A Better Bet than an LIC?

One of the frustrations with listed investment companies, or LICs, is that they often trade for long periods at a discount to their net tangible assets, which reflects the current market value of the stocks in the portfolio.

Usually, poor performance is to blame, but unless you think the portfolio is undervalued, it makes perfect sense for an LIC to trade at a discount due to the fee structure. Sometimes the fees are very low, but others with performance fees can really add up over time. The best time to buy an LIC is when the portfolio is undervalued, and it trades at a discount to the market value of the portfolio adjusted for fees.

Relics of the 80s such as conglomerates, like Wesfarmers, also regularly trade at a discount to the underlying value of their various businesses. This explains why there are so many spin offs in the US, as it’s still a reliable way to close the discount and create value for shareholders.

We wouldn’t expect the Wesfarmers spin-off of Coles to create much value, if any. The best spin offs are where the sibling is small compared to the parent, which has been mismanaged by the parent and has struggled to get the money it needs to invest and grow revenue. Coles doesn’t satisfy any of these conditions.

While we are bottom up global investors, one theme currently running through our portfolio is a collection of holding companies that we don’t believe deserve to trade at their current discounts to the value of their underlying investments.

Take Chinese tech juggernaut Tencent, for example. We recently sold our position in Tencent after it reached our assessment of fair value, but we retained an interest through technology holding company Naspers. Let’s see why.

Tencent’s US$476bn market value makes it the largest Chinese company by market capitalization. It’s PC and online gaming division has grown incredibly fast over the past decade, but there is much more growth to come from its PayPal-like online payment app and social media apps.

To give you a sense of how embedded Tencent’s app is in the lives of Chinese citizens, consider that in February 2018 the number of active monthly users on its free mobile messaging app WeChat reached 1bn. reportedly, more than 400m of them spend more than two hours per day on the app.

Co-founder and entrepreneurial CEO, Pony Ma, has a 9% stake in the company and, together with Alibaba CEO Jack Ma, made the top 20 in the Forbes list of the world’s richest people for the first time in March 2018. The key point is that Tencent is a wonderful business.

Naspers is listed in South Africa and is being credited with the best investment of all time. It paid US$37m for a third of Tencent many years back, which is now worth US$157bn.

Naspers also has some comparatively small investments in other internet companies, such as Flipkart, India’s Amazon equivalent, Mail.Ru, a Russian Internet company; and, an online classifieds advertising business with market leading positions in emerging markets such as India, Brazil, and Poland. Yet its stock currently trades at a 41% discount to its Tencent holding alone. It’s almost like buying Tencent for half price.

Similarly, our investment in America’s second largest internet provider Charter Communications is through holding company Liberty Broadband, whose primary value is its 22.7% shareholding in Charter.

“The best time to buy an LIC is when the portfolio is undervalued” 

This aligns our interests with Liberty Chairman John Malone, who effectively controls Charter through Liberty Broadband. It also offers a second layer of value as both Liberty Broadband and Charter trade at a discount to fair value in our view. A discount on a discount if you will.

Naspers, Tencent, Liberty Broadband, and Charter all have experienced management teams with skin in the game and track records for achieving results. John Malone for example, is a respected industry veteran with a relatively low public profile despite compounding capital at 30% for two and a half decades, more than twice the return of the S&P. We’re delighted to partner with these founders at a significant discount to fair value.

Buying complicated businesses can be perilous for investors that don’t spot all the risks, but unravelling complicated holding structures in high quality businesses has given us the rare potential for higher returns with less risk.

Nathan Bell, Head of Research, Peters MacGregor Capital Management.
Disclosure: Peters MacGregor Capital Management Limited holds a financial interest in Liberty Broadband and Naspers through various mandates where it acts as investment manager.