Update No. 186 – 24/10/14

The whole foundation of Eternal Growth Partners was based on my view that industry fee structures didn’t properly align the interests of the Fund Manager with the investor. In these pages I frequently pillory the funds management industry for using clients as a revenue source, rather than providing a valuable service and earning a fee. Although as a default, I generally prefer negative reinforcement, this week I will be a little new school and try on a little positive reinforcement.

There is a newly listed LIC (Listed Investment Company) called Future Generation Investment Fund (ASX ticker – FGX). The fund was created out of the stub that remained of Australian Infrastructure Fund (AIX) when they sold all of their assets.

LIC’s are just about a dime a dozen, but FGX is VERY different.

From the prospectus:

“The Company intends to invest in funds managed by Australian Fund Managers who forgo all Management and Performance Fees with respect to the funds managed on behalf of the Company. In addition, the Directors have agreed to waive all their director fees and the Company will seek to engage service providers on a pro bono basis.”

As I understand it, outside of the Auditors, who could not work pro-bono for legal reasons, services across the board are being delivered at no cost to the Company. Interestingly, most of the participating Fund Managers that have been selected are among that rare-breed who actually deserves their management fees. When you strip away (or add back in) the management and performance fees, I expect this group will deliver a very good result for their investors over a reasonable holding period. I suspect even after the 1% annual charitable contribution is made that investors will still end up with an above market return over the medium term.

My initial response as an investor who encourages ethical behaviour from the Fund Management industry was to purchase a holding in FGX as a means of supporting a good concept, but instead I will throw it out there to you fellow EGP investors (and readers). If you are looking to diversify your fund managers, I can think of few better places for you to do so than with a fund that has such a wonderful structure. The usual caveats for buying LIC’s would of course remain, be careful to pay no more than NTA, but FGX’s trading price at time of writing is $1.03 and NTA is something around $1.06, so for a long-term investment, it’s probably a perfectly reasonable starting point. Naturally, this is not investment advice, but for the most part such advice, like the management fees most fund managers charge is worthless – Tony Hansen 24/10/2014


Apr 1st 2011

Jul 1st 2014

Current Price

Current Period

Since Inception

EGP Fund No. 1












EGP Fund No. 1 Pty Ltd. Up by 0.81%, trailing the benchmark by 0.84% since July 1st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 71.75%, leading the benchmark by 40.54% all-time (April 1st 2011).

*1 after 31May 2013 dividend of 2.333 cents per share plus 1.000 cent per share Franking Credit & 31 May 2014 Dividend of 7.000 cents per share plus 3.000 cent per share Franking Credit

*2 calculated based on dividends reinvested

6 thoughts on “Update No. 186 – 24/10/14

  1. ray_jane says:

    free options dilutive ?

    hi Tony ..i have had an eye on a couple of LICs for many months now but I’m waiting to pick them up at below their post tax NTAs..FGX is on my list but the free options concern me …my simple mind questions that they could be a curse or a bonus..say if the share prices was less than the $1.10 exercie price on the 16.09.16 exercise date then wouldn’t the impact mostly be not very much (and actually a curse for those who bought the already traded options) but if the share price had increased above the exercise price then surely that would have to dilute things for the existing full shares wouldn’t it….the new perpetual lic looks good but those options mmm …. i’m trying to get my head around this so whatever you can say to help me understand would be helpful.. thanks jane 

  2. Damien says:

    Interesting find, but wary of the options

    Thanks for sharing this opportunity Tony. Very interesting. There’s a reasonable chance that the 182 million options will exercised at $1.10 in future though, which will dilute NTA, but guess this can be factored into calculations and approach.

  3. Tony says:

    The dilutive options…

    Interesting the two of you make the same point only hours apart. You are correct of course that there is some dilutive risk. The important thing is, the better FGX perform on behalf of their shareholders, the greater the dilution will be, so in some respects, you want the dilution to occur.

    It is also correct that it is relatively easy to calculate an ex dilution NTA, at the moment, the exercise of the options would add to NTA, it is likelier than not when the exercise date rolls around that it will knock a little off NTA. That is worth it to have a properly aligned LIC available – Tony

  4. Tony says:

    LIC’s generally

    Further to your comment Jane, I think the average investor can skew the odds in their favour by selectively using LIC’s in their equity portfolio, buy the better ones when they trade below NTA & sell if they exceed NTA by very much.

    I myself owned a number of LIC’s during the GFC, for most of them, you can build a simple model of their holdings & closely track their NTA. If you can buy these assets at a reasonable discount, especially if the manager has a reasonable longer term record, it can help you squeeze a little better than market returns whilst maintaining a substantial diversification – Tony

  5. ray_jane says:

    simple tips for simple folk

    well i have been pondering this all day and i think that unless a person bought in at the pre float, then buying the full shares at anything like close to the post tax NTA, while the options are still being traded (FGXO), or are still held by the original float purchasers as freebies for exercising at the exercise date, then should the FGX on market share price be close to, or greater than $1.10 it will be a mistake and will have to heavily dilute the post float value for any on market purchasers of the post float full shares at the exercise date.. i like the thinking behind the structure but will wait and watch for the exercise date to pass and see if it still trades at a discount to its NTA or maybe buy in sooner if a big fall in price happens…   

  6. Tony says:


    A simple way to protect yourself Jane, if you wanted to own FGX but found the options concerning would be to buy equal parts of both. If you buy 1 FGX & 1 FGXO (at the moment, the pigeon pair would cost about $1.075 or $1.08 – so still less than the IPO investors paid)  and the NTA is say $1.40 in September 2016, presumably every rational investor would exercise their option, thereby leading to post option NTA of $1.25 per share. Presumably market participants will be aware of this in the lead up to the exercise & FGX share price will tend around the post dilution price.

    If the next 2 years in the market are tough ones and the NTA is say 90c at exercise date, then rational investors will let the option lapse and NTA and share price will presumably remain around 90c.

    Obviously not advice, and patiently waiting in investment markets is generally a wise path, but the point is, you can figure out what the SP should be inclusive of and exclusive of the options – Tony

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