Errors, omissions and obscurity in LMI NTA reporting

Summary: LMIs are required to report NTA or NAV each month. However, there is no regulation, oversight or consistency in this reporting. Some LMIs exploit this lack of oversight to paint the most positive picture of their NTA and performance. In this post, I will progressively provide examples of errors, omissions, obscurity and misleading information.


Details:

1. Tax and Franking Credits add complexity. Some LMIs exploit this

"Pre-tax NTA" is typically reported after realised gains/losses but before unrealised gains/losses

"Post-tax NTA" is typically reported after both realised and unrealised gains/losses with any deferred tax assets (carried losses) also added back

Distributed franking credits are part of past total returns and performance. Undistributed franking credit balances with the ATO are not part of Net Assets and shouldn't be counted in formal NTA figures. It is fair enough to note them though especially if the LIC has a policy of maximising return of them to shareholders by paying a high dividend.

PAF provides a good example of this complexity in the 4 levels of NTA it reported in April 2016:



In 13 May 2016 the NTA report suddenly has a gap in before tax NTA due to franking credits:

Suddenly there is a gap between the "NTA before tax accruals + franking credits" and the "NTA before tax accruals." Did this gap actually emerge in a week or is this because prior reporting was incorrect? Of course, no errors or changes were every mentioned!

Now we know for the frst time that undistributed franking credits are adding 4.2 cents/share to the NTA!  (This is not something most LICs do.)

One week later in its 20 May 2016 report why not just drop the less flattering information and obscure the amount due to undistributed franking credits?

After its 30 June 2017 NTA update PAF now reports in the footnote how much it is adding to Pre-tax NTA with undistributed franking credits:

It includes a note 1:

<<
1. Includes $0.0351 of franking credits.
>>

As of 22 March 2019 PAF reports that of $1.1244 in Pre-tax NTA $0.064 is undistributed franking credits. This equals 5.7%. PAF's NTA discount on a like-for-like basis with other LICs that don't include franking balances is thus 5.7% bigger than is usually calculated and reported.

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The naked truth about Thorney Opportunities Limited (TOP)

LMI: Thorney Opportunities Limited (TOP)

Investing Recommendation: From Jan 2015 to Feb 2019, TOPs NTA outperformed VAS by 2.72% annualised. Meanwhile its TSR has been much lower as at inception it was on a premium over 20%. Unless NTA underperformance takes hold, the higher end of its recent discount ranges are worthwhile trading opportunities but the fees make this LMI uninvestible long-term.

Trading Recommendation: Trade when discount is at least 3% greater than recent (1 to 6 months) average. Minimum Pre-tax discount advised is 12%.

28 Feb 2019 Discount/Premium: Pre-tax -12.75%  Post-tax -Undisclosed
(Note: TOP may be reporting Pre-tax NTA as Post-tax. If so, it doesn't report Post-tax NTA)

Actual Performance:

In its March 2019 Chairman's Update TOP reports the following performance graph but no numbers to check:

Using Excel's CAGR formula I've computed the actual TOP Inception to Date (ITD) performance using the post-restructure NTA at 31 Jan 2014 ($0.475), 28 Feb 2019 Pre-tax NTA ($0.745 - TOP quotes $0.785 but this seems as if it may not include tax on realised gains), Dividends (4.4 cents), Franking (1.9 cents) and Options at expiry (0 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 11.03%

- This is an impressive ITD figure especially given the outrageous fees but the query is whether there will ever be periods of such rapid NTA gains again.

- The true Pre-tax figure after realised gains ($0.745 or $0.785) will affect the result. I've used the lower figure till this is clarified.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 7 Jan 2015 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the TOP IPO and investing in the closest index fund to the benchmark.

- TOP has an annualised TSR of 3.39% using its 31 Jan 2014 share price

- VAS has an annualised TSR of 8.31%

- VSO has an annualised TSR of 8.61%

- TOP's ITD TSR has been massively reduced by the starting price of $0.585 which is a 23% premium to its Starting NTA.


Performance Impact on NTA Discount/Premium:

TOP has an NTA CAGR of 11.03% compared to 8.31% for VAS. Meanwhile, TOP's ITD TSR has only been 3.39%. Since inception, with more sensible entry prices, TOP TSR has been much closer to NTA performance.

I expect that, if it continues to at least match VAS, the higher end of its discount ranges will be good buying opportunities to trade. But the outrageous fees mean you should limit your holding period to short term trades.


Management and Performance Fees:

Management Fee

1.65% per annum (inc GST) of gross assets (not net assets!) calculated half yearly

Performance Fee

20% of the total (not excess to a benchmark!) increase in net asset value net of base fee for the year. No high water mark applies. Calculated annually.

These fees are among the most rapacious of any Australian fund, listed or unlisted. Thus, I would strongly advise against holding TOP or TEK for more than a 6 month period.

