• Christopher Hall

Global Value Fund’s Rights Issue – Good or bad, and what to do about it

Yesterday morning you may have received an email detailing an invitation to buy more shares in the Global Value Fund (GVF).

This invitation is called a Rights Issue and it is not compulsory, although it could be worthwhile. Let’s look at how to decide.

What is GVF?

GVF is an investment company whose shares trade on the ASX.

GVF’s sole purpose is to invest money for us, their shareholders. This structure is called a Listed Investment Company, or ‘LIC’.

What do GVF do?

Effectively GVF buy $1 for less than $1.

GVF buy shares in other companies, and GVF’s speciality is buying these shares at a discount.

Eventually GVF sell the shares for their true value, or an amount more than what they paid for the shares. We as shareholders keep the profits.

Why are GVFs raising Money?

GVF are a ‘Fund Manager’ who make money from managing other people’s money.

The more money they manage, the more money they make themselves to pay their team, analysts and other parties contributing to the success of our investment in GVF.

It’s in our interest for GVF to manage more money, have the best team possible to help provide us with better returns – as long as our investment isn’t negatively impacted.

Will this impact my investment?

No, this raising won’t really have an impact on your GVF investment.

GVF invest money. At the moment, GVF manage about $113m, which is not a lot compared to Warren Buffet’s ~$500b.

A better reference point is to see how much money GVF have invested compared to how much money is sitting in the bank.

Over the last few years GVF has not been restricted in finding investments, rather by having enough money to invest in all the opportunities they have found.

This would indicate that GVF raising money is not a concern for investors.

Won’t my shareholding be diluted?

Having your shareholding be diluted is a problem for most ASX listed companies.

For example, on any given day, BHP only have a set number of mines – or ‘pie’. These mines are effectively blocks of land – which don’t grow, no matter how hard you try. When BHP issue more shares (like GVF are now), the ‘pie’ is split between even more people and that is ‘diluting’.

Like BHP, GVF will also raise money through the new shares.

These new GVF shares are sold for $1.10, approximately the same value as the shares we already own (about $1.10). This means that every new dollar that comes in gets put to work in the same investments that we already own.

The only difference is that GVF will now have more money to spend, and it makes no difference whether it’s an ‘old dollar’, or a ‘new dollar’. Our piece of pie won’t suddenly be shared by more hungry mouths because new investors BYO pie.

We’re not concerned about being diluted in GVF.

What should I do?

There are two ways to look at this:

  1. I was buying more shares anyway:

This is simple: If you were buying more shares anyway, then the rights issue will let you buy more share with no brokerage. A win.

  1. I wasn’t planning on buying more shares right now

The rights issue can be thought of as a discount coupon that expires in a few weeks.

Your coupon lets you buy GVF shares for $1.10 – but only once.

If you can sell your shares for more than $1.10 before the expiry, then sell the number of shares you know you can re-buy (one quarter of what you already own) on the market. Then re-buy your shares at $1.10 and keep the profit.

Note that while this is a great strategy to use with most companies on the ASX, it is unlikely to happen here as it rarely occurs with LICs.

Advanced/ Experienced Investor response:

GVF have been trading at a premium, every LIC manager’s dream.

When an LIC is trading at a premium, the manager should take every opportunity to increase Funds Under Management (FUM) - exactly what this rights issue is doing.

The announcement of this rights issue has evaporated GVF’s premium, taking the share price back to the rights issue price, or Net Tangible Assets (NTA).

In summary, this is a well-timed and well-priced rights issue, which is of little surprise given Geoff Wilson (WAM, WAX, WAA, WLE etc) is on the board of GVF.

Call or email me if you would like to discuss this issue further.

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