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LICs beware: Inside the $90million war

LICs have provided a useful investment tool for self-directed investors for many years, but recent events are once again bringing their structure into question.
Investing 101

Listed investment companies or LICs have provided a useful investment tool for self-directed investors for many years, but recent events are once again bringing their structure into question. The market for LICs exploded in the five years to 2020, as the combination of a captive pool of capital for fund managers and the payment of stamping fee incentives created a near perfect storm.

Yet many financial advisers, along with the regulators, have questioned the structure considering widespread underperformance and shares trading at discounts to net tangible asset values. A less understood risk has been highlighted recently with a war breaking out for the Contango Income Generator LIC (ASX:CIE); the combatants? Geoff Wilson of Wilson Asset Management and Marty Switzer of Contango.

What happened?

  • At the core of this story are the mum and dad investors who have allocated $90 million to the Contango LIC. Despite the best of intentions and an experienced management team, the LIC has delivered a negative return of 19% for the 12 months to 31 July, underperforming the ASX200 by 6%. The story over three years is similar, down 4.4% per annum, compared to a positive return of 1% from the index, all while charging an active management fee of 1% or close to $1 million per year.

    Naturally, the result is an LIC that trades at a 10% discount to the value of the shares it owns. How do you solve the underperformance?

    According to Contango Asset Management, by changing the entire nature of the strategy. The group recently gave notice to shareholders that it wanted to shift from being a franking credit focused, Australian share fund, into a long-short global equity strategy managed by WCM, a California-based fund manager distributed in Australia by the Switzer Financial Group. And the kicker? An increase in the management fee from 0.95% to 1.4% plus a 20% fee for outperformance. Interestingly, the WCM strategy has been performing strongly throughout 2020.

    Wilson takes issue

    Geoff Wilson, who has form in fighting for control of underperforming LICs, fired the first salvo, after buying up 14% of CIE shares on issue, stating that “We believe in treating all shareholders fairly, which unfortunately the current Contango Income Generator board of directors has failed to do”. 

    Further, Wilson suggests “the current boards proposal to appointment an unproven manager of LICs is flawed and on unfavourable terms for the company.”

    Wilson initially told the market his preference to  “reposition its investment focus towards investing in the highest quality Australian companies” but no formal proposal was lodged.

    A timely reminder

    This seems like a timely reminder for LIC investors on the important differences between them and less popular unlisted managed funds. When management of a managed fund changes, you can redeem your investment immediately and receive the full value of the underlying shares owned on your behalf.  As we are seeing in this case, doing so today would mean you receive 13% less than the shares the LIC owns on your behalf. 

    This reiterates why most financial advisers tend to prefer the use of managed funds when choosing to outsource to professional managers.  

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