5 Factors For Profiting From ASX LIC Takeovers And Wind Ups

Pressure has been mounting on many ASX LICs this year to address issues of sub-par performance and widening discounts to NTA. In some cases this has led to corporate activity in the sector that has subsequently seen strong returns in the shorter term for such LICs.

It made me reflect on what signs we should be looking for to position for LICs that have added potential. That is the extra potential due to a possible takeover or a wind up that closes the discount to NTA. I covered this theme in an article I wrote in September for Rask Media, How To Profit From ASX LICs Getting Wound Up.

To summarise some key factors to look for, I see these five areas amongst the most critical (but not the only factors).

1) Discount to NTA of circa 20% (if it is only in the 10-15% range I often hear LICs provide the excuse that many other LICs experience discounts and this is normal, so nothing changes from management).

2) Activist shareholders going substantial / Top 20 shareholders – The most well known is WAM Capital Ltd (ASX:WAM) agitating to change the structure of underperforming LICs. Obtaining 5% enables them to call meetings to propose alternatives. We have also seen Sandon Capital Investments Ltd (ASX:SNC) and the Global Value Fund Ltd (ASX:GVF) active in campaigning for changes in rival LICs in the past.

Such stakes should be viewed in the context of other major holders. For instance sometimes the fund manger may also hold a large block in its own LIC that can act as a barrier to prevent any change.

3) Investment Management Agreement – Most LICs that have launched in recent years have agreements lasting 10 years and can often include expensive break fees. Even though the shareholders may wish to wind up the company only a few years into its life, this can complicate matters. For example aiming to close a 20% discount by winding up a LIC does not sound as enticing if this involves losing 5-10% of this because of having to compensate the fund manager.

4) Hidden Value – Sometimes in my opinion the market tends to under appreciate certain “hidden value” inside of the LIC. This could be realised quickly in the event of a takeover or a wind up. Some examples here are tax losses and franking credits. One reason it may go underappreciated is many LIC investors may just focus on the pre-tax NTA, and perhaps not read the annual report and notice the tax losses or franking account balance. The law can enable one LIC to takeover another and still utilise such value contained in the target LIC.

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Disclosure: At the time of writing, I own the following LICs from the above list – ALF, TGG & BAF.

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