Has anyone else been buyingthe MGFO options?
The options give you theright to purchase an MGF unit at a 7.5% discount to NAV. Therefore if NAV is$2.00/s, you can exercise an option and be given a unit for $1.85/s. Thisoption has a little over 2 years remaining and expires in March 2024.
Why these options are interesting:
- It is market unaware and only depends on the discount closing. Ie. MGF can perform horribly and the option could still be in the money if the discount closes below 7.5% to NAV.
- 2 years is a long time
- Magellan has a history of converting open ended structures to active ETF’s if they are trading at persistent discounts. They did this with MHH a year ago.
- There is a strong argument that with Hamish no longer being lead portfolio manager as the prospectus stated, Magellans hand may be forced and there’ll be pressure to allow investors to exit at NAV.
- MGF only accounts for $3bn of Magellans $85bn of FUM, so not a material percentage of FUM. Magellan is also losing $300M a year in FUM just through buybacks of MGF which they’ll be able to stop if converted.
- Should they convert to an active ETF, all option holders will inevitably exercise their options, which will bring another $2bn of FUM to Magellan at a cost of $150m to Magellan, who must fund the discount to NAV.
- A conversion to an active ETF, would also stop the inevitable negative media attention that comes with a LIT trading at a 20% discount to NAV, as investors get frustrated they cannot exit at NAV, whilst all other Magellan FUM can. This situation then possibly leads to activist investors and further negative press.
The options are currentlypricing the odds of MGF trading at less than a 7.5% discount to NAV over thenext 2 years at ~5% or a 1 in 20 chance. These odds are materially off.
The discount will eitherclose because 1. Buybacks/performance improve and it naturally trades above a7.5% discount or 2. Magellan convert it to an active ETF.
My odds of each of the abovehappening are:
- Buybacks/performance improves discount to par – this alone is a 10% or 1/10 chance of happening. Whilst it seems unlikely with the current negative sentiment, LIC’s do pull it off. Just two recent examples are L1 Long Short Fund (20% discount to 0% discount to post tax NTA), Ophir High Conviction (10% discount to pre tax to 10% premium to pre tax).
- Conversion to active ETF – Magellan did this recently with MHH and I believe they may do so with MGF to avoid the negative media which comes along with large discounts to NAV. My odds of this happening are 20% or 1/5 and if this were to happen, more likely in the next couple months.
If my odds of each situationare correct, the option should be priced at closer to $0.04, which is 5 x thecurrent price.
If MGF does reach NAV in thenext 2 years, then you’ll return 18 X your initial capital.
Rather than playing thediscount closing by buying MGF, in my view, this is a much better risk/rewardplay.
