Summary: While Independent Investment Research, Bell Potter, Livewire, Morningstar, the AFR, Affluence Funds Management and others continue to cover LICs and LITs as investments, none sound the alarm on the implosions coming.

This site has fully covered all reasons retail investors should avoid ASX Closed End Funds, especially equity ones. And the summary remains overwhelming and unrebutted: > CaptiveCapital's 95 theses on why ASX Closed End Funds should be eliminated

Nevertheless, some of these CEFs are imploding currently. During Oct-Nov 2024, I'll update this post to briefly note the major red flags.

1. NAOS LICs: NAC, NCC, NSC

I've written extensively about undisclosed Total Expense Ratios (TERs) - including leverage costs - driving underperformance and, for the small CEFs, actual death spirals. I warned specifically about the NAOS LICs here: > Which CEF Management Fees are most misleading? 

Sadly, many NAOS shareholders haven't yet taken heed.

In its 1 Oct 2024 presentation NAOS argues that despite their most recent annual performance being -23%, -27% and -28% its LICs have "potential to grow NTA significantly over the long term" in part due to the fact its LICs are geared.

Now, as of 16 Oct 2024, NAC is trying to raise more capital at NTA from shareholders.

The reality is that NAC and NCC are in terminal death spirals due to their TERs (with debt costs a key factor) and NSC is close behind. Remember that loans have LVR covenants and as NAOS LIC NTAs fall, desperate measures become likely.


Of the 3 LICs, NAC is closest to implosion. Management fees alone chew up over 4% of Net Assets (1.925% of Gross Assets - thus include all debt). Interest Expense is now eating over 4.2% of Net Assets. The Total Expense Ratio at 30 Jun 2024 was over 11%! This means NAC has to generate 11%/yr just to get to break even.

As of 30 Sep 2024, the situation is (predictably) even worse. Pre-tax NTA after realised tax is down from 53c to 45c thus Net Assets (excluding the Deferred Tax Asset representing tax losses) are now down to just $19.3m!

While the CEF boosters claim discounts are opportunities, this is the actual outcome for the majority of sub-scale CEFs with blocking stakes - the TER and extractions simply burn through the capital while retail holders are trapped.




Note that as of 24 Oct 2024, NAC is trading at 49c on an NTA of less than 45c: an over 10% premium! This simply goes to show how misunderstood and price-inefficient ASX LICs are. NAC deserves to be trading at a discount well over 40%. So NAC's discount is currently mispriced by more than 50%! (Search for "discount factors" on this blog, and then also add discounts for the illiquidity and NTA mispricing of large NAC holdings like ASX:MOV).

Retail investors can pray Geoff Wilson will bail out each tiddler, but with a market cap obliterated to just $20m, there's little value to Wilson Asset Management compared to the overhead costs and effort.

2. Benjamin Hornigold Ltd (BHD)

You won't find much written on BHD but I recommend:

> Livewire: Looking out for pirates in LIC land

"Governance and transparency on LICs is generally poorer than retail managed funds (which seems to attract some less ethical operators to LICs).

Related to this, unlike unlisted managed funds, it is often difficult to sell a poorly performing LIC for anything near NTA. In some extreme cases you can’t sell them at all"

> Livewire: The LIC/LIT "mis-selling crisis" is grossly exaggerated and the key issues widely misunderstood

"There is no doubt that these two funds have been disasters for investors although there were some clear early red flags. (I tried to warn some investors off these funds in mid-2017 and wrote about them in a late 2018 Livewire article “Looking out for pirates in LIC land”. Perhaps if ASIC had been more proactive, HML and BHD wouldn’t have morphed into the pronounced and prolonged shipwrecks they became. 

In any case, given fraudulent funds are a rarity in the LIC/LIT space, I believe they should be excluded from the analysis..."

Dominic McCormick was "contracted by LICAT to provide independent commentary and input on issues impacting the closed end listed investment fund space" when the mis-selling of LICs/LITs and proposed ban on commissions (stamping fees) was being hotly debated. The change in tune between the two articles is notable.

