IIR LMI Monthly Update – 5 March 2024

March 6, 2024

There was plenty happening in February with reporting season wrapping up for the half-year results for those LMIs with a June year-end and full year results for those with a December year-end. The strong finish to 2023 saw better than expected returns with some dividend increases and some dividend cuts across the LIC/LIT sector. We will provide a review of the results in the next edition of the monthly update.

Below, we take a look at the newsflow and observations for February 2024 with the attached report providing full details as well as pricing and returns for the LMI market as of 31 January 2024. We also take a look at the premium/discount of the LIC/LIT market with a focus on the widening discounts of Mid/Small Cap LICs/LITs.

NBI Unitholders Approve Transition to Unlisted Fund: At a meeting in February, NB Global Corporate Income Trust (ASX: NBI) unitholders voted overwhelmingly in favour of the Trust to de-list from the ASX and operate as an unlisted fund. Trading is scheduled to be suspended on 10 May 2024. Unitholders also voted in favour of a transition fee and a limit on the monthly redemptions at 5% of the Fund’s NAV at the end of the preceding month. The Transition Fee will apply to redemptions from the Fund within 12-months from the cessation of trading of the Fund on the ASX. The Transition Fee seeks to facilitate the transition from a closed-ended fund to an open-ended fund with daily liquidity. Unitholders that do not sell on market prior to the suspension of trading, will be subject to the transition fee and redemption limitations if they seek to exit within 12-months after delisting. For investors seeking long-term exposure to the investment strategy, units can still be picked up at a discount to NAV.  

Is WAM Doing the Right Thing Maintaining the Dividend? After acquiring a number of listed and unlisted vehicles to grow the Company, WAM Capital Limited (ASX: WAM) is in a situation where the Company is paying out in excess of $100 million in dividends at the current rate, with the Profits Reserve under constant strain and a depleted franking credit account. The Chairman, Geoff Wilson, has previously stated that the Company will continue to maintain the dividend until the Profits Reserve is depleted to a point where the Board are forced to cut dividends. Is this the right approach? The answer to that question will be different for everyone. In IIR’s view, we believe prudent management of the Profits Reserve to ensure long-term sustainability and growth of dividends is optimal. This may mean having to cut dividends at times when there is prolonged market weakness however resetting dividends to more sustainable levels when the opportunity arises is what IIR believes is in the best interests of shareholders long-term. Some shareholders however, may be reliant on the dividend stream and do not want to see the dividend cut. Those shareholders that are not concerned with the share price on a day-to-day basis may want the Board to continue to maintain the dividend as long as possible, even if this compromises the ability of the portfolio to generate capital growth. 

The market resurgence towards the end of the year, saw WAM’s Profit Reserves boosted which resulted in the Company maintaining the FY24 interim dividend, albeit partially franked. The short-term fix may keep shareholders happy from a dividend perspective, however any kind of market weakness and the music will come to a halt with the portfolio needing to generate capital gains in the 2H’FY24 to be able to maintain the dividend. In the meantime, the constant threat of a dividend cut will likely see continued volatility in the share price.

TGF Board Have a Lot to Answer For: Tribeca Global Natural Resources Limited (ASX: TGF) released their 1H’FY24 results on 27 February 2024, reporting a $10.6 million loss and not being able to pay a dividend for the period.

In early 2023, TGF undertook a highly dilutive capital raising. The capital was raised to grow the size of the Company to improve liquidity and broaden the shareholder base which was aimed at taking steps towards addressing the persistent discount to NTA at which the Company was trading. After raising the capital, the Company then made the decision to payout an oversized dividend, and decided to not just dip its toe in the water with dividends but emptied the lake. The payment of the dividend for the FY23 period saw the Company exhaust any retained earnings and left the potential for further dividends up to having a bumper half year, which did not eventuate. 

In its AGM Investment Management Presentation in November 2023, the Company stated it was committed to closing the NTA discount believing one of the key drivers to be providing consistent dividends to shareholders. At this time, given the performance of the portfolio it was becoming difficult to see how the Company was going to be able to pay an interim dividend. IIR views the retained earnings and reserves position of the Company as well as the communication to shareholders regrading dividends to have been poorly managed.

