest at or below the NAV once the options have been exercised or expired, or, at or below a fully diluted calculation of NAV.
We caution clients with regard to the number of new LIC investments coming to market and suggest looking at it from the investment managers perspective. The free option from the managers perspective will increase their assets under management and therefore the ongoing fees that they earn from that vehicle. While this is a positive incentive for the manager to perform, as pointed out previously investors do not get to participate entirely in this performance.