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The naked truth about Contrarian Value Fund (CVF)

LMI: Contrarian Value Fund (CVF)

Investing Recommendation: From Jan 2015 to Feb 2019, CVF's NTA outperformed VAS by 3.29% annualised. Meanwhile its TSR has been much lower, especially since Oct 2018. Unless underperformance takes hold, the higher end of its recent discount ranges are worthwhile investing opportunities while performance fees remain ineligible due to not clearing the indexed high watermark.

Trading Recommendation: Trade when discount is at least 3% greater than recent (1 to 6 months) average. Minimum Pre-tax discount advised is 15%.

28 Feb 2019 Discount/Premium: Pre-tax -15.7%  Post-tax -14.29%

Note: Undistributed franking credits would boost these discounts by 5% (see below)

Actual NTA Performance:

In its Feb 2019 monthly report CVF reports the following performance:



Using Excel's CAGR formula I've computed the CVF Inception to Date (ITD) non-reinvested performance using the IPO NTA after offer costs ($0.976), 28 Feb 2019 Pre-tax NTA ($1.21), Dividends (18 cents), Franking (5.14 cents) and Options at expiry (1.5 cents). Undistributed franking credits are ignored here.

Actual Compound Annual Growth Rate for Pre-tax NTA (non-reinvested): 10.14%

- CVFs published ITD of 14.1% net is a significant overstatement of performance. It's cumulative figure of 73.4% net is also way off and even easier to check. 1.734 * $0.976 = $1.69 yet you can see that the End NTA inclusive of dividends, franking and options value is $1.456. Even if we add undistributed franking credits (see Insights section below) of ~ 7 cents this is $1.526.

Note: With divs not reinvested and using the same values as in Excel, Sharesight produces a 10.17% NTA CAGR. The small difference being due to the specific timings of dividends and options value in Sharesight. This is a nice cross-check on the ballpark consistency of CAGR calculations between simple Start to End Date ones in Excel and Sharesight's more precise timings.

Actual NTA CAGR using Sharesight (divs reinvested, undistributed franking included)

First in Sharesight we turn on Dividend Reinvestment and set it to "Round down and track balance." Then we enter a Sell trade at the end date (28 Feb 2019) at End NTA value (not share price) and enter a "dividend" at option expiry (30 June 2016) for 1.5 cents to reflect option value. While not strictly portfolio return, option value is included to offset option dilution effects on NTA (it can be generous when option value at expiry is high given the Start NTA used is not the IPO price but the NTA after offer costs of $0.976.)

End NTA is the only debateable element:

- Pre-tax NTA is $1.21. Post-tax NTA is $1.19. Given CVF is an active trader splitting it at $1.20 is fair.
- Undistributed franking credits per share are ~ $0.07 (see Feb 2019 report)
- So for End NTA I calculate using both $1.20 and $1.27

CVF's Comprehensive NTA CAGR from inception to Feb 2019 is:

11.82% annualised including undistributed franking

10.39% annualised excluding undistributed franking


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 7 Jan 2015 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the CVF IPO and investing in the closest index fund to the benchmark. Dividends (or option payments) are reinvested for both CVF and Australian-listed index funds like VAS. Sharesight does not offer this for index funds (e.g. ACWI) listed outside Australia.

- CVF has an annualised TSR of 5.86% using its IPO price of $1.

- VAS has an annualised TSR of 8.53%

- ACWI has an annualised TSR of 10.62%
(CVF invests in overseas stocks so this is relevant too)


Performance and Risk Impact on NTA Discount/Premium:

CVF's 11.82% NTA CAGR is significantly higher than VAS's 8.53% and also exceeds ACWI's 10.62%. Meanwhile its TSR is lagging significantly at 5.86%. The TSR isn't going to improve much due to a better understanding of CVF's true performance. But if CVF gets back on track with a permanent lead portfolio manager, being mostly invested rather than in cash, and acceptable NTA growth then the current extra discount due to a cloud over future returns will dissipate.

Risk-adjusted returns will vary depending on the balance of risk priorities (e.g. minimising drawdowns or capital loss or volatility or correlation) and how this specific investment is intended to fit within a portfolio strategy (CVF would typically be chosen to complement something like VAS not replace it.) CVF's NTA variance so far justifies some risk-adjusted discount compared to VAS but its up to individual investors to determine the extent.


Selected Brief Insights:

I expect that, if it continues to at least match VAS, the higher end of its discount ranges will be good trading opportunities. However, its lead portfolio manager (Gary Hui) left under a cloud and its data scientist left at the same time. It has been mostly in cash since Nov 2018. So there is an extra discount currently being applied that predicts future returns will have little connection to past outperformance. This extra discount needs to be assessed too.

In its Feb 2019 monthly report CVF reports: "Not reflected in the NTA, is $0.06 per share worth of unused franking credits. The NTA is also net of $0.03 per share tax payable on realised gains which will generate franking credits when paid."

