RG1: Income Fund - The Reserve That Keeps on Giving
RG1: Income Fund - The Reserve That Keeps on Giving
In a Nutshell
Executive Summary
In a Nutshell
Regal Investment Fund (RG1) is a $601 million closed-end fund investing in global equities with a long/short strategy. At A$2.35 versus fair value A$2.39, the stock offers 1.7% upside—essentially priced correctly. The compelling feature is a 7.3% grossed-up dividend yield backed by the deepest profits reserve in the ASX listed investment company sector: 138 cents per share covering 11 years of dividends. This transforms volatile investment returns into reliable income.
Investor Profiles
| Profile | Rating | Rationale |
|---|---|---|
| Income | ★★★★★ | The 7.3% grossed-up yield (5.1% cash) is fully franked and backed by an 11-year profits reserve—triple the depth of any ASX peer. The 12 cents per share annual dividend is policy-committed and sustainable through market drawdowns. Income investors receive a fixed income-like return without duration risk. |
| Value | ★★☆☆☆ | Trading at a 13% discount to net tangible assets versus the normalised 10-15% range offers minimal margin of safety. The discount recently narrowed from 20% to 7% through buybacks and is now at the tight end of history. Re-rating catalyst is limited—the market already prices this fairly. |
| Growth | ★☆☆☆☆ | Net tangible asset growth of 2-4% annually after dividends is modest. The listed investment company structure is in structural decline as exchange-traded funds dominate capital flows. New capital cannot be raised at a discount, limiting growth optionality. Growth investors should look elsewhere. |
| Quality | ★★★☆☆ | Zero debt, 93% Level 1 liquid assets, and KPMG-audited accounts with clean opinions deliver balance sheet strength. However, business model resilience scores 4.9/10—typical for listed investment companies facing exchange-traded fund competition. The 1.5% management fee is the highest among peers. |
| Thematic | ★☆☆☆☆ | The listed investment company model faces existential headwinds as the industry shrinks. Vehicles are converting to trusts or winding up. Exchange-traded funds offer similar exposure at 0.2-0.5% fees versus RG1's 1.5%. No structural tailwinds support the wrapper—only execution on capital management. |
Best Fit: Income Investors. Australian taxpayers in their 40s-60s seeking reliable, tax-effective income will find RG1's combination of a 7.3% grossed-up yield and 11-year reserve backing unmatched in the sector. The dividend provides bond-like certainty with equity upside optionality. Capital appreciation of 2-4% annually is a bonus, not the core proposition. For retirees or near-retirees prioritising income stability over growth, this structure delivers.
Executive Summary
RG1 invests in global equities using a long/short strategy managed by Regal Partners. The fund earns returns from portfolio appreciation and distributes income from a $335 million profits reserve. Manager fees of 1.5% plus performance fees above a high water mark create a 4-5% annual drag on gross returns. Value creation comes from two sources: investment performance and capital management through buybacks at discounts to net tangible assets.
The first half of financial year 2026 delivered a 31.4% portfolio return—exceptional but representing a cyclical peak. New chief investment officer Paul Moore took over in September 2025 after predecessor struggles. The board responded proactively by accelerating buybacks (retiring 28% of shares over two years) and lifting the dividend to 12 cents per share. These actions narrowed the discount from 20% to 7%, approaching historical tights.
The investment case centres on income, not growth. The 138 cents per share profits reserve covers 11 years of dividends—three times deeper than any peer. This transforms volatile investment returns into predictable shareholder income. Portfolio returns normalising to 8-12% annually drive 2-4% net tangible asset growth. Total returns of 8.1% (grossed-up) fall slightly short of the 10.1% cost of equity—the permanent cost of the listed investment company discount structure.
At A$2.35 versus fair value A$2.39, the stock is 1.7% undervalued—essentially fairly priced.
Results & Outlook
What happened?
The first half of FY26 produced a 31.4% net portfolio return on 96% net equity exposure. This is more than three times sustainable levels and reflects broad global equity strength in the second half of calendar 2025. Net tangible assets climbed from $2.35 to $2.55 per share (December 2025), or approximately $2.72 after January's continued gains. The discount compressed to 7%—historically tight—as the buyback program retired 8 million shares at below net asset value. Total fee drag fell to 4.1% from historical levels above 5%, driven by lower leverage costs.
| Metric | Dec-25A | Y1E | Y2E | Y3E |
|---|---|---|---|---|
| NTA per share (A$) | 2.72 | 2.80 | 2.86 | 2.92 |
| Discount to NTA (%) | -13 | -11 | -11 | -11 |
| Net portfolio return (%) | 31.4 | 7.5 | 7.0 | 6.5 |
| Dividend (cps) | 12.0 | 12.0 | 12.0 | 12.0 |
| Profits reserve (cps) | 138 | 144 | 146 | 147 |
| Shares outstanding (M) | 241 | 233 | 226 | 220 |
What's next?
Portfolio returns normalise to 7-8% annually as the exceptional first half represents mean reversion from prior weakness. The discount likely widens modestly toward the 10-15% historical range as current levels at 7% leave little compression room. Net tangible asset growth of 2-3% per year after dividends is driven by portfolio returns, fee drag, and buyback accretion. The 12 cents per share dividend remains policy-committed with the profits reserve growing to 12+ years of coverage.
Key catalysts arrive in August 2026 with full-year results—chief investment officer Paul Moore's credibility test after one exceptional half. The Reserve Bank of Australia's April rate decision matters: further hikes raise the cost of equity and pressure valuations. Saba Capital's holdings (currently 6.1%) warrant monitoring for activist escalation above 8%. Monthly net tangible asset announcements provide real-time tracking; any decline exceeding 5% in a month triggers reassessment of return assumptions.
Valuation & Risks
| Metric | Value |
|---|---|
| Fair Value | A$2.39 |
| Current Price | A$2.35 |
| Upside | +1.7% |
| 12-Month Total Return (cash) | +5.9% |
| 12-Month Total Return (grossed-up) | +8.1% |
| Confidence Range | A$2.28 – A$2.49 |
What could go wrong?
The correlated risk cluster presents the greatest danger: market drawdown, chief investment officer underperformance, and discount widening form a self-reinforcing loop. This combination carries 25% probability. In this scenario, net tangible assets fall 10-15% while the discount widens from 13% to 15-18%, producing a 20-25% price decline. Market corrections widen listed investment company discounts mechanically as risk appetite evaporates—investors sell closed-end funds faster than underlying assets.
The current 7% discount sits at historical tights with limited room to compress further but meaningful capacity to widen. Normalisation to 10-15% creates an $0.11-0.22 price headwind even on stable net tangible assets. This reversion carries 65% probability given cycle positioning. The first half's 31.4% return is not repeatable—Paul Moore's five-month tenure provides one exceptional data point, not a track record. Consecutive weak halves would destroy market confidence and widen the discount 5-10 percentage points rapidly.