It has been a tough environment for active managers, so I thought I would take a look at a performance comparison of the most popular ASX LICs.
List of the 15 most commonly held ASX LICs and performance comparison for 18/19
ASX LIC List
ASX LIC Perf (TSR) inc franking 18/19
(ASX:AFI) 8.9%
(ASX:ARG) 7.6%
(ASX:WAM) -5.9%
(ASX:MLT) 8.9%
(ASX:BKI) 11.2%
(ASX:MFF) 10.2%
(ASX:MGG) 13.4%
(ASX:WLE) 2.5%
(ASX:DJW) 10.5%
(ASX:WAX) -3.2%
(ASX: WGB) -10.9%
(ASX:FGG) -1.9%
(ASX:PMC) -16.7%
(ASX:PAI) -9.2%
(ASX:MIR) 2.0%
Not many on the list managed to beat the ASX200 for the year. For example the equivalent return there was approximately 13.4%. In fact, if I have the numbers right, I don’t think any of them beat that index. The figures above were grossed up to include the benefits of franking, likewise when I referred to the benchmark figure just then.
Top ASX dividend shares with investors
The average return amongst the bunch above was just under 2%. I find the returns all so underwhelming that I am questioning myself if I have made some typos. So please let me know if you think some of these are incorrect. I came across the list (i.e. which are most widely held) from a table provided by CommSec as per below. They took a look at data from SMSFs last year. So the weak performance has affected plenty of investors. Many of these shares are quite popular with SMSFs and dividend investing blogs in Australia. Topping the list are a couple of the “grandfather” LICs that suit investors following the Peter Thornhill style of investing.
Source:CommSec
Now I haven’t had time to dissect the smaller sized LICs, yet I believe the results would look even worse!
ASX LICs discount / premium to NTA
The figures above are based off shareholder return so in many instances were dragged down by movements in the relationship between share price and NTA.
Without going back and checking, at a glance ones where the premium might have taken a hit include, WAM, WAX, FGG, PMC, PAI, MIR. Newer Wilson LICs such as WLE and WGB moved to discounts.
Part of this exercise of glancing at some of the LIC performance was to make me feel better about my own struggling portfolio!
It seems as though I run a blog about a couple of the most unfashionable areas in investing right now, LICs and value investing with more of a micro-cap focus! Don’t be surprised if when you visit this page next time it is about stocks like Beyond Meat (NASDAQ:BYND) and crypto currencies. People might be interested then.
ASX LICs conflict of interest and DON’T buy at IPO
Having said that, at this point in time I am happy at least I didn’t rush in buying more LICs about a year ago after some modest discount widening at the time. Likewise committing money to LICs at IPO stage. The increased supply of LICs has weighed on the sector.
Are LIC discounts that wide?
An old rule of thumb I have heard with ASX LICs is since outperforming the benchmark can be a mugs game for active managers we should expect discounts. For example some believe if fees chew up 1% of the NTA then a 10% discount is normal. Many LICs easily leak 2% in fees when all costs are considered so using that theory a 20% discount might be considered normal in some cases.
In the absence of specific catalysts to close the discount gap maybe that sort of thinking might still be a good rule of thumb?
ETF vs LIC performance
It is not only the discount widening that has hit returns in 18/19. Many funds managers have simply underperformed with their stock picking.I can relate to that as my own picks have also done relatively poorly versus the index. This will continue to leave in many cases their longer term performance record (even after their “creative” reporting of performance) to be looking fairly poor.
This comes at a time of increasing choice and competition from ETFs.
Catalysts for ASX LIC discounts to tighten
Obviously there is future performance to improve but that can be difficult to predict. There are some areas I believe that are worth watching that are not as difficult to forecast.
The IMA I see as an important area. This can often be a stumbling block for shareholders to organise to capture value by winding up a LIC at near the NTA. As the newer LICs get in the back half period of usually 10 year IMAs then things could get more interesting.
Pre GFC the LIC sector climbed from about 40 to over 60 from memory. As discounts widened many didn’t survive and the number fell back to near 40. Now I recently read we have around 114! In time a significant number will not survive in their current form. I might explore which ones in a later blog post (well perhaps explore some of a rather big bunch anyway).
Shareholder Activism, buying ASX LICs at a discount
Activists getting above the 5% threshold in LICs. I have already seen some examples in recent months and expect more of this to occur.
Situations also become more interesting where the fees of the LIC are not too large whilst you potentially have to wait for a catalyst. I refer to instances where the company might add say 1.5% to the NTA each year via a buy back policy which potentially can cover nearly all of the fee drag. Also cases where the manager is a long way from their “high watermark” in terms of future performance fees.
When these catalysts start to line up and if the discounts get to nearer 25% there could be some excellent buying. The one big dilemma though is if you find the discount attractive and you buy over the next few months, only to find out we run into a bear market. Suddenly this doesn’t help so much when the NTA is falling rapidly!
Blue Sky Alternative Access Fund (ASX:BAF) & WAM Capital?
I might write some more on BAF later but I thought something might have to change soon? Whether that be getting rebranded under a different manager or even if it is wound up?
Hey Steve, Interesting that the Commsec SMSF list did not have the $1.15 billion AUI which had a reasonable year. They need to get cracking on the marketing as they have always been under the radar. Ha ha.
Good point Eddie, that one often goes under the radar a bit.
In checking AUI I get a figure of 10.9%. Of course once again this is just shareholder return so I don’t know whether their discount widened, quite possibly.
