DGR vs DHR, page-8

Hi Grayza1 and all,

I think the answer is fairly straightforward:

By investing $1 in your favoured pick, e.g. Dark Horse, you get 100% exposure to that theme.

If, however, you invest your $1 in DGR, you only get a partial exposure to Dark Horse as your $1 is spread over a number of other companies within DGR's asset portfolio.

At present, it works out to be c. 3.9c of your $1 is allocated to Dark Horse if you invest in DGR based upon the price of the marketable securities and cash in the DGR portfolio and assigning NIL value to the non listed investments ($6.22m/$157.9m).

Secondly, you are exposed to another layer of costs by investing in DGR that you aren't exposed to by investing in the investee companies directly (admin, G&A, regulatory, etc).

Thirdly, your $1 invested may give you exposure to investments that you really don't like and ascribe NIL value to. In essence, investing in DGR you have to take the 'whole bag of apples', rotten ones included.

Fourthly, LIC's like DGR invariably trade at a discount to NTA. I have never seen one trade at NTA or above.

For all of the above reasons this is why DGR trades at a discount to NTA ... and always will. That is the trade-off for the drawbacks listed above. Is the discount enough to offset these drawbacks ???

In DGR's case the arbitrage is especially large and would ordinarily attract a bid from value investors. In DGR's case the liquidity is so terrible that an institution cannot invest and for retail investors there is simply not the speculative upside/ vol.

For retail investors, for example, if one of the investee companies makes a major discovery, investors/ speculators in DGR will not enjoy as much upside on a $1 for $1 basis as DGR's upside is only from one investee company of many within its portfolio and, due to an applied discount to NTA, the market will only ascribe a % of that upside which the investee company achieves.

The flipside is that there is less downside if an investee company goes into liquidation by investing in DGR vs. that Company specifically.

At some point, I would imagine that Mather or related parties will get tired of this large discount to NTA and make an offer to take the Company private. I have seen this happen previously with LIC's and the offer is invariably below the NTA but at a price that tired shareholders will accept.

A buyout of SOLG would narrow the discount gap too, as it is harder to apply a large discount to cash on the balance sheet, but one will persist never-the-less as it comes with 'reallocation risk' - i.e. what will management do with the cash ... will they blow it?

Cheers
John