Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Magellan’s High Conviction LIC to become an ETF
As the old idiom goes, “Out with the old, in with the new.” Fund managers across the board are doing just that.
Despite experiencing solid returns and a stellar year, many managers are becoming increasingly frustrated with the way their LICs trade. Despite achieving market-beating returns, there are a significant number of LICs that persistently trade at a discount to their net tangible assets (NTA) figure, or the value of the stocks they own. So much so, that Geoff Wilson listed his WAR LIC solely to target them.
One of the main features of a listed investment vehicle is that it can trade at a premium or a discount to its underlying asset value. According to Horizon ETFs, the theory goes “a premium or discount to the NAV (net asset value) occurs when the market price of an ETF on the exchange rises above or falls below its NAV. If the market price is higher than the NAV, the ETF is said to be trading at a ‘premium.’ If the price is lower, it is trading at a ‘discount.’ Investors buy LICs in the belief that the discount to asset backing will start to diminish, presenting a great buying opportunity. But often, if the discount to NTA is huge, the discount could continue to fall.
This persistent underperformance has led a few LICs to take steps to remove long-standing discounts to NTA by converting to an active ETF. Last month, Monash Absolute Investment Company (ASX: MA1) undertook a restructure from shares held in the listed investment company (LIC) into a newly established exchange-traded managed fund (ETMF), now trading as the Monash Absolute Active Trust (ASX: MAAT).
These discounts have, arguably, led to a steady rise in popularity of ETFs and ETMFs which, as a result of their structure and composition, trade at or closer to market value. This makes ETFs and ETMFs more popular with retail investors who represent a high proportion of LIC investors.
Next in line, announced last week, was Magellan Asset Management Limited’s – Magellan High Conviction Trust (ASX: MHH), which will convert to an open-ended active ETF from a closed-ended listed investment trust (LIT). The company said, “If the transition is implemented, unitholders will be able to apply for and redeem units directly with Magellan and will also have the ability to buy and sell units on the ASX generally at a tight spread to net asset value.”
Brett Cairns, Magellan’s CEO, said: “Magellan is continuously focused on ways to improve the experience of investors in our funds. On balance, we believe the benefits for unitholders of reducing the trading discount in MHH outweighs the benefits of MHH remaining as a closed-ended fund. We believe transitioning the fund to an open-ended Active ETF is in the best interests of investors as it will allow direct access to the fund for applications and redemptions and see the units in the fund trade at a tight spread to net asset value going forward.”
The ETMF structure uses a market-maker to support liquidity. This permits the fund to trade on an exchange at a price close to its underlying NTA and is supported through intraday pricing.
Sidenote: Geoff Wilson’s WAM Strategic Value (ASX:WAR) LIC made an initial investment in MHH due to the discount and is now sitting on a nice profit.