- This means there are around 7 cents per share of franking credits yet to be distributed. If CVF reported NTA like PAF and PGF its Pre-tax NTA would be $1.27 and discount ~20%.

- In its 31 Dec 2018 Interim Report CVF states: "A fully franked interim dividend of 2 cents per share has been declared and will be paid on the 2nd of May 2019. A review is currently underway as to the feasibility of paying a fully franked special dividend before 30 June 2019." Given its franking credits balance is so high it would certainly be in retiree investor's interests, but higher dividends reduce fund AUM and future fees.


Management and Performance Fees:

Management Fee
0.0915% per month (inc GST) which equals 1.1% per year

Performance Fee

20% of the outperformance over a hurdle - which is 8% per annum when the S&P/ASX 200 Accumulation index is positive and 0% when the benchmark is negative or zero. A rolling high watermark applies.

Extracts from most recent Annual Report, Interim Report and Prospectus:

<<
A Performance Fee is payable for a Performance Period ended 30 June, at the rate of 20% of the out performance of the Fund over an 8% per annum cumulative hurdle when the Fund’s benchmark (the S&P/ASX 200 Accumulation index) is positive and over 0% when the benchmark is negative, since the date that a performance fee was last paid.
>>

<<
The Hurdle is the greater of: – the value of the Portfolio at the end of the last Performance Calculation Period for which a Performance Fee was paid indexed by the Period Hurdle Rate for each Performance Calculation Period since that period.
>>

<<
Once a Performance Fee has been paid, no further Performance Fee can be accrued or paid unless the Portfolio’s value increases above its previous high, indexed by the Hurdle.
>>

Fee Comments:

For FY2017-18 Total Expenses before tax were $6.22m. The performance fee was $4.96m. NTA before providing for tax on unrealised positions was $82.305m at 30 June 2018.

Total Expense Ratio w/o Performance fees = 1.53% of end NTA

Total Expense Ratio inc Performance fees = 7.56% of end NTA

Whether the performance fee applies and over how much of the positive return is the key fee factor here. You can get some idea of the likelihood of the June 30th performance fee applying by seeing whether the Interim Report has accrued a payable amount in expectation a performance fee would apply.

Personally, while the fund's NTA is comfortably below the rolling high watermark figure I am happy to consider buying at higher than average discounts above 15%.

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The naked truth about Acorn Capital Investment Fund (ACQ)

LMI: Acorn Capital Investment Fund (ACQ)

Investing Recommendation: From May 2014 to Feb 2019, ACQ's NTA outperformed the Emerging Companies Index by 3.8% annualised which is substantial. Meanwhile its TSR (i.e. share price) has lagged. While outperformance continues, the higher end of its recent discount ranges are worthwhile investing opportunities.

Trading Recommendation: Trade when discount is at least 2% greater than recent (1 to 6 months) average. Minimum Pre-tax discount advised is 7%.

28 Feb 2019 Discount/Premium: Pre-tax -13.25%  Post-tax -9.67%

Actual Performance:

In its Feb 2019 monthly report ACQ reports the following performance:

Using Excel's CAGR formula I've computed the actual ACQ Inception to Date (ITD) performance using the IPO NTA after offer costs ($0.9703), 28 Feb 2019 Pre-tax NTA ($1.254), Dividends (11.5 cents), Franking (4.93 cents) and Options at expiry (0 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 8.03% 

- ACQ's published ITD of 8.46% is before tax but ignores franking credits too. The 8.03% figure is more accurate and comparable. It's good to see its own figure isn't too far from the mark.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 1 May 2014 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the ACQ IPO and investing in the closest index fund to the benchmark.

- ACQ has an annualised TSR of 4.93% using its IPO price of $1

- Using its first day closing price of $0.93 the TSR is 6.03%

- This example shows the ripoff most LIC IPOs used to be. You paid $1 for 97 cents of NTA and the options usually expired worthless. Yet, because most active funds underperform, LMIs tend to quickly trade at proportionate discounts to NTA based on underperformance and total costs. LMIs should only be bought after listing and when performance and discount ranges are clearer. ACQ has typically traded at a discount of 5 to 15% and the larger end of discount ranges have been worthwhile investing opportunities.

- VSO has an annualised TSR of 8.01%

- XEC (Emerging Companies Index) has an annualised TSR of 4.65%

- VAS has an annualised TSR of 7.15%

Note that ACQ reports the S&P Emerging Companies Index (XEC) as having a CAGR of 6.32% which is a fair way from 4.65%. The official S&P site suggests even less than 4.65%.


Performance Impact on NTA Discount/Premium:

ACQ's 8.03% NTA CAGR is significantly higher than XEC's 4.65% and almost identical to VSO's 8.01%. Meanwhile its TSR is lagging somewhat at 4.93% (IPO) or 6.03% (1st trading day).

I expect that, while it continues to outperform, the higher end of its discount ranges will be good buying opportunities. However, keep an eye on the comparative VAS return as the opportunity cost of investing in a market sub-index is investing in the major low-cost passive index funds.


