My other column for The Bull this week, “Good stocks to buy on the cheap”, outlined my view on international equities and gaining exposure through listed wealth-management companies. Another strategy is targeting listed investment companies (LICs) on ASX.
To recap briefly, I favour international equities because corporate earnings are rising, and history shows US equities perform well in the lead-up to the first interest-rate hike, expected in next year. The odds favour another solid year for international equities before slower gains start in 2015-16.
Wealth managers that specialise in international equities provide strong exposure to this trend, and well-known names such as Magellan Financial Group and Platinum Asset Management are more interesting after recent price falls. Both are high-quality companies with good records.
But most wealth-management companies look fully valued at current prices. BT Investment Management and Henderson Group Plc, for example, have rallied this year. By comparison, several LICs are trading at more reasonable levels.
Twelve LICs specialise in international equities, according to ASX data. Another will soon join them: the UK-based Global Value Fund, which wants to raise up to $100 million through an Initial Public Offering. It has a good record and a strong supporter in Wilson Asset Management.
I expect more internationally focused LICs to list on ASX this year. PM Capital has already listed two successful LICs this financial year: the PM Capital Global Opportunities Fund and the PM Capital Asian Opportunities Fund. Both were well supported by investors during their IPOs.
Compared with other parts of the LIC universe, international equities are poorly represented. With the LIC sector enjoying strong growth in the past 12 months, amid greater interest from financial advisers and Self-Managed Super Funds, it seems a no-brainer that more international equity LICs will emerge.
Another feature of international equity LICs is valuations. Five of the 12 LICs trade at a discount to their pre-tax NTA, meaning investors in theory can buy the assets for less than they are worth. The Hunter Hall Global Value Fund, for example, traded at an 11.6 per cent discount in May, and the PM Capital Asian Opportunities Fund traded at a 3 per cent discount, shows ASX data.
The Magellan Flagship Fund traded at a 4.2 per cent premium to NTA and the PM Capital Global Opporutnies Fund was at a 1.1 per cent premium. Platinum Capital enjoyed a 10.8 per cent premium.
The Hunter Hall Global Value Fund could be the pick of international LICs at current prices. It invests in international and domestic equities, mostly small- and mid-cap stocks, and is run by prominent value investor Peter Hall. The fund had net assets of $222 million in May 2014.
Hunter Hall’s discount to NTA is partly explained by a 5.6 per cent average annual portfolio underperformance against its benchmark index over three years. But it has outperformed in the last six months by 2.3 per cent, and if the trend continues, Hunter Hall could narrow its gap to NTA.
The share price rallied from 85 cents in January 2013 to $1.10 earlier year, before easing to $1.02. Its pre-tax NTA per share in May was $1.17.
Higher liquidity in Hunter Hall this financial year suggests investors are anticipating improved investment performance. A new dividend policy has also attracted attention, given SMSFs are attracted to LICs with higher, reliable, franked yield.
The board is clearly intent on closing what has been a persistent gap to NTA over several years. Portfolio investors seeking higher international equities could do worse than buy a proven manager that is trading at a 10.8 per cent discount in NTA, and is showing signs of better investment performance relative to its benchmark index.
Of the rest, PM Capital Asian Opportunities Fund appeals. I have written before for The Bull that growth in middle-class Asian consumers is one of the world’s great investment trends. PM Capital has a good record and its Asia focus makes it stand out among ASX international equity LICs.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at June 11, 2014.
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