Listed Managed Investment - Monthly Sector Review

KKR Launches its Credit Income Fund
US Investment Group KKR launched an IPO for a new listed
investment trust, the KKR Credit Income Fund (ASX: KKC), and is
seeking to raise up to $925m. The offer size was increased from
a previous maximum of $825m due to strong demand under the
cornerstone and broker firm offers. Given the strong demand the
offer closed on 16 October, 2019, just two days after opening. The
shares are expected to start trading on the ASX on 21 November.
KKC, which will invest in a range of credit strategies, joins the
growing list of credit focussed LITs on the ASX. The fund will invest
in two underlying KKR credit investment strategies, specifically a
long-term target portfolio allocation of 50-60% to the Global Credit
Opportunities Fund (GCOF) and a long-term target allocation of 40-
50% to the European Direct Lending (EDL) investment strategy, via
the soon to be launched KLPE II. GCOF invests in a portfolio of subinvestment
grade traded credit securities, mainly bank loans and high
yield bonds. KLPE II is a European direct lending strategy targeting
upper middle-market companies in Western Europe by largely first
lien, senior secured private debt, with a very selective provision of
second lien secured facilities.
KKC intends paying quarterly distributions and has a target net
return of 6 – 8% p.a. with an estimated current net yield of 4 – 6%
p.a. once the offer funds have been deployed. Whilst the trust may
appeal to investors looking for regular income, we remind investors
that sub-investment grade assets may lead to heightened net asset
value volatility. The Manager has a strong track record and IIR has
confidence in its ability to achieve the stated investment objectives
over the foreseeable future and continue to generate well above
broad market performance over the medium and long term. Our
rating for KKC is Recommended Plus. Please refer to our full report
for more detail.
Two New LITs join the ASX
The Partners Group Global Income Fund (ASX: PGG) commenced
trading on the ASX on 26 September 2019 after raising $550m.
This was above the initial target of $500m and reflects the strong
demand for higher yielding income investments. Our rating for PGG
is Recommended.
Magellan High Conviction Trust (ASX:MHH) commenced trading on
the ASX on 9 October after raising $862m, well above the minimum
target of $250m. There was no maximum under the offer. MHH will
invest in a portfolio of 8 to 12 of the Manager’s best global stock
ideas based on the same investment process that underpins the long
running Magellan Global Fund and the ASX listed Magellan Global
Trust (ASX:MGG). Our rating for MHH is Recommended.
URB to Merge with 360 Capital Fund
The Listed Investment Company URB Investments (ASX:URB)
announced plans to merge with 360 Capital Total Return Fund
(ASX:TOT) via a scheme of arrangement. Investors in URB will
receive 0.9833 TOT share for each URB share, the equivalent of
$1.16 URB share. The consideration was based on the respective
NTA calculations for both URB and TOT at 30 September 2019. It
represents a slight premium of 3% to adjusted pre-tax NTA per share
for URB shareholders and premium of 13.2% to URB’s closing price
ahead of the announcement.
URB was listed on the ASX in April 2017 after an IPO that raised
$80.1m and has a portfolio invested based on the urban renewal
theme. URB has the ability to invest up to 75% of its portfolio in
direct property, but following the sale of a number of properties
around 12% of the portfolio is in direct property. At 30 September
equities made up slightly more than 50% of the portfolio and cash
was at 34.6%.
With a relatively small market cap, URB’s shares have mostly traded
at a discount to pre-tax NTA since listing despite a good performance
from the fund. For the two years to 30 September 2019 the portfolio
delivered a return of 9.5% p.a.
The scheme of arrangement is subject to URB shareholder approval.
If approved, URB shareholders will own shares in a larger listed
property vehicle that will have a market cap of around $170m and will
own a diversified portfolio of direct and indirect real estate assets and
real estate debt investments.
The merger continues the wave of corporate activity we have seen
in the LMI sector and, given the prevalence of discounts to NTA,
particularly amongst some of the smaller LICs and LITs, we expect
the trend to continue.
QRI Raises $94.7m
Qualitas Real Estate Income Fund (ASX:QRI) raised $94.7m via its 1
for 1 entitlement offer, less than the $266m under the offer. $39m
of the proceeds has already been invested in the Qualitas Senior
Debt Fund with the remaining funds to be invested in a number of
commercial real estate loans which are currently being assessed
by the Manager. The Manager continues to see strong demand for
commercial real estate loans and has a robust debt pipeline.
Spotlight on Ellerston Global Investments Limited
Ellerston Global Investments Limited (ASX:EGI) commenced trading
on the ASX on 20 October 2014. EGI provides investors with a
concentrated global equity portfolio with a mid/small cap bias based
on the highest conviction ideas from a filtered universe of securities
that the Manager feels are in a period of ‘Price Discovery’. The
EGI portfolio is benchmark independent, providing diversification
to investor’s global equity portfolios. EGI seeks to construct a
concentrated portfolio of global companies that are unlikely to be
found in most global equity portfolios or in standard global equity
ETF’s. The Manager takes an active, absolute and often contrarian
approach to identify opportunities in global equity markets.
The portfolio generally consist of between 20-40 securities
representing the highest conviction ideas, with the most compelling
risk/reward asymmetry. The Manager’s investment process combines
both qualitative and quantitative approaches, and is both systematic
and repeatable. Investment opportunities often result from catalysts
including spin offs, fallen angels, management changes, corporate
restructures, post IPO and which offer embedded optionality.
EGI has underperformed on a pre-tax NTA basis versus its benchmark
the MSCI World Index (Local) over the medium term. However, we
note the recent short term performance has been better. The dilution
impact of a number of options which were exercised in 2018 does
factor in this pre-tax NTA underperformance versus the benchmark.
At 31 August 2019 EGI was trading at an 18.7% discount to its NTA
and well above its three year average discount of 11.0%. The discount
is also well above the IIR LMI international diversified shares peer
group which trades currently at an average discount of 5.9%. The
current discount also represents the largest discount to NTA since
listing. In our view the current discount provides a possible attractive
entry point for investors who are seeking exposure to a diversified
portfolio of international stocks. If EGI can build on the recent
improved performance, this may lead to a narrowing of the discount.
We also note, that a on market share buyback is currently active as
part of capital management initiative by the Board to try and narrow
the discount. EGI currently holds a Recommended rating from IIR.
EGI also provides investors with a circa 3.1% fully franked dividend
yield. The EGI yield is slightly higher than its benchmark index
yield which is circa 2.5 %. The index provides minimal franking
for Australian investors if accessed through an ETF given the low
allocation of Australian shares in the MSCI World index which is
dominated by US companies. International companies also tend to
be lower yielding than their Australian counterparts. This is one of the
main contributing factors as to why most international equity LMIs
listed on the ASX tend be lower in yield when compared to Australian
only focused equity LMI’s. We note the final dividend declared for
FY19 was in line with the final dividend declared in respect of the
FY18 year with total FY19 dividends unchanged on the prior year.