Management and Performance Fees:

TBA...

Management Fee
 per annum (inc GST)

Performance Fee

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The naked truth about MFF Capital Investments (MFF)

LMI: MFF Capital Investments (MFF)

Investing Recommendation: Over 12 years of substantial outperformance and low relative fees means this should be a top-rated investment for US exposure. The sizeable unpaid capital gains taxes on its long-held core positions is the only reason for the discount to pre-tax NTA.

Trading Recommendation: Trade when discount is at least 2% greater than recent (1 to 6 months) average. Minimum discount advised is 3%.

Actual Performance:

MFF does not report comparative performance in its monthly reports or anywhere else I could find.

Using Excel's CAGR formula I've computed the actual MFF Inception to Date (ITD) performance using the IPO NTA after offer costs ($0.98), 28 Feb 2019 Pre-tax NTA ($2.98), Dividends (14 cents), Franking (3.47 cents) and Options at expiry ($0.975).

Actual Compound Annual Growth Rate for Pre-tax NTA: 12.52% 


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 19 Dec 2006 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the MFF IPO and investing in the closest index fund to the benchmark.

- MFF has an annualised TSR of 9.49%

- NASDAQ:ACWI has an annualised TSR of 7.77%

- NYSE:VTI (US Total Stock Market) has an annualised TSR of 7.83%


Performance Impact on NTA Discount/Premium:

MFF's 12.52% NTA CAGR is massively higher than ACWI's 7.77% (or VTI's 7.83%) for a period greater than 12 years. Meanwhile its TSR is lagging at 9.84%. I expect that, while it continues to outperform, the higher end of its discount ranges will be good buying opportunities as it will tend toward trading at a 5% discount to NAV. The discount is only occurring because of the sizeable unpaid capital gains taxes on its long-held core positions.


Management and Performance Fees:

Management Fee

1.35% per annum (inc GST)

Performance Fee

10.0% of the excess return of the units of the Fund above the higher of the Index Relative Hurdle (MSCI World Net Total Return Index (AUD)) and the Absolute Return Hurdle (the yield of 10-year Australian Government Bonds). Additionally, the Performance Fees are subject to a high water mark.

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The naked truth about Magellan Global Trust (MGG)

LMI: Magellan Global Trust (MGG)

Investing Recommendation: MGG has outperformed ACWI by 1.3% annualised between 18 Oct 2017 and 28 Feb 2019. While it continues to outperform its worth considering when trading at the high end of its recent discount range. Fees are not excessive given peers and relative performance.

Trading Recommendation: Trade when discount is at least 2% greater than recent (1 to 6 months) average. Minimum discount advised is 3%.

Actual Performance:

In its Feb 2019 monthly report MGG reports the following performance:

The fine print states: "Calculations are based on the ASX released net asset value with distributions reinvested, after ongoing fees and expenses but excluding individual tax, member fees and entry fees (if applicable)."

Using Excel's CAGR formula I've computed the actual MGG Inception to Date (ITD) performance using the IPO NTA after offer costs ($1.5), 28 Feb 2019 Pre-tax NTA ($1.674), Dividends (9 cents) and Franking (0 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 12.63% 

- This is close to the 13% ITD Magellan publishes (its figure is based on dividends reinvested which explains the small difference). It's rare to see an accurate ITD figure from a fund manager.

- After 14 Mar 2019 the NAV includes some dilution due to the Feb 2019 Unit Purchase Plan.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 18 Oct 2017 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the MGG IPO and investing in the closest index fund to the benchmark.

- MGG has an annualised TSR of 9.84%

- NASDAQ:ACWI has an annualised TSR of 11.31%

- Note that I ignore the IPO benefits for existing Magellan investors and the Feb 2019 Unit Purchase Plan benefits for existing shareholders.


Performance Impact on NTA Discount/Premium:

MGG's 12.63% NTA CAGR is higher than ACWI's 11.31% for the same period. Meanwhile its TSR is lagging at 9.84%. I expect that, while it continues to outperform, the higher end of its discount ranges will be good buying opportunities as it will tend toward trading at NAV or occasionally small premiums.


Management and Performance Fees:

Management Fee
1.35% per annum (inc GST)

Performance Fee

10.0% of the excess return of the units of the Fund above the higher of the Index Relative Hurdle (MSCI World Net Total Return Index (AUD)) and the Absolute Return Hurdle (the yield of 10-year Australian Government Bonds). Additionally, the Performance Fees are subject to a high water mark.

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The naked truth about Pengana Private Equity Trust (PE1)

LMI: Pengana Private Equity Trust (PE1)

Investing Recommendation: Do not invest. Fees are very high and PE1 will take 4 years to be fully invested. If you want private equity exposure, get it via superannuation.

Trading Recommendation: Post IPO and short term only if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 8%.


