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Shareholders will be hoping that the skyrocketing Rumble Resources Ltd (ASX: RTR) share price can find another burst of energy today after it started its major drilling program.

The zinc-lead explorer announced it has commenced diamond and reverse circulation drilling at its prized Earaheedy project and is targeting a depth of at least 30,000 metres.

Why the Rumble share price has surged

The Rumble share price surged over 270% to 67 cents since mid-April after management unveiled a major Zinc-Lead discovery at its Chinook prospect. Chinook is within the Earaheedy project.

This latest drilling campaign will help the explorer get a better understanding of the style of mineralisation and scope out the discovery.

You never know, it may even make further new discoveries while they are at it.

Drilling campaigned funded from capital raise

Rumble won’t have an issue funding its drilling program, which is typically a very expensive exercise. But since it raised $40 million, management is confident it can expedite the scoping out of the discovery at the Chinook and other regional prospects.

Chinook has so far been the star of the show. Rumble fast tracked two holes for assay that confirmed a major discovery. But 24 other holes have assays pending.

Rumble is hoping to repeat its success with its Magazine prospect, which is just south-east of Chinook. The assays from the seven holes it drilled for 940 metres are pending too.

Another catalyst for the Rumble share price

The results from these assays are probably a bigger catalyst for the Rumble share price than today’s news.

But there is no exact timing on when these will be made available. Management was only willing to say that the results are forthcoming.

“Assays are anticipated shortly,” said Rumble in its ASX statement.

“Once all assays are received and analysed, Rumble will release a comprehensive announcement of the results and the next steps, which include this drill program.”

Project background

The Earaheedy Zinc-Lead Project is located approximately 110km north of Wiluna, Western Australia.

The project is 75% owned by Rumble with the balance held by Zenith Minerals Ltd (ASX: ZNC).

The prices of zinc and lead have joined the commodity supercycle party and have risen strongly over the past year.

While its mainly lithium that is dominating headlines when it comes to the electric vehicle revolution, lead is also used in batteries.

Zinc is used mainly to galvanise steel, but some experts believe zinc-ion batteries are a better alternative to lithium-ion for some applications.

More reading

• The BPM Minerals (ASX:BPM) share price is up 145% today. Here’s why
• Up 760% in a year, the Rumble Resources (ASX:RTR) share price is falling today
• The Rumble Resources (ASX:RTR) share price is surging 26% today

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The Airtasker Ltd (ASX: ART) share price will be on watch as it comes out of a trading halt today. This follows the company’s update on its recently launched share placement.

Before being temporarily halted at market close last Thursday, Airtasker shares closed at $1.08.

Quick take on Airtasker

Established in 2012, Airtasker is an online marketplace that allows users to outsource everyday tasks to people who are seeking work. Jobs can range from home cleaning, office admin, handyman work, photography, computer and IT support, among others.

Airtasker makes its money from a service fee that is deducted from the agreed offer price of the services.

What was announced?

Airtasker shares could be on the move today as investors digest the company’s impending share dilution.

According to this morning’s release, Airtasker advised it has successfully completed a $20.7 million fully underwritten share placement. Offered to institutional, sophisticated, and professional investors, the placement listed the new ordinary shares at $1 each. This represents a discount of 7.4% on the company’s last closing price of $1.08 on 20 May 2021.

Over 20.7 million new shares will be issued, reflecting around 4.9% of Airtasker’s fully diluted pre-offer issued share capital. The placement received strong support from both new and existing domestic investors. However, the company noted that the allocations of the shares were heavily weighted in favour of existing shareholders.

The newly created shares will be issued using the company’s existing placement capacity. Under listing rule 7.1, this allows up to 15% of its shares to be issued without shareholder approval.

The monies raised will be primarily used to fund the Zaarly Inc. acquisition, a United States-based local services marketplace. In addition, Airtasker will seek to further expand into key city markets across the United States and the United Kingdom.

