ASG - ASG: Growth Equity CEF Set For Weakness

2023-07-07 12:29:08 ET

Summary

• ASG is a mid-cap growth fund that has underperformed the market in the past year due to its lack of exposure to mega-cap tech names.
• The fund's valuation metrics are stretched, and it is likely to underperform until it sees a significant re-set lower.
• Mid-cap growth names have a different forward profile with risk-free rates at 5% as opposed to the 0% rates environment seen in the past.
• The author expects a market-wide risk sell-off in the second half of the year, which could provide a good entry point for ASG.

Thesis

Liberty All-Star Growth Fund ( ASG ) is an equity closed-end fund. The CEF comes from ALPS Advisors and is the sister fund of the Liberty All-Star Equity ( USA ) CEF. We have covered this name before here , and in this article, we are going to have a look at how ASG has performed in the past year, its drivers, and its forward given the current market risk factors.

ASG falls in the 'Growth Equity' category due to its build:

The fund combines three growth style investment managers, each with a distinct capitalization focus (small-, mid- and large-cap) selected and continuously monitored by the Fund's Investment Advisor.

Growth has outperformed value in the past decade, due to the explosive growth of certain segments of the information technology sector. 2022 was a tough year, however, with this segment experiencing a severe drawdown.

Performance

Interesting enough, on a 1-year look back the CEF still exhibits a negative total return:

While the Nasdaq and an equal-weight technology ETF have reverted to positive returns, ASG has not. The main culprit for this lagging performance is the fund's composition. Not all 'growth' names are built the same. While QQQ and QQQE fall in the Growth - Large Cap category, ASG falls in the Growth - Mid-Cap box:

Mid-Caps have not done that well in the current recovery. It has really been a very bifurcated market in 2023, with seven Mega-Caps virtually accounting for over 80% of the returns in the S&P 500. On the mid-cap front, the recovery in performance has not been as strong:

In effect, even the SPY has outperformed ASG in 2023. Unless we see a sustained widening of market breadth, this state of affairs is set to continue.

ASG Holdings/Composition

The fund is overweight information technology, followed by health care:

As opposed to other equity CEFs which always contain most of the multi-national tech mega-caps, this fund has only a modest weighting to those names:

We can see the CEF having top-10 positions in only Microsoft, Amazon, and Visa as large mega-caps. This build has held the fund back this year. Furthermore, on the valuation front the portfolio metrics look very stretched:

We can see the fund exhibiting a very stretched portfolio P/E ratio, above the category average and the index. Similarly, the P/B and P/S ratios are on the wide side.

It is hard to see how the fund can go on a rampage with these sorts of valuation metrics in a 5% rates environment. Low profitability growth tech did well in a 0% environment where cash was chasing the sector, having no other alternative. With low standard deviation bond funds yielding close to 6%, the story is very different. We are just very hard-pressed to see the start of a new structural bull market in mid-cap growth at these valuation levels. We need a very significant pull-back here to get us to more palatable starting points.

What is next for ASG

Mid-cap growth names will not perform the same in a 5% rates environment as a 0% one. Fundamentally, from a valuation standpoint, they need to become cheaper in order to start being attractive. From a technical standpoint also ASG does not become attractive either until it goes below $5/share:

If we have learned one thing from the excesses of 2020/2021, that should be that valuations do matter. Buying cheap assets from a valuation standpoint will always yield robust long-term results. Conversely, trying to time the market by buying 'expensive' and trying to sell when it goes a bit 'more expensive' does not usually result in the best outcomes.

We see ASG weaker from here, especially on the back of an expected risk-off event in the second half of 2023. With the CNN Fear & Greed index at extreme Greed levels as of the writing of this article, the next move for ASG in our opinion will be lower. The fund is a great long-term performer, but the macro context matters here.

Conclusion

ASG is an equity CEF. The fund focuses on mid-cap growth names, and historically has posted very robust results. The past year is a different story, with ASG in negative total return territory, despite the Nasdaq being higher. The reason behind this performance is the fund's composition, which is not overweight tech mega-caps. A handful of names have carried the market this year, and ASG has been left behind. The vehicle, however, does have a solid +13% total return in 2023, but lags the S&P 500 and ( QQQ ) or the equal weight version ( QQQE ). We like this fund long-term, but do not think this is a good entry point. In fact, the CEF's valuation metrics look very stretched, and in order to get healthy long-term results here we need a substantial re-set lower. We expect a market-wide risk sell-off in the second half of the year, and we would consider levels in the $4 to $4.5/share range as good entry points for ASG. We are a Sell here until those price points.

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