Lonsec Product Review:

Link: Lonsec PE1 March 2019

Key Excerpts:

<<
Weaknesses:

• The portfolio is expected to take four years to reach its target allocation. The Fund will have a high cash/ credit exposure initially, which reduces the incentive to enter the IPO.

• Being a relatively small LIT, the Fund is likely to be highly correlated to the broader equity market and exhibit high volatility. The Fund may also be relatively illiquid (particularly if the IPO raising is at the lower end of the range).

• The fee load is very high in absolute terms (but similar to other private market funds), including two layers of management and performance fees.

The fees are 1.25% p.a. for the Responsible Entity/ management fee and a 20% performance fee over a hurdle rate of 8% p.a. (net of Responsible Entity/ management fees). The Manager invests into private equity as a Limited Partner (’LP’) and the Fund will invest into primary, secondary and co-investment opportunities. As such, the Fund will effectively have two layers of management and performance fees. The total fee load is estimated by Pengana as being 2.36% p.a. for FY2019.

Lonsec notes that the portfolio composition is likely be markedly different to the target allocation over the first three years. IPO investors will therefore need patience. Initially the Fund will have a large holding in cash/credit exposure. Once built out, the portfolio will be highly diversified across companies, industries and vintages.
>>


Independent Investment Research Product Review:

Link: IIR PE1 March 2019

Key Excerpts:

<<
Based on the below portfolio allocation the blended management fee would be 2.42%p.a. With respect to performance fees, if you were to assume an 18%p.a gross return from the underlying funds and assume a performance hurdle of 8%p.a across all investments, after management fees the total performance fee would equate to 2.5%p.a. Using this gross return assumption this would equate to total fees (management plus performance fees) of 4.92%p.a.


>>

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The naked truth about Naos Small Cap Opportunities Company (NSC)

LMI: Naos Small Cap Opportunities Company Limited (NSC)

Investing Recommendation: Do not invest. Performance since NAOS took over has been terrible and the history of this LIC and investor sentiment will overhang the price even if NTA returns outperform for a period.

Trading Recommendation: Short term only if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 18%.

Actual Performance:

In its Feb 2019 monthly report NSC reports the following performance:

Using Excel's CAGR formula I've computed the actual NSC Inception to Date (ITD) performance using the end-of-month NTA from when NAOS commenced ($1.04), 28 Feb 2019 Pre-tax NTA ($0.75), Dividends (8 cents) and Franking (3.43 cents).

NSC performance since NAOS took over:


Actual Compound Annual Growth Rate for Pre-tax NTA: -13.01% 

- NAOS reports -11.77% before fees and interest. Either way, it's shocking.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 31 Oct 2017 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in NSC when NAOS took over and investing in the closest index fund (VSO):

- NSC has an annualised TSR of -10.21% 

- VSO has an annualised TSR of 8.24%


Performance Impact on NTA Discount/Premium:

The enormous difference between the VSO TSR of 8.24% and NSC's -13.01%  NTA CAGR has driven the discount down to ~15% and the NSC TSR to be -10.21%. And that's with virtually all investors not having done their own NTA CAGR calculation and not knowing the actual annualised gap between NSC's NTA CAGR and VSO's is over 21% not 16.75%. Relative to other LMIs this discount should be much greater but once discounts get close to 20% for LMIs with NTA over $100m they tend not to increase as rapidly.


Selected Brief Insights:

Given its management fee of 1.265% (includes GST) and 20% outperformance fee I expect NSC to continue to underperform and the discount to continue to widen. Mean reversion is often misunderstood and won't help NSC outperform. There are now alternate small cap LMIs like OPH and WMI and I expect the NSC discount to increase steadily.

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The naked truth about Fat Prophets Global Property Fund (FPP)

LMI: Fat Prophets Global Property Fund (FPP)

Investing Recommendation: Is too small (too small a cost base, many investors won't consider at this size) and too illiquid to be investible despite decent CAGR returns. The TSR has stubbornly underperformed more than expected and the fees are high.

Trading Recommendation: Short term only if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 15%. Trading around dividend period may be worthwhile.

Actual Performance:

In its March 2019 Investor Presentation FPP reports performance of 14%:

Using Excel's CAGR formula I've computed the actual FPP Inception to Date (ITD) performance using the IPO NTA after offer costs ($1.061), 28 Feb 2019 Pre-tax NTA ($1.1612), Dividends (4.55 cents) and Franking (0 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 9.86% 

- Note that performance fees for the current financial year will apply and don't seem to have been taken out of the NTA yet.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 16 Oct 2017 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the FPP IPO and investing in the closest index funds (VAP, DJRE).



- FPP has an annualised TSR of -10.46%

- VAP has an annualised TSR of 12.94%

- DJRE has an annualised TSR of 10.86%

- Note that the TSR starts from the IPO price of $1.10 while the NTA CAGR starts with the offer costs taken out ($1.061). No options were issued to even partially compensate IPO investors.

