Why Listed Investment Companies perform better when Options expire

The following article is contributed by guest author Mr. Boyd Peters, an experienced investment management professional.

Many investors like Listed Investment Companies (LICS) for their reliable dividends and franking. In order to get the IPO away LICs issue free Options to shareholders. However because Options hold back LIC share prices and neuter trading volumes the sooner the Options are out of the way the better the share price will perform.

Recently listed LIC Options are now expiring. Despite good portfolio performance and NTAs above the Option price, many share prices remain below that. Investors want Options to expire before buying the headstock as they are uncertain how much dilution there’ll be when more shares are issued. Many are happy to acquire the shares at the same price through an Options Shortfall Placement – which is now expected and desirable to brokers who earn commission this way.

LICs suffer a conundrum with their Options as investors won’t pay above $1 for shares when they can pick up the Options for a fraction of a cent and exercise them at $1. The other side of this is that because the share price doesn’t break $1 the Options only trade at a fraction of a cent – hence the Catch-22. The share price thus sits in a doldrums and volume and share price are suppressed until the Options are out of the way.

This was most recently seen with Bailador Technology Investments (ASX: BTI) – notwithstanding an NTA of $1.26 the share price wouldn’t hold above the $1 Option exercise price prior to expiry.

Next LIC Options expiring

The next LICs with Options expiring are Barrack Street Investments (ASX: BST) and Glennon Capital (ASX: GC1) in mid-August. Barrack St listed in August 2014 and its investment portfolio has returned around 15% p.a since then. Notwithstanding its strong portfolio performance and an NTA over $1.10 its share price has been stubborn in the $0.90s, below the $1 exercise price.

BST’s largest 5 positions at July 1 were IPH Limited (ASX: IPH/ being 11% of its portfolio) TradeMe Group Ltd (ASX: TME/ 9%) Aconex Ltd (ASX: ACX/ 8%) BT Investment Management Ltd (ASX: BTT/8%) and Magellan Financial Group Ltd (ASX: MFG/ 8%).

During the March quarter they added BT, Reliance Worldwide Corporation (ASX: RWC) and Silver Chef Limited (ASX: SIV). According to Barrack Street their new position in BTT was centred around the business’s ability to use its brand and distribution to attract FUM growth; Reliance Worldwide enjoy leading market positions across various geographies and have an attractive growth strategy by way of new and innovative plumbing supplier RWCRWCs; and Silver Chef’s unique offering, particularly its economic business model, long-standing management team and meticulous execution on its long-term strategy, position it as a high-quality growth company.

Post Options lift

Post options can be a strong period for an LIC share price. Bailador’s share price went from $1 to $1.30 in the 8 weeks following its Options expiry and trading volumes lifted also. This was after its NTA adjusted down from $1.26 to $1.16 through new share issues. Clearly the market wants the Options out of the way.

Barrack St might also see a strong post-Options share price bounce. It has flagged at least a 1.5c dividend timed to be post Options expiry.

Not many, and short dated

Options have a valuable place, but care needs to be given to how many are issued, the duration of them and the exercise price. Unfavourable terms neuter an IPO, too generous hold back the share price. An LIC board needs to be experienced to structure them correctly and work hard to see them exercised as quickly as possible.

Disclosure: Opinions are not to be construed as a recommendation or financial advice. The author is not authorised to provide financial advice. Please seek professional financial advice before making any investment decision. The author of this article Boyd Peters does not hold any securities mentioned within this article. The author Boyd Peters may provide some shareholder relations services to Barrick Street Investments. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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