Share price summary

Since Airtasker’s successful initial public offering (IPO) listing in late March 2021, the company’s share price has remained relatively flat. After accelerating more than 120% within the first few days of listing, profit taking took hold, sending Airtasker shares lower.

On valuation grounds, Airtasker presides a market capitalisation of roughly $424 million, with close to 393 million shares outstanding.

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There’s a small-cap ASX share that’s more than doubled in the past year, but a couple of fund managers reckon there’s more upside yet.

Non-bank money lender Wisr Ltd (ASX: WZR) was trading at 15 cents 12 months ago, but after market close on Monday it had spiked up to 32 cents.

According to Shaw and Partners portfolio manager James Gerrish, the company has an “exciting” 1 to 3 years ahead of it.

“You take a bunch of loans and create a security out of them. And you sell those loans on a set yield,” he said in his Direct From The Desk podcast.

“We hold Wisr in the Market Matters Emerging Companies portfolio. We’re bullish on that stock.”

Millennials + gen Z = a huge market

Shaw and Partners senior analyst Danny Younis reckons non-bank lenders have a big advantage with younger consumers.

“Millennials and generation Z are less likely to use cash these days. They’re less likely to use credit cards these days,” he said in the podcast.

“And they’re very distrustful of the big four banks.”

This factor gives Wizr a massive total addressable market (TAM) lending just in this country.

“The market is huge. Right now the TAM is $100 billion in Australia,” said Younis. 

“And a big chunk of that is credit cards… Credit card debt in Australia is running at about $40 billion. That is a huge issue.”

Wisr shares have 70% upside

Despite the stock doubling in the past year, Shaw and Partners have a 55 cent price target for Wisr. This is another 70% up from the current level.

“The key over the next 12 to 18 months is a couple of things. One, you need to get customer numbers up — go from 400,000 up to a million,” said Younis.

“The second is to keep your bad debts low. So you want to continually have a prime book. You don’t want to be a subprime lender.”

Younis and Gerrish were complimentary about the people in charge at Wisr.

“The management team is very, very strong… They’re really focused on customer analytics and data analytics, and utilising technology to really drive that adoption rate,” said Younis.

“When they had their investor day 3 or 4 months ago and we finally got to meet them, it really proved to me this company is thinking ahead of the curve.”

Younis added the chief executive Anthony Nantes formerly worked for small business lender Prospa Group Ltd (ASX: PGL).

“A really great background in this whole lending space… and he’s got a large chunk of shares.”

Wisr currently sits at a market capitalisation of $345 million. Adcock Private Equity Pty Ltd is the biggest shareholder with a 15.8% stake.

More reading

• Here’s why the Wisr (ASX:WZR) share price is up 5% today
• Why the Wisr (ASX:WZR) share price is rocketing 6%

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The TechnologyOne Ltd (ASX: TNE) share price will be one to watch closely today.

This follows the release of the enterprise software company’s half year results this morning.

How did TechnologyOne perform in the first half?

TechnologyOne was a strong performer during the first half of FY 2021, thanks largely to continuing strong demand for the TechnologyOne Global SaaS ERP Solution.

According to the release, for the six months ended 31 March, TechnologyOne reported a 5% increase in total revenue to $144.3 million. This was underpinned by a 41% jump in SaaS Annual Recurring Revenue (ARR) to $155.8 million thanks to a 21% increase in large-scale enterprise SaaS customers to 576.

Due partly to a 5% reduction in expenses thanks to significant efficiencies, the company’s profits grew at an even quicker rate. First half profit after tax was up 48% over the prior corresponding period to $28.2 million.

One slight disappointment was that its cash flow generation was negative $2.9 million. However, this is expected to be stronger over the full year and didn’t stop the TechnologyOne board from increasing its dividend by 10% to 3.82 cents per share.

Management commentary

TechnologyOne’s CEO, Edward Chung, commented: “I am pleased to announce that we have delivered our 12th year of record first half profit and revenue and record SaaS fees.”