Performance Impact on NTA Discount/Premium:

The VAP and DJRE TSRs have exceeded the FPP NTA CAGR without the issues of tiny size and liquidity. This has driven the discount down to ~18% and the FPP TSR to be -10.46%.

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The naked truth about Concentrated Leaders Fund (CLF)

LMI: Concentrated Leaders Fund (CLF)

Investing Recommendation: Is investible long-term if NTA performance continues to exceed VAS. However, be careful of effect and timing of performance fees.

Trading Recommendation: Short term if discount is at least 2% greater than recent (1 to 6 months) average or to take advantage of large franking credits balance. Minimum discount advised is 5%.

Actual Performance:

In its Feb 2019 monthly report CLF reports an Inception To Date return of 10.35% (gross of expenses, fees and taxes):

Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the Starting NTA ($1.35), 28 Feb 2019 Pre-tax NTA ($1.4), Dividends (7 cents), Franking (3.01 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 9.53% 

- As noted below VAS delivered 6.74% over the period so CLF outperformed VAS by 2.79%.

- In its 30 June 2018 annual report CLF reports: "As at 30 June 2018 the Company franking account had a franking credits balance of $9.6 million." This equals about 15 cents a share as of 28 Feb 2019. This would take the CLF CAGR from 9.53% to 18.93% (artificially inflated due to the short period CLF has existed in its new internal management form but still a significant boost to current shareholders that is barely known.)


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 01 Jan 2018 to 28 Feb 2019 you can determine comparative Total Shareholder Return annualised performance between investing in CLF post-internalisation and investing in the most relevant passive index fund:

- CLF has an annualised TSR of 7.44%

- VAS has an annualised TSR of 6.74%

Performance Impact on NTA Discount/Premium:

The difference between the VAS TSR of 6.74% and CLF's 9.53% NTA CAGR has driven CLF to a TSR of 7.44% for the same period. If CLF's NTA (after all costs) continues to outperform VAS the discount should tend toward zero with the fee structure and other LMI demand/supply factors determining any discount or premium.

Selected Brief Insights:

- WAM Active Limited (WAA) and WAM Capital (WAM) have accumulated large stakes in CLF likely due to the outperformance, franking credits balance and because it flies a little under the radar currently. Continued interest in accumulating it at a reasonable price will support the CLF price.


Management and Performance Fees:

Management Fee

CLF now has an internal investment team. The equivalent of management fees can be calculated by dividing internal management costs (mostly staff) by the NTA. This will need to be done more accurately in the 2018-2019 FY.

Based on the half year report it is roughly $700,000 / $80 million = .875%

Performance Fee

20% of the increase in the value of investments of the portfolio over the return of the S&P/ASX 200 Accumulation Index for each calendar year, less the gross remuneration of the investment management team paid during that calendar year.

Extracts from most recent Annual Report, Interim Report and Prospectus:

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Noted in the CLF 2017-2018 Annual Report:

"A performance bonus structure for the investment management team was introduced as outlined in the Directors’ Report. The investment management team is eligible for participation in a Performance Bonus Pool each calendar year. The Performance Bonus Pool is equal to 20% of the increase in the value of investments of the portfolio over the return of the S&P/ASX 200 Accumulation Index for each calendar year, less the gross remuneration of the investment management team paid during that calendar year, and is to be shared amongst the investment management team as determined by the Chief Executive Officer. If the S&P/ASX 200 Accumulation Index has decreased in any calendar year, the Performance Bonus Pool will be based on the increase in the value of investments. If the value of the investments have decreased in any calendar year, there will be no Performance Bonus Pool for that year, however the Performance Bonus Pool may be increased in later years if the aggregate performance is positive and exceeds the S&P/ASX 200 Accumulation Index over a three year period."
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Fee Comments:

For the half year ending Dec 2018 Total Expenses before tax were $1.22m (multiply by 2). There was no performance fee taken out yet. NTA before providing for tax on unrealised positions was $70.29m at 31 Dec 2018.

Total Expense Ratio w/o Performance fees = 3.47% of end NTA

Total Expense Ratio inc Performance fees = n/a

As you can see the operating expenses alone each year take over 3% out of NTA each year, though this includes employee compensation which would be subtracted from any outperformance amount.

Whether the performance fee applies and over how much of the positive return will be a key fee factor. You can normally get some idea of the likelihood of the end of FY performance fee applying by seeing whether the Interim Report has accrued a payable amount in expectation a performance fee would apply. However, for the transition year of 2018-19 you need to estimate. My estimate is that performance fees will apply.

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The naked truth about Glennon Small Companies (GC1)

LMI: Glennon Small Companies (GC1)

Investing Recommendation: Do not invest. NTA and TSR underperformance has been appalling.

Trading Recommendation: Very short term if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 15%.


