New & innovative LICs: Buffett and Aurora Sandringham DIT yield investor interest

Recent years have seen a stream of listings in the Listed Investment Company (LIC) sector, with offerings ranging from traditional Australian equity funds through to funds specialising in resources and absolute return strategies. The market capitalisation of the sector has not surprisingly grown from $9.1b to $16.3b over the last 2 years, and continues to rise.

New and innovative structures and strategies are continually being developed, along with features which aim to address investor concerns about their investments trading at a discount to the Net Asset Value (or NAV) of the fund.

Examples of new listed product developments include upcoming listings such as Aurora Sandringham Dividend Income Trust (ASDIT) and Global Masters Fund Limited (Global Masters).

ASDIT is unique in that it is an open-ended fund (as opposed to being a close-ended fund like most LICs) and has a redemption facility which allows investors to redeem units at Net Asset Value (NAV) on a monthly basis (less a buy sell spread of 0.2%). This will ensure that the Fund will trade on the ASX around NAV at all times.

According to the Product Disclosure Statement, ASDIT aims to take advantage of the changes in the market prices of shares around the announcement of their half yearly and yearly results. The manager therefore buys shares following the announcement of their interim and full-year results and plans to hold the shares for at least 45 days to capture dividend income and any associated franking credits. The fund will focus this strategy on the 30 largest companies listed on the ASX by market capitalisation, with no one stock accounting for more than 15% of the trust’s net assets. Leverage may also be applied when considered appropriate.

This strategy is similar to the Dividend Yield Play (DYP) portfolio study recently conducted by ASX. The strategy produced a 20% pa return (after costs) over the 2004-05 financial year and illustrated the benefits of trading for dividends using leverage.

Global Masters is also unique in terms of its structure and underlying investments. According to the Product Disclosure Statement, the fund intends to invest a substantial proportion of the company’s assets (up to 80%) in Berkshire Hathaway Class A stock which is listed on New York Stock Exchange and is currently trading at US$82,500 per share (as at 26/09/05). Global Masters aims to provide Australian investors with access to long-term capital appreciation through investments in quality international portfolios.

Global Masters has a close-ended structure, however has put in place, similar to ASDIT, a buy-back facility which will allow investors to redeem units at NAV on a yearly basis (less an administrative fee of 5%).

These redemption and buy-back initiatives aim to address the current phenomenon of LICs trading at a discount to their underlying asset value. For example, a fund manager may be producing returns on the portfolio of 20% pa, however investors may not be rewarded for the performance due to the forces of market supply and demand.

The risks of these investments, as with any managed investment, include market risk and manager or key person risk.

To find out more information regarding these new and innovative funds, visit the Listed Managed Investments website at www.asx.com.au/LMI or view the Product Disclosure Statements at http://www.aurorafunds.com.au and http://www.globalmastersfund.com.au

For more information regarding the ASX Dividend Yield Play (DYP) study, visit http://www.asx.com.au/yield