Summary: WAM Leaders (WLE) is the largest Wilson Asset Management LIC ($1.7b market cap). It very actively (300% turnover) invests in large cap ASX200 companies, holding around 50 at a time with ~70% of exposure in the top 20. Up to Dec 2023, WLE and WMI are the only Wilson funds to have outperformed the best alternate passive ETFs (e.g. VAS). However, in calendar 2023, WLE underperformed significantly and I don't view it as a rare active management outperformer in the long run. Out of the Income LICs, WLE has the highest gross yield sustainable for at least a few years.
In Oct 2023, Wilson launched an Open End unlisted trust version of WLE to raise up to $1 billion more in FUM to charge fees on. Logically, this ought to constrain WLE's future premiums to NTA (though logic hasn't penetrated the bubble of PL8 investors which has traded for years at 15-20% premiums despite an Open End version at NAV).
In this post, I focus on the pros and cons of WLE's Closed End structure versus the new Open End structure (Wilson Asset Management Leaders Fund aka WAMLF). Generally, Open End structures are superior to Closed End for all of the reasons I've detailed on this site. Interestingly, the WLE / WAMLF situation is different currently due to particular reasons I explore below.
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| Should WLE investors jump ship to the new Open End version? |
Details:
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1. WLE Key Facts
31 Dec 2023:
Share Price: $1.37. Pre-tax NTA: $1.38. Discount: 0.7%
In NTA terms, since inception (30 May 2016 to 31 Dec 2023), WLE delivered a return of 8.94% annualised compared to VAS with 8.54%:
Note: I've added an estimate of 7c in franking credits (as of 31 Dec 2023) in the WLE NTA return to keep it like-for-like.
In Total Shareholder Return (TSR), since inception (31 May 2016 to 31 Dec 2023), WLE delivered a return of 8.58% annualised which is almost identical to VAS at 8.56%:
In the last 5yrs, the TSR to 31 Dec 2023 was 12.48% annualised for WLE compared to 10.59% for VAS:
2. WLE vs WAMLF Key Insights
WLE and WAMLF will have exactly the same portfolio and fees. The key differences arise from the Closed End LIC structure of WLE vs Open End trust structure of WAMLF. The differences are substantial and dollar outcomes for investors will be different.
WLE Closed End Pros:
- Franking credits from holdings are still passed through in years that performance is negative. For Open End trusts like WAMLF if there are no realised gains then there is no distribution, and thus no franking credits from holdings that year can be passed through (they are lost).
- The current dividend is 9c/year fully-franked so grosses up to 12.86c/year. Divided by the $1.37 share price at 31 Dec 2023 and this is a gross yield of 9.4%. (Retirees with pension super accounts pay no tax and are attracted by yields at such levels). WLE has sufficient profit reserves and franking credits, and will collect enough future franking credits, to keep this gross dividend for at least a few years even if the portfolio has negative performance. For income-focused investors, this stability is very attractive (to an irrational extent as they could sell shares) compared to Open End trusts whose distributions are entirely dependent on realising gains in each year.
- Franking credits retained from prior years are additive to NTA. At 31 Dec 2023 I estimate at least 7c. (I add this for NTA Return comparisons with benchmarks like VAS). WAMLF does not pay tax and franking credits from the portfolio are not retainable from year to year.
- WLE has the potential to trade at premiums or discounts to NTA which can deliver extra returns when buying and selling (especially if estimating the NTA in a spreadsheet). In the last 5yrs, WLE has traded at a premium high of 16% and a discount low of 11%. I expect that if its sustainable fully-franked yield remains among the highest of LICs investing in the ASX300, it will trade at premiums of 1 to 10%. (If WAM cuts its dividend substantially WLE's premium may also expand depending on how many switch.)
- No inherited capital gains tax liabilities. Unlisted Open End trusts often will carry such liabilities so its best to invest just after the 30 June distribution.
- Can buy and sell yourself on-market at any time. WAMLF will only have monthly redemptions at the price of the last day of the month (not the day you decide to submit your redemption). It will take up to 7 days to get the cash after the end of the month.
- No minimums for initial investment, additional investment, holding.or withdrawals. WAMLF has a $10,000 minimum investment for existing Wilson LIC investors, otherwise $25,000 plus minimums for the others.
WAMLF Open End Pros:
- All investors obtain the NAV performance of the portfolio and strategy regardless of when they enter and exit.
- All investors have full exit liquidity at NAV at the end of month NAV value.
- Financial planners pretend to add value by pointing clients toward outperforming funds (after some period of outperformance, which is not a predictor) but for Closed End funds trading at premiums this is a barrier. Being able to obtain the NAV performance in WAMLF will suit many financial planners.
- As an Open End trust, WAMLF doesn't pay tax like a LIC but passes through all tax liabilities to holders. The major benefit is that there is no drag from tax being held as franking credits till distributed.
- There is only one basis for performance in Open End funds: the Total Shareholder Return is identical to the NAV return. This will make WAMLF performance (after all fees and expenses) transparent and directly comparable to other funds and passive ETFs like VAS/A200. Wilson Asset Management's fantasy before fees/expenses performance fiigures won't be possible for an Open End fund.
- The other structural advantages of Open End funds over Closed End (beyond entry/exit at NAV) will apply. The main driver is that all actions the fund takes (including any that might benefit the manager at the expense of shareholders) are incorporated in the sole NAV performance return the fund is judged by.
- If investors don't like the actions, direction or prospects of WAMLF at any point, they can simply vote with their feet and fully exit at NAV. Closed End fund investors are often captive (if they can't fully exit at NAV) and are forced to waste time contacting the fund, complaining on Hotcopper, or trying in vain to get a successful vote to occur.
Will enough WLE investors (or potential buyers) now favour WAMLF such that it affects the medium term WLE demand/supply and premium/discount?
- In this case, due to the particular reasons and circumstances noted above, I don't think so.
- With the addition of WAMLF, I expect future opportunities to trade WLE based on some of the measurable (i.e. objective) factors discussed above.
Links:
> YouTube: Wilson Asset Management Leaders Fund Presentation (Oct 2023)
