Mar 13, 2015

Listed investment companies chase funds from banks to the market

Hard on the heels of Peter Hall launching a $90 million raising for his listed invested company Hunter Hall Global Value, Geoff Wilson's Wilson Asset Management has followed suit, also with a $90 million raising.
For WAM, this comes on top of the upwards of $100 million raised through a share purchase plan, which closed this week.
Both raisings are tapping into the shift of funds out of banks and term deposits in the wake of the recent 0.25 percentage point cut to interest rates by the Reserve Bank of Australia, and ongoing speculation of a further cut to rates in the coming months. This has lit a fire under share prices, pushing them into record territory.
Lower interest rates is prompting many investors to take their money out of fixed-income investments such as term deposits offered by banks, to chase higher yields in the sharemarket. Typically, term deposits are yielding less than 3 per cent, whereas a host of blue chip shares are offering yields of more than 5 per cent, before taking franking credits into account.
This flow of funds saw $1 billion raised through newly floated listed investment companies in 2014, led by Perpetual's $250 million raising by its new vehicle Perpetual Equity Investment Co. A further $753 million was raised via placements and share purchase plans, according to research by Bell Potter Securities.
Additionally, a number of listed investment companies are trading at substantial premiums to their underlying holdings, led by Djerriwarrh Investments at 31 per cent and Mirrabooka at 26 per cent. Listed investment companies trading at hefty premia to their underlying net worth is typically a sign of a bull sharemarket, brokers said.
The quick moves by experienced fund managers such as Mr Hall and Mr Wilson to tap investor appetite for equity investments via their listed investment companies highlights the ease with which existing listed entities can raise funds using their existing shareholder base and investment track record, rather than by launching a new investment vehicle, which involves issuing prospectuses and courting a new investor base.
Contango and K2 Asset Management have delayed the launch of planned funds, due partly to the oxygen taken out of this end of the market by Perpetual's large raising for its recently listed fund which came to market in late 2014.
Contango now expects to launch an Income Generator Fund after Easter, seeking upwards of $50 million.
Of the funds raised by listed investment companies in 2014, $130 million came from the exercising options, according to Bell Potter, with as much as $1.9 billion in potential raisings via options, which expire over the year ahead, although the strike price for some options exceeds their ruling share price, which makes it unlikely investors will act.
"For a number of the smaller listed investment companies, the year ahead is make or break time with looming option expiry – they either get bigger – to reduce their management expense ratio – or lose out," one fund manager said.

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