Contrary to Dominic McCormick's opinion, BHD and HML were not CEF exceptions that somehow got through the tight filter of the ASX and the competent scrutiny of ASIC. The ASX and ASIC are entirely useless at preventing retail investors from being ripped off in the Closed End Fund sector.

Even now, years later, BHD is still going under new Directors/management, supposedly only existing to recover substantial debts from prior Directors/Related Entities. But the annual reports reveal it is rapidly imploding as legal fees, Director fees and other expenses consume an ever-growing proportion of Net Assets. Meanwhile, invested asset returns cannot hope to cover total expenses, and the NTA is in a classic Total Expense Ratio (TER) death spiral. BHD's Total Expense Ratio in 2024 is now up to 14.3%!



3. Glennon Small Companies Ltd (GC1)

Uncoincidentally, Michael Glennon is among the new Director crew in BHD but also has a longrunning LIC called Glennon Small Companies (GC1). It's Total Shareholder Return (TSR) performance since 31 Aug 2015 has been horrendous: -1.18% annualised versus 8.84% for VAS and 9.39% for VSO.



Herein lies the issue with limiting concern in CEFs (and on the ASX more broadly) to just clearly illegal ripoffs. There are many legal ways to rip off retail investors on the ASX. And, as I consistently argue, in Open End funds you can at least escape at any time at NAV, but in Closed End funds you are captive.

GC1's discount is consistently over 20% and as high as 40%; there's no investor demand and holder's just want out! Surely, a tiny $23m fund, started in 2015, with a TER of over 3.6%, performing so atrociously, should be wound up? No chance! You'll have to prise the money out of the insiders cold dead hands.

I've detailed the numerous legal ripoffs that plague the ASX CEF sector, especially LICs which have the full discretion of a company to enter into all kinds of transactions. (See: CaptiveCapital's 95 theses on why ASX Closed End Funds should be eliminated). The GC1 2024 annual report revealed a curious tidbit about transactions with Metgasco (ASX:MEL) but you'd need to read the Metgasco annual report to find the complicated details:

Metgasco 2023-24 annual report

This is what can happen to LICs in the wastelands as capital shrinks: increasingly complex schemes to use loans or non-standard investments, and potential conflicted or exploitable arrangements with other entities or Directors. I doubt the vast majority of GC1 retail investors know their LIC has so much unsecured debt tied up with Metgasco. Indeed, do they know Michael Glennon is the largest debt holder and what potential conflicts this causes? Yet this is highly material information that should be highlighted in timely ASX announcements for GC1.


4. Duxton Water Ltd (D2O)

Not actually a LIC but is covered as one. It's been touted as an alternative asset income fund (water rights) and even Phil King's Regal Funds bought in. However, the dividend yield is not based in actual earnings, and D2O has simply been relying on debt and asset sales to offset insufficient and highly-variable operating cash earnings.

D2O is marketed as a reliable income investment offering a steadily increasing fully-franked dividend with an attractive gross yield of 6-7%: 


In reality, it ofen doesn't generate operating profits to cover its dividends so they subtract from Net Assets instead. D2O has a very high Total Expense Ratio (TER) of ~4.7% not including Performance fees or Impairment of water entitlements. Perhaps their auditor should point out to them that Finance expenses are part of Total Expenses:


Duxton Water has underwritten its Dividend Reinvestment Plan at discounts to NTA without seeking  shareholder approval, conducted a significant capital raising at large discounts to NTA, and is often paying more on its borrowings than it earns from the assets they've funded.

D20 appears to be targeting retirees obsessed with reliable, fully-franked dividends who don't care about the share price (total return) - "the kids are going to get those." Such retirees might want to consider how reliably Duxton Water is actually earning its dividends and read my other post on this topic: > Staying ahead of the retiree Income LIC shakeout


Links:

> Professional Planner: Evans Dixon case shows it matters who else is investing in your LIC