Switzer Dividend Growth Fund Appoints New Manager: Switzer Dividend Growth Fund (ASX: SWTZ) has announced a change to the investment manager. The Trust will be replacing Blackmore Capital Pty Ltd with Vertium Asset Management Pty Ltd as investment manager, effective 28 March 2024. 

SWTZ seeks to provide investors with an above market yield while maximising franking where possible and deliver capital growth over the long-term. The Fund seeks to achieve this through a portfolio of ASX-listed equities and do so with lower volatility and capital preservation relative to the S&P/ASX 200 Accumulation Index. 

There will be no change to the management fee payable, however the change in the investment manager will be accompanied by two changes to the investment strategy for the Fund: 1) the benchmark will change from the S&P/ASX 200 to the S&P/ASX 100 Index with the Fund now seeking to provide an income return that exceeds the S&P/ASX 100 Accumulation Index over rolling 12-month periods, franked to a material extent, while also maintaining a lower level of volatility; and 2) the Fund will be able to use derivatives up to a maximum of 10% of the Fund, providing an efficient way to manage market exposure and allow the Fund to maximise option income. 

The Responsible Entity (RE) believes the change in the investment manager provides an opportunity to improve the performance of the Fund, both from an income and capital growth perspective. The change comes after a comprehensive review by the Board of the existing arrangements. 

PAI Cuts Interim Dividend: Platinum Asia Investments Limited (ASX: PAI) cut the interim dividend for the FY24 period 40% on the previous interim dividend to 1.5 cents per share. The dividend is fully franked and this is the primary reason for the dividend cut. The Company seeks to pay fully franked dividends and while the Company has the ability to pay a dividend given the Profits Reserve position, the franking account has depleted in recent years. After the payment of the interim dividend, the Company has the ability to pay fully franked dividends of up to 1.5 cents per share. Given the Company’s policy to only pay fully franked dividends, there may be further dividend cuts in the event the Company does not generate franking credits.

GCI Raises $97 million through Entitlement Offer: In February, Gryphon Capital Income Trust (ASX: GCI) raised $97.3 million through the entitlement offer and shortfall offer, achieving the maximum potential raise under the offer. 48.63 million new units will be issued under the offer. Following the offer, the Trust announced an additional placement to wholesale and sophisticated investors, which raised a further $37.7 million through the issue of 18.87 million new units. All new units under the offer and placement were issued at $2.00 per unit.

MOT Announces Unit Purchase Plan (UPP): On 23 February 2024, Metrics Income Opportunities Trust (ASX: MOT) announced a non-underwritten UPP, providing eligible unitholders the opportunity to acquire up to $30,000 worth of new units at $2.13 per unit, which represented a slight discount to the NAV at the date of the announcement. The UPP is scheduled to open on 6 March 2024 and close on 28 March 2024. Funds raised will be invested in accordance with the investment mandate of the Trust.  

RF1 Increasing Exposure to Private Credit Strategy: Regal Investment Fund (ASX: RF1) has been repositioning its portfolio, increasing exposure to the Private Credit Strategy. The Private Credit Strategy is the most recent addition to the portfolio, with the strategy added to the portfolio in March 2023. The initial weighting to the strategy was 3% of the RF1 portfolio. During the December quarter, the RF1 increased exposure to the Private Credit Strategy from 3.0% to 12%, with the strategy representing 14% of the portfolio as at 31 January 2024.

The increased exposure signifies that the Manager believes the strategy offers attractive risk-adjusted returns when compared to the long/short equity strategies with exposure being reduced to the Market Neutral and Small Companies strategies.  

PAI and PMC Options Expiring on 28 March: The bonus options issued by Platinum Asia Investments Limited (ASX: PAI) and Platinum Capital Limited (ASX: PMC) in April 2023 expire on 28 March 2024. The bonus options were issued to provide shareholders the opportunity to participate in any upturn in markets during the bonus option exercise period with the exercise of options increasing the size of the company’s providing the potential for enhanced liquidity. The bonus options were assessed as a fair and equitable way to potentially increase the size of the company’s given both companies have traded at persistent discounts in recent years.

Very few options have been exercised to date with the options trading out-of-the-money for the most part. Given where the share price is trading at, the relative performance of the portfolio in recent times and the dividend cut by PAI, it is hard to see a large portion of options being exercised, however any market improvements over the coming month may see this change.