“Our Global SaaS ERP is the future of enterprise software. It provides our enterprise customers a mission critical solution to run their entire business on any device, anywhere at anytime. It also allows them to innovate and meet the challenges ahead with greater agility and speed, without having to worry about underlying technologies. This makes life simple for them.”

Looking ahead, Mr Chung said: “As in previous years, our first half result is not necessarily indicative of our full year. In particular, as we continue to aggressively grow our SaaS business we will also continue to reduce our legacy licence fee business, which will be down approximately $7m over the full year. While this has a significant immediate impact on our P&L over the full year, this is an integral part of our strategy to grow our SaaS business and the recurring revenue base.”

Outlook

Despite previously stating that its second half would be the stronger half in FY 2021, this isn’t expected to be the case any longer.

Management is guiding to a full year net profit before tax of $94.3 million to $98.6 million. This represents year on year grow of 10% to 15% on an underlying basis.

Looking further ahead, management is targeting ARR of over $500 million by FY 2026. And thanks to the economies of scale from its Global SaaS ERP solution, it also expects continuing profit before tax margin expansion to 35%.

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Ask a Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In Part 2 of this edition, Katana Asset Management’s co-founder Romano Sala Tenna reveals 4 ASX shares every investor should consider adding to their portfolio.

(You can find Part 1 of the interview here).

We covered the key criteria an ASX share needs to meet before you’ll consider buying it in Part 1 of our interview. Flipping that, when do you decide to sell out of a share?

That’s a harder thing. There’s an enormous amount of work that’s been done on theories of when to buy. When to sell hasn’t received the same sort of air time.

We do try to look for a tangible change in sentiment as indicated by technical signals.

We can buy a company and it can reach its price target where we value it. But if the sentiment is strong –then we’re prepared to hold the course on some of these stocks. For example, over the past year or two, we experienced tech stocks trading above their long term discounted cash flow valuations.

By the same token, when we see a break in sentiment, then we’re prepared to take some off the table. We generally do that in stages, not sell the holding out in one parcel.

A good example is FMG [Fortescue Metals Group Ltd (ASX: FMG)].

We established a trade on the last pullback around $19 and sold half at $24.40 when the technicals were turning. We’re close to selling the balance. We think the sentiment, based on what we’re seeing, is probably turning down in those companies.

What was your best performing investment over the past 12 months?

Our number 1 contributor to benchmark outperformance over the last 12 months is Mineral Resources [Mineral Resources Ltd (ASX: MIN)], which is an ASX 100 company. It’s a company we’ve invested in since 2006 and traded actively. Over the last 5 years, we’ve averaged 3.3% of the portfolio in Mineral Resources, but it’s ranged from 0–8% over that time frame.

One of the things we do is get to know companies, very well. And then we take advantage of the month to month fluctuation in share prices,

What attracted you to Mineral Resource shares?

One of the things we really like about Mineral Resources is that they’ve got 2 real drivers from here.

First, they’re looking to grow their production from 20 million tonnes per annum to 90 mtpa over the next 3-5 years. So even though we’re expecting the price of iron ore to come down, that’s going to provide a huge buffer in terms of volume growth.

The second thing is they have the largest hard rock lithium mine in the world, Wodgina, which is currently on care and maintenance and not contributing anything to earnings. But what we’re seeing right now is that the market for lithium hydroxide and lithium carbonate is firming up quite solidly.

And we expect to see, in the not too distant future, that mine will be brought out of care and maintenance and back into production. And that could be quite a substantial revenue generator

You have a strong focus on risk management. Part of that involves your flexibility to move to higher cash levels if required. How did that play out in the lead up to the February 2020 crash and over the months that followed?

That’s a great question and really comes to the core of what we do.

We were sitting right about at 20% cash in early February [2020]. And we were tracking COVID very closely from late December. But by mid-February, we still had no idea as to the magnitude of what was about to transpire and how it would spread.

What we were nervous about is that by late February the Nasdaq reached a record high, while we’re getting very clear daily reports out of China that COVID was having a profound impact on one of their major factory districts. So we started to get the view that global supply chains would be notably impacted. And Chinese demand for a variety of goods and services, especially things that Australia produces, would be impacted.

