Summary: Contrary to the claims of ASX Closed End Fund (CEF) boosters, the industry is destined to shrink over time. Until now, the protaganists for mergers and conversions have been existing CEFs like WAM/WLE, GVF (aka Staude Capital, Mirabella) and SNC. But outsider activists have now stepped up the pace (e.g. Saba Capital, Harvest Lane). This activity will snowball as precedents start getting set. I'll keep track of the outsider CEF activists in this post.

Outsider activists are gathering for the CEF feast!


1. Harvest Lane Asset Management

In it's June 2023 Monthly Update for its Absolute Return Fund Harvest Lane wrote:

Finally, discounted Listed Investment Companies (LICs) received notable mentions throughout financial media during the month. A large number of ASX listed LICs trade at meaningful discounts to NTA and a handful of managers in recent years have undertaken initiatives to close the prevailing discount, either via a wind up or conversion to a more liquid, open ended structure. 

Our view is that LICs are a fundamentally flawed investment product, and pressure to address significant discounts will accelerate across the board in the years ahead. Indeed, the Australian Financial Review was quick to point out the recent arrival of Saba Capital Management, an investor with a track record of agitating for change at discounted LICs, on the registers of VG1.ASX and PIA.ASX, just two of many that trade at persistent discounts. 

The main argument for LICs is that the closed end structure removes redemption risk to allow for a truly long term investment horizon. In reality, many managers run identical portfolios concurrently via open ended vehicles, reducing the closed end counterparts to little more than pots of trapped capital where the manager continues to draw fees regardless of how poor performance may be. To us, the continuation of such a suboptimal outcome for LIC shareholders is untenable, and we're evidently not the only ones to notice. 

It's delightful to discover a rare instance of the "fundamental flaws" in CEFs (LICs being the main type in Australia) being highlighted by a firm within the Australian finance industry. Yes, CEFs are "pots of trapped capital" where underperformance is rife and can't be escaped - hence the name and mission of CaptiveCapital.

However, whether a nearly identical open end fund already exists or not is irrelevant to whether a CEF should be wound up, they are easy to create. It just makes the exit path even more obvious (e.g. MEC vs Ellerston Global Mid Small Cap Fund).

The continuation of these suboptimal outcomes is untenable but the Australian CEF industry will go down kicking and screaming. The real underlying issue is that active management inevitably underperforms low-cost passive ETF exposure which you can exit fully any time at NAV. So equity CEFs are all destined to trade at bigger and bigger discounts. 

Harvest Lane finally got investors together at Morphic Ethical Equities (MEC) and lo and behold suddenly there were massive changes by MEC to its buyback, dividend and distribution of franking - basically everything possible was done to stave off a EGM vote to convert or wind-up. MEC is slowly self-liquidating.

See: > AFR: Gloves off! Ellerston’s last-standing LIC targeted by M&A arb fund

2. Saba Capital

In 2023, Saba Capital has built over 5% stakes in VG1, PIA and HM1.

Please see this post for details:

PIA - Pengana International Equities LIC - Cheat Sheet

3. Other Activist Funds

A few other activist funds (apart from existing CEFs like WAM) are circling smaller ASX LICs and LITs: Almitas, Samuel Terry Asset Management. And there are the non-activist medium term holders: 1607, City of London.

As described in the About page, CaptiveCapital aims to time entry and exit into CEF conversions and wind-ups and so I do not disclose all opportunities on the public pages of this site.

Also, many substantial stakes do not eventuate into near term discount reversion because:

- The activist needs time to build the size of holding desired without overpaying

- The activist may need to try and finish other opportunities and wait for any discount-closing promises made to play out

- The outsider fund turns out to not be an activist and is passively along for a temporary ride (1607 Capital, City of London)

- The activist receives a sole exit closer to NAV at the expense of other shareholders (e.g. Wilson Asset Management which was in CIE which became WLS)

- Blocking stakes rise or become more substantial due to the difficulty of getting smaller shareholders organised or because of alliances between shareholders.

- The Investment Management Agreement (usually not public) turns out to have inescapable penalties for an early end (e.g. 1% of NAV per year left).