I suppose one point I was trying to get across is that in the last couple of years many were investing in LICs with little regard of the effect discount widening can have. Common view was it doesn’t matter if you are holding for a decade plus. A bit of truth in that but the way the sector has gone tells me some investors have changed their tune. Eg same buyers found out they didn’t like how the discount widened or got scared out and sold because of the franking uncertainty. Or now believe these LICs can’t add any alpha.
Others of course are truly long term LIC investors and may well not care too much about the discount widening trend in 18/19.
I agree. AUI is an old school LIC and I think that the discount has narrowed off the top of my head over the least 18 months. I think that some of the more newer LICs have more volatility in terms of shareholders bailing whereas the older ones have had shareholders just getting their dividends and not worrying about discounts as long as the share price doesn’t get smashed.
Hi Steve,
Excellent post as usual.
I’m surprised even with FOFA etc that the LIC IPO bonanza / share raisings have gone on strongly for so long. I expected a repeat of the pre-GFC LIC consolidation / clean out to have commenced by now. Rest assured it’s coming. Although not my thing nowadays participating in activism plays should not be too difficult as one can simply piggyback off the likes of Wilson. WAM will have enough LIC activism opportunities to keep it busy for the next decade.
Can’t say there’s much to interest me in the market given it’s strength. Fortunately our existing long term equity holdings throw off far more income than we need. Being in the early stage of retirement we are being very conservative in holding a very substantial allocation of cash. In no hurry to deploy that into the market until risk / reward is very much in our factor.
Cheers
Hi Nodrog,
Thanks for commenting, I am also surprised at the number of new LICs that keep popping up. There was a few fixed income ones that jumped on the bandwagon in the last year or so from memory. I’d avoid paying NTA for them.
When you launch say in for example 2015 with a 10 year IMA, perhaps with a hefty break fee it gets you a free lunch for a while of counting your base fees coming in the door. Throw in a stake from management and friends that “align” interests to shareholders (translation – blocking stake), and it can keep the activists away for awhile. Later on though as it becomes harder to hide from the true performance of the LIC, the pressure heats up as these factors don’t save them. Therefore I think the LIC numbers reducing might be more a trend for say 2022-2025.
The way you describe your situation it makes sense to not necessarily be 100% invested. Sure this could lead to more chance of underperforming certain indexes but who really cares?
A bigger dilemma is probably for those around 30-40 yrs of age hoping to build wealth and achieve higher returns. The starting point of valuations here looks to make that tough. Plus from a behavioural point of view investors of this age may not necessarily appreciate how falling markets can mess with your thinking. Or how good concepts can be taken a bit too far on occasions eg US index investing, tech sector in 1999.
If I was 35 with a decent salary I suppose I would be virtually fully invested rather than a higher than normal cash balance that I do. I wouldn’t borrow to buy shares though. Yet I see on some forums there is a NAB equity builder product that is getting more popular by the day.
Cheers
Steve.
a few comments:
1. active management fees are collapsing with many active managers closing. Highlights the high fees for LICs.
2. RBA cuts have driven a wall of money into the market. Benefits passive and domestic in the first instance. Active / international lagging.
3. The comments about 1% fee leading to 10% discounts etc – good way of illustrating that you need outperformance to reduce discounts.
4. Agree there will be consolidation.
5. I think there is reasonable money to be made. My core holdings include MFF (lower cost than their ETFs, Chris Mackay both humble and astute) and WQG (like their process, good returns, issuance now done, local marketing efforts may step up).
6. PIA and NSC both interesting. Both buying back to reduce fee drag.
I agree with all your points there Ed.
Seems to be more hype about the other Magellan Listed ASX product’s although I’ve thought that MFF might be the preferable product. Sadly many years ago I took some profits in MFF and sold it all.
WQG has at least got the options issue out of the way, even though I thought they didn’t handle that well (unsurprisingly). Have done a good job picking stocks though. I suppose with these two one should just keep in mind the large US focus and tailwind that has given them. That’s different from something like PIA who would be more likely to invest in other markets.
I’ve got tired of suggesting US markets could underperform as I’ve been horribly wrong in saying that before! Just worth being aware of your portfolio tilts if for example you ran with just MFF and WQG for global exposure.
PIA and NSC have had their temptations for me in recent months but I don’t hold at this point. IMA for PIA I think is still a very long one (late 2020s?) might be something to check. Ideally I prefer not to have these long agreements in the background. To a lesser extent this IMA issue exists with NSC and a break fee in there. Then there is a matter of dealing with convertible notes outstanding for NSC. Both have seen some of the largest discounts in the LIC space so worth keeping an eye on. Still baffles me that plenty of investors happy to buy NCC though.
You were correct BAF went into receivership, how did you fare?
Hi Baz, thanks for commenting. I think BAF has returned 22% since this blog post. I’ve fared a bit better as I got them cheaper in the weeks prior. Plenty of LICs that I’ve discussed that I own on this blog have disappointed me, but BAF has fared well thus far. Cheers, Steve.
Great post, Steve. We recently did a podcast about investing in LICs. Would love to have you on the show to discuss your thoughts. Let me know if you’d be interested sometime.
https://qavpodcast.com.au/2019/11/07/s01e36-listed-investing-companies/
Hi Cameron, thanks and I shall have a listen soon of your podcast. Feel free to message me at valueinvestingforaliving@gmail.com. We can take it from there in regards to potentially doing a podcast. Cheers, Steve.