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2 ASX LICs I’m Watching Like A Hawk

Spheria Emerging Companies Limited (ASX: SEC) and Ellerston Global Investments Limited (ASX: EGI) are looking more interesting than ever. Both have traded at discounts to their NTA of near 20% in recent times.

Spheria Emerging Companies Limited (ASX:SEC)

Although SEC is only about 18 months old, the two key portfolio managers have worked together for around 6.5 years. This includes a three-year period together at Schroders Investment Management. During this phase they achieved a return of 11.5% per annum net of fees for the smaller companies’ fund.

When they started the Spheria Australian Smaller Companies Fund they continued in similar form, initially posting a 12-month return net of fees of 11.6%.

Don’t Judge On Short Term Performance

I prefer a much longer record to judge performance on than 18 months. Ideally, the period to assess fund manager performance will also include a bear market. It’s pleasing to have the longer track record of the Portfolio Managers before they launched the LIC.

Still, even in the LICs shorter life they have returned about 7% per annum by the NTA measure.

Bottom Up Focus On Cash Generative Business Models

SEC has more of a traditional ‘bottom-up’ value approach compared with other fund managers. In recent years their style hasn’t necessarily suited the markets we have witnessed here in Australia or overseas. Therefore, I think the companies they own are more likely to show clear visibility in future cash flows and have strong balance sheets.

Final Thoughts On SEC

There doesn’t appear to me to be any obvious reason why this LIC should trade at a larger discount to NTA compared with so many others. I don’t see any corporate governance issues or major problems with the structure.

For those wanting to outsource some ASX small cap exposure to an active fund manager SEC might be worthy of further thought. The small cap sector has been under a bit of pressure lately in part from active managers facing redemption pressures. This could be a good area to monitor for opportunities.

Ellerston Global Investments Limited (ASX:EGI)

EGI will become 5 years old this year, having listed in late 2014. The performance numbers they quote in their most recent NTA report shows little deviation from their benchmark.

EGI runs a portfolio that is quite benchmark unaware. They run a mid /small cap bias with their portfolio of global stocks. They have also at times run high cash balances and used options to protect some of the downside. Such strategies have made it more difficult to keep up with global benchmarks that have been led by a narrow group of leading stocks.

Experienced And Cost Efficient Manager

Ellerston have extensive experience running global strategies that dates back a lot longer than the life of this LIC. Despite this, their management fees are cheaper than many of their rivals, with their base management fee here being 0.75% per annum.

Accessing this LIC at a sizeable discount may then offer investors a good chance of above-benchmark returns over the medium term.

A Global LIC With A Difference

Focusing on the mid / small cap areas globally, Ellerston look to invest in companies with clearly identifiable catalysts. Whilst some may argue that the small size of this LIC is a weakness, it can potentially give them advantage over some of their rivals. EGI can invest in smaller stocks that other larger global fund managers may have to overlook due to their size.

Another aspect where they differ from other global LICs on the ASX is that they generally have chosen to hedge the currency exposures. Now that the AUD has moved quite a bit lower over recent years, products offering hedged exposure might be worth more thought.

Strong Buyback & Dividend Policy

EGI is regularly buying back shares at a discount, which is an easy low risk way to assist in growing the NTA per share.

They also trade with a dividend yield of above 3%. This looks very sustainable when you examine their history over the last couple of years. It’s important to note their current healthy dividend profit reserve.

Final Thoughts On EGI

Investors with international exposure in their portfolio focused on larger shares may find EGI useful for added diversification. Smaller shares globally have also been lagging in recent times and are worth watching for opportunities.

The other point of difference with their flexibility to hedge currencies could be more tempting if the AUD weakens from here.

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Disclosure: At the time of publishing, Steve Green does not have a financial interest in the companies mentioned. 

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