It looked like the world wasn’t giving this any credence. So, we started to move cash, around 35% in cash before the bottom fell out of the market. Ideally, we would have liked to have a bit more.

But by the 13th of March, I wrote a piece saying “now’s the time to buy, because we’ve reached peak fear”. So, we were down to about 7-8% cash by the third week of March.

We would have gone lower, but we were under the impression that there was going to be a plethora of capital raisings coming down the pipeline. And we wanted to keep aside some capital.

Nonetheless, it set us up for outperformance over the next 12 months.

What are a few top ASX shares you think our readers should consider adding to their portfolios?

We’re watching gold closely to see if there’s a confirmed breakout there. Gold share valuations are very good. If we get a confirmed breakout in the gold price there’s going to be some good upside. We’re not there yet, but we’re watching it very closely.

I think Regis [Regis Resources Ltd (ASX: RRL)] is outstanding value. The acquisition they made was poorly timed and poorly priced, when they picked up 30% of Tropicana [gold mine] from IGO [IGO Ltd (ASX: IGO)]. Not poor as in a bad asset. I think that’s a very high-quality asset, but I don’t think they needed to do that when they diluted their capital base by so much.

But if you look at consensus analyst forecasts for Regis, now it’s 6.5 times earnings for the coming financial year. And it’s one of the highest paying dividend-yielding stocks in the gold space, with high free cash flow, and 2 tier-1 assets… I think that’s the pick of the gold stocks at the large end.

On the small end, there are probably 10 gold stocks I could mention that are worth taking a look at. But there’s a lot more of a speculative element to them.

You mentioned energy prices earlier. Do ASX energy shares stand out for you?

In energy, there’s a massive disconnect between where the oil price and LNG spot prices are versus where a share like say Woodside [Woodside Petroleum Ltd (ASX: WPL)] is trading.

Last time the oil price was here, Woodside was at $34 per share. Now it’s at $21.88 per share.

If you look at the LNG price, you can actually sell LNG cargoes in the spot market right out to March next year, almost 12 months out, at north of $10 per MBTU. If you go back a few months ago you’re looking at $4.50–5.00 for spot cargoes. So it’s in the vicinity of double that.

Now we could always be wrong. We could always see the oil price retrace and the LNG spot price retrace substantially. But I think it’s more likely that we see a reverse there and a recovery in Woodside.

We’ve also been doing a fair bit of work in the copper space and finding ways to play that. Copper is at multi-year highs and could potentially push into record highs here.

Any other promising ASX 200 shares?

You also have to be looking a little bit to where most people aren’t looking. We’re trading Elders [Elders Ltd (ASX: ELD)] as a short-term momentum/earnings growth play. I still think there’s more to come there.

And some of the shopping centre REITs [real estate investment trusts] are being treated like they’re dinosaur assets. But we have a different view on that.

We actually see things like SCG [Scentre Group (ASX: SCG)] as being monopolistic assets. Imagine a 40-acre shop in the middle of your suburb; trying to replicate that asset just isn’t physically possible to do.

As these centres continue to morph into life centres, I think there’s going to be more growth than is currently forecast. And you’re not going to be able to get 40 acres and get a Council to sign-off to build a competing centre. Who wants a shopping centre next door?

I think they’re going to be solid long-term property banks that morph into lifestyle centres with great upside.

**

(You can find Part 1 of the interview here).

More reading

• 5 things to watch on the ASX 200 on Tuesday
• Are ASX 200 iron ore shares in for a rough ride?
• Why AnteoTech, Fortescue, Synlait, & TPG shares are tumbling lower
• ASX 200 Weekly Wrap: ASX whipsaws in volatile week
• 5 things to watch on the ASX 200 on Monday

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Some ASX dividend shares might be able to pay retirees steady income in retirement.

Plenty of businesses that were known as dividend shares in the S&P/ASX 200 Index (ASX: XJO) cut their payments in the COVID-19 year of 2020. Commonwealth Bank of Australia (ASX: CBA) and Sydney Airport Holdings Ltd (ASX: SYD) were just two that had to implement cuts.

