LIC legend Geoff Wilson ‘still playing the game’ as ETFs shine

Geoff Wilson sees a bright future for listed investment companies as the industry moves from consolidation to growth.

Wilson Asset Management chairman and chief investment officer Geoff Wilson: ‘LICs are alive and well, and they’re expanding.’ Picture: John Feder

Geoff Wilson sees a bright future for listed investment companies as the industry moves from consolidation to growth despite the relentless growth of exchange-traded funds.

Fortunately stuck in Noosa during the Sydney lockdown, the chairman and chief investment officer of Wilson Asset Management spoke to The Australian about the future of LICs and sharemarket outlook after exceptional results and a capital raising by WAM Leaders.

“Broadly everyone is saying ETFs are growing exponentially and LICs are dead,” he says.

“My message is that LICs are alive and well, and they’re expanding.”

As for the market outlook, he says “we’re still playing the game” despite some worrisome anecdotes from retail punters who have found it so easy to make money from shares.

“The hard part is, until you see some clear cracks, you’ve really got to keep playing,” he says.

“Everyone knew at the start of 87 the market was expensive, but it still went up another 60 per cent, then fell 50. That’s the hard part. You assume it will be inflation, interest rates backing up … and it will be the big PE (price/earnings) contraction that will be the one to worry about.”

After a few years of consolidation and rationalisation following a proliferation of LICs, many of which were persistently trading well below their net asset values because they scale to suit the structure, the industry seems to be undergoing something of renaissance.

A massive rebound in the sharemarket has also helped the best LICs rise to the top.

Thus with WAM Leaders trading at an 8 per cent premium to NAV – thanks in no small part to an enviable investment track record – the board saw a golden opportunity to raise capital for growth and give their shareholders a change to top up.

On its fifth anniversary, the fund returned 37 per cent before fees in the financial year to June 30, outstripping its benchmark S&P/ASX 200 Accumulation Index by 9.2 per cent.

Since inception in May 2016, WAM Leaders’ investment portfolio has returned 14.9 per cent per annum before fees, outperforming the index by 4.5 per cent per annum.

WAM Leaders reported a record profit of $318.1m for the 2020-21 financial year.

It will pay a fully franked dividend of 7c a share, implying that its securities were trading on a fully-franked dividend yield of 4.5 per cent or 6.4 per cent grossed-up.

Together with fully franked dividends paid in the period, the strong investment portfolio performance resulted in a record 58.6 per cent total shareholder return for the 12 months.

WAM Leaders’ 1-for-5 non-renounceable entitlement offer will raise about $241.2m by issuing about 167.5 million shares at $1.44 a share – equal to its pre-tax NAV as of June 30.

It comes after another Wilson fund – WAM Strategic Value – raised $225m at $1.25 a share in a heavily oversubscribed initial public offer last month. WAM Strategic Value was trading around $1.32.

Odds are that other LICs with premiums to NAV or smaller discounts are likely to follow Wilson’s lead by raising capital in what could well be a growth phase for the industry.

Indeed, Wilson says there was something of a first mover advantage. “Size does matter in the listed investment company market. Larger LICs tend to get almost a free kick in terms of rating,” he says.

That was certainly evident in the case of Washington H. Soul Pattinson last month. Its shares rose about 10 per cent after its $11bn merger with Milton Corp.

The thinking is that LICs need to be bigger than $100m to flourish. It’s partly about fixed costs but bigger LICs also offer better liquidity.

WAM Global is up a few per cent since its merger with Templeton Global last month.

With Milton absorbed by Soul Patts, WAM Leaders is the third-largest LIC investing in large caps, behind AFIC and Argo, both of which also trade at a premium to NAV.

The LICs and listed investment trust sector combined grew 32 per cent last financial year according to Ian Irvine, CEO of the Listed Investment Companies and Trusts Association.

With the IPO from WAM Strategic Value, the sector raised $300m in new capital, but most of the rise came from both the increasing value of investment portfolios and the share price of the LICs and LITs.

“There is continuing interest from investors who understand the benefits of the LIC and LIT closed-end fund structure, including its cost efficiency, management stability and focus on the long term,” Irvine says.

In the case of LICs, Irvine says the ability for profits from previous periods to be returned to investors in future periods has helped deliver income stability.

He says LICAT was also pleased to see the income/yield segment of the LIC/LIT sector performing well.