Harvesting discounts from LICs and other stocks - Daryl Wilson

Summary

Daryl Wilson, CEO of Affin Funds Management, discusses the discount capture strategy in his presentation. He explains that buying listed investment companies (LICs) when they trade at a discount to their asset value can add value to returns. Wilson highlights the cyclical nature of the LIC market and emphasizes the importance of historical discount analysis and alignment of interests between managers and shareholders when identifying attractive investment opportunities. His fund, focused on this strategy, has shown strong performance with less volatility over the past five years.

Takeaways

• 😀 Daryl Wilson, CEO of Affin Funds Management, has over 25 years of experience in funds management and founded Affin in 2015.
• 💼 Affin Funds offers four funds aiming to deliver better than average returns over three years with regular income and smooth returns during market volatility.
• 📈 The presentation focuses on 'harvesting discounts', a strategy where the fund aims to buy listed investment companies (LICs) when they trade at a discount to their net asset value and sell when the discount narrows.
• 📊 AIC is highlighted as an example of an LIC that has fluctuated between trading at a premium and a discount to its asset value over time.
• 🔍 Affin Funds looks for opportunities in the LIC space, REITs, infrastructure funds, and other hard asset investments that may present discount capture opportunities.
• 💡 The fund seeks three key factors in potential investments: large discounts, underlying assets trading cheaper than they should be, and special situations or corporate events that could close discounts.
• 📉 The current market presents an opportunity for discount capture as many LICs are trading at significant discounts, with the average discount across Affin's portfolio being about 24%.
• 🏢 Specific holdings like Ride Capital and CD1, CD2, and CD3 are mentioned as examples of LICs with attractive discounts and potential for restructuring or winding down, which could eliminate discounts.
• 💼 GDI, an office REIT, is highlighted as an example of a stock trading at a significant discount to its net asset value, with potential for recovery as market conditions change.
• 📚 Affin Funds provides a guide for investors interested in learning more about the discount capture strategy and how to identify opportunities in the LIC sector.

Q & A

Who is Daryl Wilson and what is his role at Affin Funds Management?

Daryl Wilson is the CEO and portfolio manager at Affin Funds Management. He founded Affin in 2015 and has over 25 years of experience in various aspects of fund management, including investment operations and capital raising.

What is the main focus of Daryl Wilson's presentation?

Daryl Wilson's presentation focuses on 'harvesting discounts from LICs and other stocks', a strategy that involves buying listed investment companies (LICs) when they are trading at a discount to their net asset value and selling them when the discount narrows or disappears.

What are the three common characteristics of the funds offered by Affluence?

The three common characteristics of the funds offered by Affluence are: targeting to deliver better than average returns over three years and longer, providing regular income of at least 5% per annum, and smoothing returns to provide a better experience for investors during volatile market conditions.

What is the difference between an LIC and an ETF or an unlisted managed fund?

An LIC (Listed Investment Company) is a listed investment fund that trades on the stock exchange. Unlike ETFs (Exchange-Traded Funds) or unlisted managed funds, LICs do not necessarily trade at their net asset value but rather at the whims of the market, which can result in them trading at a premium or discount to their asset value.

How does the discount capture strategy work in the context of LICs?

The discount capture strategy involves buying LICs when they are trading at a significant discount to their net asset value and selling them when the discount narrows or when they trade at a premium. This strategy aims to add additional value to the returns generated by the LIC's investment activities.

What is the significance of the current discount levels in the LIC market according to the presentation?

According to the presentation, the current discount levels in the LIC market are significant, with the average discount across the portfolio being about 24%. This presents an opportunity for investors to buy LICs at a lower price relative to their net asset value, with the potential for substantial upside if the discounts narrow.

What are the factors that Affluence considers when looking for discount capture opportunities?

Affluence looks for opportunities with an abnormally large discount, situations where the underlying assets are trading cheaper than they should be, and special situations or corporate events that may create one-off opportunities. They also consider the alignment of interest between the LIC's management and its shareholders.

Can you provide an example of a LIC that Affluence finds attractive based on the presentation?

One example given in the presentation is Ride Capital, a $93 million market cap LIC. Affluence finds it attractive due to the valuation of its underlying ASX small-cap portfolio, strong alignment of interest between the investment managers and the LIC's shareholders, the current discount level, and potential for restructure.

What is the performance of the Affluence LIC fund over the last five years according to the presentation?

The Affluence LIC fund has delivered a return of about 12 to 13.3% over the last five years, outperforming the average of the LICs that they monitor and doing so with much less volatility than the market average.

How does the discount capture strategy apply to other types of funds besides LICs?

The discount capture strategy can also be applied to other types of funds such as REITs (Real Estate Investment Trusts) and infrastructure funds, where there is a hard asset price and an underlying asset portfolio that can trade at a discount or premium to its net asset value.

What is the potential catalyst for closing or eliminating the discount in LICs according to the presentation?

The presentation mentions that corporate events such as restructures or activist investor actions can serve as catalysts for closing or eliminating the discount in LICs. These events can create a one-off opportunity for investors to realize the full value of their investment.