But these two ASX dividend shares increased their payments in 2020 and have done so again in the first half of FY21:

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

Soul Patts, an investment house, increased its dividend by 3.4% to 60 cents per share. The FY21 interim dividend was grown by 4% to 26 cents per share.

The business declares dividends from the cash it receives from its investment portfolio, rather than accounting earnings.

The net cash flows from investments received by the ASX dividend share in FY20 was 49% higher than FY19. It’s the only company in the All Ordinaries (ASX: XAO) that has increased its dividends every year for 20 years.

It has investments in plenty of other ASX shares like TPG Telecom Ltd (ASX: TPG), Brickworks Limited (ASX: BKW), New Hope Corporation Limited (ASX: NHC), Milton Corporation Limited (ASX: MLT) and Bki Investment Co Ltd (ASX: BKI).

Management explain that one of Soul Patts’ key advantages is a flexible mandate to make long-term investment decisions and adjust the portfolio by changing the mix of investment classes over time.

Soul Patts Chair Robert Millner said:

Our aim is to pay a stable and growing dividend year on year. During the GFC many companies cut their dividends while WHSP was able to increase dividends and we are seeing the same thing occur this year as a result of our diversified portfolio and long-term investment decisions.

At the current Soul Patts share price, it has a grossed-up dividend yield of 3%.

APA Group (ASX: APA)

APA is one of the biggest infrastructure businesses on the ASX. It’s also the ASX dividend share with one of the longest consecutive distribution growth streaks, aside from Soul Patts. That consecutive improvement goes back more than a decade and a half.

In FY20 APA grew its overall distribution by 6.4% to 50 cents per security. In the FY21 interim result, it grew the distribution by another 4.3% to 24 cents per security.

It owns a wide array of energy assets. Predominately, its assets relate to gas pipelines, gas storage and gas energy generation. APA also has a growing portfolio of renewable energy assets.

The business funds its growing distribution by the cashflow from its assets and projects.

APA says that it has maintained a consistent growth strategy and has built a significant portfolio of energy infrastructure assets that are essential today to ensuring the ongoing supply of gas and electricity for Australians.

The company believes the pool of investment opportunities remains significant. The US remains an attractive opportunity and it remains focused on applying its disciplined approach to finding the right investment there. At the current APA share price, it has a current distribution yield of 5.4%.

More reading

• 5 things to watch on the ASX 200 on Tuesday
• ASX 200 up, Zip rises, Aristocrat Leisure reports
• Are ASX 200 iron ore shares in for a rough ride?
• Why is the AMP (ASX:AMP) share price falling again today?
• How to tell if an ASX 200 share is risky

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The A2 Milk Company Ltd (ASX: A2M) share price just can’t seem to catch a break of late, tumbling on downgrade after downgrade. Without the A2 protein milk seller’s growth engine in China, positive investor sentiment has waned in a big way.

While it has been a bleak time for the Australian milk company, things are looking brighter further afield. In the United States, there is a newly listed alternative milk producer on the block. Swedish plant-based milk company Oatly Group (NASDAQ: OTLY) successfully listed on the NASDAQ last week, with its shares now sitting almost 22% above their initial public offering (IPO) price.

Let’s take a moment to compare the two.

ASX-listed A2 Milk’s Achilles’ heel

Firstly, A2 Milk and Oatly are both traditional cow’s milk alternatives, though there’s still a significant difference between the two. While A2 Milk offers an easier to digest product that lacks the A1 protein, Oatly goes a step further and cuts the cows out completely.

Oatly is the world’s largest oat milk company. Being made from oats, it is a vegan-friendly alternative to cow’s milk for those who are lactose intolerant.

Although the company is new to public markets, Oatly was founded in 1994. Today, its products are sold in 60,000 shops and more than 32,000 coffee shops across 20 countries.  

