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Why I Like The Ellerston & Spheria Emerging Companies ASX LICs

If you ask me, the Spheria Emerging Companies LIC (ASX: SEC) and Ellerston Global Investments LIC (ASX: EGI) look tempting.

Spheria Emerging Companies LIC (ASX: SEC)

Although SEC is only about 18 months old, the two key portfolio managers have worked together for around 6.5 years. This includes a three-year period together at Schroders Investment Management. During this phase they achieved a return of 11.5% per annum net of fees for the smaller companies’ fund.

When they started the Spheria Australian Smaller Companies Fund they continued in similar form, initially posting a 12-month return net of fees of 11.6%.

I prefer a much longer record to judge performance on than 18 months. Ideally, the period to assess fund manager performance will also include a bear market. It’s pleasing to have the longer track record of the Portfolio Managers before they launched the LIC.

It’s worth noting that SEC has more of a traditional ‘bottom-up’ value approach compared with other fund managers. In recent years their style hasn’t necessarily suited the markets we have witnessed here in Australia or overseas. Therefore, I think the companies they own are more likely to show clear visibility in future cash flows and have strong balance sheets.

My Take

For those wanting to outsource some ASX small cap exposure to an active fund manager SEC might be worthy of further thought.

Ellerston Global Investments LIC (ASX: EGI)

EGI will become 5 years old this year, having listed in late 2014. The performance numbers they quote in their most recent NTA report shows little deviation from their benchmark.

EGI runs a portfolio that is quite benchmark unaware. They run a mid /small cap bias with their portfolio of global stocks. They have also at times run high cash balances and used options to protect some of the downside. Such strategies have made it more difficult to keep up with global benchmarks that have been led by a narrow group of leading stocks.

Ellerston have extensive experience running global strategies that dates back a lot longer than the life of this LIC. Despite this, their management fees are cheaper than many of their rivals, with their base management fee here being 0.75% per annum.

Accessing this LIC at a sizeable discount may then offer investors a good chance of above-benchmark returns over the medium term.

Strong Buyback & Dividend Policy

EGI is regularly buying back shares at a discount, which is a low-risk way to assist in growing the NTA per share.

They also trade with a dividend yield of above 3%. This looks very sustainable when you examine their history over the last couple of years. It’s important to note their current healthy dividend profit reserve.

My Take on EGI

Investors with international exposure in their portfolio focused on larger shares may find EGI useful for added diversification. Smaller shares globally have also been lagging in recent times and are worth watching for opportunities.

The other point of difference with their flexibility to hedge currencies could be more tempting if the AUD weakens from here.

Disclosure: At the time of publishing, Steve does not have a financial interest in any of the companies mentioned. 

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