Actual Performance:

In its Nov 2018 AGM presentation GC1 reports an Inception To 31 Oct 2018 return of 12.17% (gross):

On its website it reports the following chart comparison of NTA performance to 31 Oct 2018:

Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the Starting NTA ($0.971), 28 Feb 2019 Pre-tax NTA ($0.96), Dividends (11.75 cents), Franking (5.05 cents) and Option value at expiry (0.3 cents).

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Actual Compound Annual Growth Rate for Pre-tax NTA: 4.42% 

- This is far, far below the most recent Inception To Date (actually 31 Oct 2018) NTA performance provided of 12.17% (gross)

- GC1's NTA was diluted by significant underwriting of options well below NTA


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 21 Dec 2015 to 28 Feb 2019 you can determine comparative Total Shareholder Return annualised performance between investing in the GC1 IPO and investing in the most relevant passive index fund (VSO):

- GC1 has an annualised TSR of 0.65%

- VSO has an annualised TSR of 12.62%


Performance Impact on NTA Discount/Premium:

The difference between the VSO TSR of 12.62% and GC1's 4.42% NTA CAGR has driven GC1 to a discount of around 10% and has meant the GC1 TSR is a negligible 0.65%. And this is with virtually no investors knowing the true Inception To Date NTA performance is so low.

When the abysmal NTA and TSR returns become better known I expect GC1 to drop to even greater discounts. Based on the evidence it is a dangerous LMI to hold for anything except the very short term at big discounts.

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The naked truth about Absolute Equity Performance Fund (AEG)

LMI: Absolute Equity Performance Fund (AEG)

Investing Recommendation: Do not invest. Manager claims outperformance for the longer period of the unlisted fund but AEG has had very poor performance and no alpha since Dec 2015. The fees are very high and volatility and drawdowns are elevated.

Trading Recommendation: Short term if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 5%. There is major performance-chasing recency bias in AEG.

Actual Performance:

In its Feb 2019 monthly report AEG reports an Inception To Date return of 1.27%:

Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the Starting NTA ($1.065), 28 Feb 2019 Pre-tax NTA ($1.042), Dividends (7 cents), Franking (3 cents) and Option value at expiry (0.2 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 2.26% 

- Amazingly this is slightly higher than AEG's reported figure. This is because they report "before the investor's tax" and so don't include franking credits and likely also exclude the small option value at expiry. It is refreshing to see an honest reporting of performance.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 16 Dec 2015 to 28 Feb 2019 you can determine comparative Total Shareholder Return annualised performance between investing in the AEG IPO and investing in the most relevant passive index fund:

- AEG has an annualised TSR of -0.28%

- VAS has an annualised TSR of 12.4%

- Obviously, AEG being market neutral cannot be compared directly like a long-only fund. However, the opportunity cost of investing in AEG as opposed to simply buying a low-cost, passive long-only ETF is worth considering.

Performance Impact on NTA Discount/Premium:

The difference between the VAS TSR of 12.4% and AEG's 2.26% NTA CAGR has driven AEG to discounts of up to 10% and has meant the AEG TSR is -0.28%.

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The naked truth about Gobal Value Fund (GVF)

Investing Recommendation: GVF's discount capture strategy is not replaceable by a passive ETF so if its true-risk adjusted performance and volatility or drawdown record suits then it may be worth investing in. The high dividend yield tends to keep the discount from getting too high and provides worthwhile entry and exit opportunities.

Trading Recommendation: Trade when discount is at least 2% greater than recent (1 to 6 months) average. Minimum discount advised is 2%.

Actual Performance:

In its most recent presentation (Nov 2018) with performance comparisons GVF reports the following performance:

Using Excel's CAGR formula I've computed the actual GVF Inception to Date (ITD) performance using the IPO NTA after offer costs ($0.975), 28 Feb 2019 Pre-tax NTA ($1.0733), Dividends (20.6 cents), Franking (6.43 cents) and Option value at expiry (0 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 7.21% 

- This is a long way from GVF's published ITD (p.a) of of 11.8% (inception to 30 Sept 2018)

- GVF's true NTA performance includes dilution due to multiple capital raisings below NTA.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 21 July 2014 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the GVF IPO and investing in the closest index fund to the most useful benchmark.

- GVF has an annualised TSR of 6.21%

- NASDAQ:ACWI has an annualised TSR of 11.81%

Obviously, GVF is not simply a long only ACWI-style equity-only fund and so on a risk-adjusted basis the performance difference is less. However, it is always useful to know the ACWI TSR for the exact same period in determining how good performance has really been.


Performance Impact on NTA Discount/Premium:

The large difference between the ACWI TSR of 11.81% and GVF's 7.21% NTA CAGR has driven the discount down to ~3% and the GVF TSR to be 6.21%. And that's with virtually all investors not having done their own NTA CAGR calculation and likely assuming the true NTA return has been around 8-9%.

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The naked truth about Ellerston Asian Equities (EAI)

Investing Recommendation: Buy only at discount greater than 10%. Has underperformed and yet to demonstrate any sustainable alpha capacity.

