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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