This points out a recent area of weakness for the ASX-listed milk company. While only 13% of Oatly’s revenue is derived from Asia, over 48% of A2 Milk’s FY21 first-half sales were from China and other Asian geographies. That leaves A2 heavily exposed to geopolitical risks associated with China.

Oatly is truly lactose free

A2 Milk acts an alternative for those who may have difficulty digesting standard cow’s milk. Without getting into the nitty-gritty details, the company’s milk still contains lactose. However, Oatly’s oat milk is completely dairy-free, lactose-free, and milk protein-free. Therefore, it is arguably an option for a wider audience of people with allergies or significant intolerances.

The plant-based food and beverage market is a high-growth industry. An expected growth in the vegan population and an increasing intolerance to animal protein is set to provide strong tailwinds. Already, Oatly estimates its total addressable market is in the realm of US$600 billion.

How the numbers stack up

Looking at the financials, Oatly achieved approximately A$617.5 million in revenue for the full year ending 31 December 2020. For comparison, A2 Milk’s revenue for the trailing twelve months ending 31 December 2020 came in at A$1,490 million.

Additionally, the US-listed Oatly is currently loss-making on the bottom line. Meanwhile, A2 Milk remains profitable despite challenging conditions.

Although A2 Milk generated more than double the revenue of Oatly in FY20, its freshly listed foe commands a market capitalisation of around A$13 billion – which is more than triple the valuation of ASX-listed A2 Milk, based on its current share price.

More reading

• Where next for the a2 Milk (ASX:A2M) share price?
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• Why is the A2 Milk (ASX:A2M) share price up 7% today?
• Why a2 Milk, EML Payments, Webjet, & Xero shares are pushing higher

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The Aristocrat Leisure Limited (ASX: ALL) share price edged higher on Monday.

The gaming technology company’s shares rose 0.1% to $40.70 following the release of its half year results.

How did Aristocrat Leisure perform?

Aristocrat was on form during the first half and delivered a result in line with expectations previously laid out by management.

For the six months ended 31 March, the company reported a normalised net profit after tax (NPAT) of $362.2 million. This is an increase of 18.4% on the prior corresponding period. This normalised result excludes a $1.1 billion deferred tax benefit from a year earlier.

Management advised that Aristocrat’s profit growth was driven by strong performances from both its Gaming and Digital businesses. Positively, almost 80% of its revenue was derived from recurring sources during the period.

What did analysts think of the result?

Analysts at Goldman Sachs were pleased with the result.

They said: “ALL reported normalised 1H21 Sales/EBITA/NPATA which was in line with GSe given the preannounced result. That said, we note that digital continues to deliver better-than-expected results, and was 6%/9% better than GSe across sales/segment profit respectively (we were above consensus on digital). Balance sheet remains robust, with net leverage now down to 1.2x (vs. 1.4x in FY20), and the group notes that it has in excess of A$2 bn of liquidity as at Mar 2021, allowing it to preserve full optionality for additional investments to accelerate its strategy.”

What about the Aristocrat Leisure share price?

Goldman has retained its buy rating and lifted its price target to $42.30. While this may only imply 5% upside (6% including dividends) for the Aristocrat Leisure share price over the next 12 months, it still sees it as a buy.

It explained: “We revise our FY21-23E EBITA by 7% to 3% reflecting: i) better digital trajectory, and ii) improved ANZ outlook. Our 12m TP (EV/EBIT SOTP based, method unchanged) increases to A$42.30 (from A$39.53) and with ~6% TSR; we stay Buy given relative earnings momentum and balance sheet strength/optionality.”

More reading

• ASX 200 up, Zip rises, Aristocrat Leisure reports
• Aristocrat (ASX:ALL) share price rises on half-year results
• ASX 200 up 0.1%: Aristocrat results, Zip’s global expansion continues
• 5 things to watch on the ASX 200 on Monday
• 3 top-performing ASX shares this week

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• Why the Infinity Lithium (ASX:INF) share price has rocketed 38% higher

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Most of our readers would be familiar with exchange-traded funds (ETFs) and listed investment companies (LICs) by now.