Trading Recommendation: Short term only if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 10%.

Actual Performance:

In its Feb 2019 monthly report EAI misleadingly reports the following performance:

The fine print states: "before all tax provisions and after fees, includes the effects of the share buyback, and excluding the effects of option exercise dilution."


Using Excel's CAGR formula I've computed the actual EAI Inception to Date (ITD) performance using the IPO NTA after offer costs ($0.975), 28 Feb 2019 Pre-tax NTA ($1.0864), Dividends (1 cent), Franking (0.43 cents) and Option value at expiry (0.1 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 3.6% 

- This is a fair way from Ellerston's published Net ITD (p.a) of of 5.81%

- EAI's NTA performance includes dilution due to options being exercised. A large proportion of which were "underwritten" - not bought on-market but taken after expiry and offered to large and institutional investors.

- Unlike many LICs with options EAI's options traded in the money for much of their time so IPO investors may have recovered some value from them.


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 15 Sept 2015 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the EAI IPO and investing in the closest index fund to the benchmark.

- EAI has an annualised TSR of 0.98%.

- NASDAQ:AAXJ has an annualised TSR of 9.45%

Performance Impact on NTA Discount/Premium:

The large difference between the AAXJ TSR of 9.45% and EAI's 3.6% NTA CAGR has driven the discount down to ~10% and the EAI TSR to be 0.98%. And that's with virtually all investors not having done their own NTA CAGR calculation and likely assuming the true NTA return has been around 4-5%.

EAI would need sustained NTA CAGR performance matching NASDAQ:AAXJ to see this discount close. What is more likely is that its NTA growth will continue to underperform and thus the discount logically should increase.

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The naked truth about Future Generation Investment (FGX)

Investing Recommendation: Can be a worthwhile medium to long term investment if NTA return doesn't lag VAS/A200 significantly when risk-adjusted as entry and exit prices can be timed opportunistically compared to passive ETFs.

Trading Recommendation: Short term if discount is at least 2% greater than recent (1 to 6 months) average. Minimum discount advised is 5%.

Actual Performance:

In its Feb 2019 monthly report FGX reports an Inception To Date return of 8.6% before expenses, fees and taxes:

Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the Starting NTA ($1.0625), 28 Feb 2019 Pre-tax NTA ($1.196), Dividends (14.8 cents), Franking (6.35 cents) and Option value at expiry (0.5 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 6.66% 

- This is a considerable difference to FGX's published ITD (p.a) of 8.6%

- FGX is not long only and has less risk exposure. E.g. As of 28 Feb 2019 it was "43.4% long equities, 33.7% absolute bias, 13.0% market neutral and 9.9% cash."


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 30 Sep 2014 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the FGX at commencement and investing in the closest index fund to the benchmark.

- FGX has an annualised TSR of 7.48%

- VAS has an annualised TSR of 8.42%

Performance Impact on NTA Discount/Premium:

The difference between the VAS TSR of 8.42% and FGX's 6.66% NTA CAGR creates proportionate FGX discounts when share prices are rising or flat.

If FGX outperforms when markets fall and, through a full cycle, delivers lower drawdowns with only slightly reduced returns than VAS you can expect it to trade much closer to NTA and even at small premiums.

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The naked truth about Perpetual Equity Investment Company Limited (PIC)

LMI: Perpetual Equity Investment Company Limited (PIC)

Investing Recommendation: The high fully-franked dividend is often chased and also keeps the discount from getting too much above 5%. The NTA performance lags VAS by 2% a year. I would not invest long-term.

Trading Recommendation: Short term only if discount is at least 3% greater than recent (1 to 6 months) average. Minimum discount advised is 5%

Actual Performance:

In its Feb 2019 monthly report PIC reports this performance comparison with an Inception To Date figure of 7.9%:

Using Excel's CAGR formula I've computed the actual Inception to Date (ITD) performance using the IPO NTA after offer costs ($0.973), 28 Feb 2019 Pre-tax NTA ($1.102), Dividends (14.3 cents), Franking (6.12 cents) and Option value at expiry (0 cents).

Actual Compound Annual Growth Rate for Pre-tax NTA: 7.27% 

- PIC's NTA performance includes dilution due to capital raisings at discounts


Actual TSR Comparison with relevant benchmark ETF:

Using Sharesight and a performance report period of 18 Dec 2014 to 28 Feb 2019 you can accurately determine like-for-like Total Shareholder Return annualised performance between investing in the PIC IPO and investing in the closest index fund to the benchmark.

- PIC has an annualised TSR of 5.64%

- VAS has an annualised TSR of 9.3%

Performance Impact on NTA Discount/Premium:

The difference between the VAS TSR of 9.3% and PIC's 7.27% NTA CAGR has driven the discount to around 5% and the PIC TSR to be 5.64%.

It's likely the discount is less than it would normally be due to PIC high level of fully-franked dividends which is driven by the stocks it invests in.

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