Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
As Monash Investors blazes the trail for active ETFs
Monash Absolute Investment Company (ASX: MA1) has announced that it is undertaking a restructure from shares held in the listed investment company (LIC) into a newly established exchange-traded managed fund (ETMF), to be known as the Monash Absolute Active Trust (ASX: MAAT).
Why is Monash doing this?
The move from LIC to ETMF will mark the end of Monash’s struggle to close the gap between its traded value and its net tangible assets (NTA).
A common frustration felt by shareholders that may have bought-in to the initial public offering (IPO) of a LIC, is that the LIC can drift south and regularly trade at discount to its NTA. This is a problem faced by most LICs, not just Monash. It is an inherent risk of the closed-end LIC structure that does not allow for redemptions or new units to be issued.
Rather than being a function of poor performance, too many LIC IPOs in the past three years have created investor discontent with discounts, pushing investor preferences toward exchange-traded funds (ETFs). The common misconception here is that LICs trading at a huge discount to NTA will recover at some point, but many discounts are becoming larger as more investors move to indexed ETF funds and the problem becomes a structural one.
Other reasons Monash is doing this: Is because the ETMF strategy is “superior to winding up the company for those shareholders who wish to remain (and for those that do not).”
What are the benefits for remaining and new unit holders?
Firstly, let’s define what an ETMF is. According to Drew Meredith of Wattle Partners (publisher of The Inside Network), ETMFs, as the name suggests, are simply exchange-traded versions of the managed funds held in many Australian portfolios. “They are actively managed and the role of ‘market maker,’ or the party that quotes a buy-sell spread that ensures the price remains in-line with the assets, is the manager itself. The dual nature of these funds is such that reporting is traditionally limited to just the top ten investment holdings.”
The attractiveness of an ETMF for a fund manager is the opportunity to finally remove long-standing discounts to net tangible assets (NTA) and ensure the units trade at the same value as the underlying shares the fund owns. The market maker manages the intra-day trading spreads for the fund to make sure they consistently trade much closer to NTA.
The benefits of ETMFs include that investors are able to “buy and sell on market via the Australian Securities Exchange at NAV +/-buy sell spread.” The Monash ETMF will allow for-real time NAV data via the Monash website. A big benefit is the minimum 6% a year distributions, payable quarterly and the ability to reinvest distributions. Fees are also lowered to 1.25%, with an increase in the hurdle on the performance fee to RBA Cash + 5%. But most of all, the benefit is “offering a strategy that is difficult for retail investors to replicate.”
What is the end objective?
Having traded at a discount anywhere from 10% and 15% below its NTA for years, this gap will finally be closed. At the time of writingm MA1 is trading at $1.19 and the NTA is $1.24. That’s a 4.20% discount.
Shifting to an ETMF structure allows new and current shareholders access to Monash Investors’ investment strategy without having to wear the stock’s persistent discount to NTA. It also makes it easier to buy or sell additional units, and does so with a regular income to investors.
Shareholders have given the green light by voting in favour of all resolutions for the transaction to proceed. MA1 will delist from ASX on 1 June 2021. MAAT units will be issued on a one-for-one basis (first distribution). MAAT will list on ASX on 10 June 2021. MA1 will pay a dividend in the September quarter 2021. MA1 will be wound up by 30 June 2022 (final distribution).
Monash Investors is just one in what will likely be a long line of discounted LICs seeking to convert in the coming months.
To check out Morningstar’s monthly report on LIC discounts click here, it has the current prices and NTA’s.