They’re both handy ways to get diversified exposure to the share market and to outsource the study involved in picking individual stocks.

LICs are the more ‘traditional’ concept, acting like private funds in that they take a higher commission in return for portfolio manager expertise.

ETFs have made their name in recent years as ‘index’ or ‘passive’ funds. They’re well-known for allowing everyday folks to put their money in to just follow a particular index while paying extremely low fees.

Even the most famous stock-picker of them all — Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) boss Warren Buffett — is a big fan of them.

“A low-cost index fund is the most sensible equity investment for the great majority of investors,” he said in Vanguard founder Jack Bogle’s book The Little Book of Common Sense Investing.

“By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.”

ETFs have thus become massively popular, with 2020 seeing all sorts of records broken for the industry.

The rise of active ETFs

Of course, if a concept becomes popular with punters, the industry is spurred on to create more products.

So it feels like in the last couple of years, there are new ‘active’ ETFs launched every week.

These ETFs act like LICs in that they require some sort of stock-picking expertise. 

Often the fund follows a particular theme, such as ethical investing, Asian technology, or value stocks.

This means some subjectivity — or at least analytical smarts — are required to know which shares to include into the fund. And which stocks to sell.

So if you now have both LICs and ETFs that are actively managed, what is the difference?

LICs vs active ETFs

Marcus Today director Marcus Padley last week explained the distinctions between the two products.

The big difference is that LICs are a ‘black box’, while ETFs are more transparent.

“The LIC may or may not be that transparent with reporting its holdings or its NTA [net tangible assets]/performance figures and the fees are much higher — plus they usually get a kicker if they outperform,” Padley said.

“An active ETF though gives you the power of an actively managed fund with greater disclosure of the underlying assets and the NTA at regular intervals. No ‘trust me I have a black box’ investment philosophy.”

The way the share prices are set is also a massive difference.

LIC share prices, like for any other listed business, fluctuate according to supply and demand. This means the fund might hold $1 worth of assets per share but the stock could be selling for 80 cents… or $1.20.

Meanwhile, ETFs have their prices artificially maintained at roughly what the underlying asset value is. This is done by “market makers”, who have buy and sell mechanisms in place to achieve price stability.

“So, no requirement on the LIC to provide liquidity and close up a discount to NTA and arbitrage any price discrepancy away.”

LICs that sell for less than they’re worth

Theoretically, a LIC that’s trading at a heavy discount to the NTA could be bought out by a big fish to be liquidated for profit.

“LIC managers tend to get upset when their fund gravy train gets taken away from them,” said Padley.

“They try to close up the discount through better communication (more updates) buybacks and even directors buying the shares. They try but… sometimes fail miserably.”

For some investors, this complication would cause them stress and they would prefer to park their money with ETFs, knowing the stock price always reflects the underlying worth.

But according to Padley, LICs can sometimes offer up tasty bargains.

“If there are transparent, good communicators and still trading at a big discount with known assets that are liquid, I have referred to them in the past as the Hot Tub Time Machine,” he said.

“Sometimes especially during periods of extreme loss of confidence, the LIC gets whacked whilst the assets it owns bounce quickly and so buying the LIC at a discount is like being able to go back in time to before the rally and buy those stocks.”

In fact, this is what famous investor Geoff Wilson is attempting to do with his new WAM Strategic Value Limited (ASX: WAR), which opened its initial public offering (IPO) this week.

This will be, if you can believe it, a $225 million LIC that will buy up shares of other LICs that are heavily discounted from NTA.

“Essentially, we are focused on identifying and investing in $1 of assets for 80c,” Wilson said in the prospectus.

“Our experience and expertise in managing closed-end vehicles provides us with a unique methodology to identify and benefit from LIC and LIT market mispricing opportunities.”

WAM Strategic Value Limited shares will start trading on the ASX on 25 June.

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• Here’s How Warren Buffett Explained Berkshire Hathaway’s Bank Selloff
• Invest like Warren Buffett with this ASX ETF

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