ASX LIC Performance Comparison – Not A Happy FY19

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      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.

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.

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.

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. A message I hope I have got across in blogging about LICs is that paying large premiums to NTA can be risky. Likewise committing money to LICs at IPO stage. The increased supply of LICs has weighed on the sector. A year ago I made a blog post looking at some of the themes in the ASX LIC space I expected over the year ahead.

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 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!

What Have I Been Buying / Selling in LICs Lately?

Not a great deal.

Argo Global Listed Infrastructure Ltd (ASX:ALI).

I actually sold more than half my ALI in the last week or so as it has bucked the trend over the last year. It is very easy for Argo to manage (outsource the management to Cohen & Steers and clip the ticket). That makes me wonder whether if the shares got to trade above the after tax NTA, maybe they won’t resist the temptation to issue more shares.

Shareholders recently in WCM Global Growth Ltd (ASX:WQG) would understand well how management of LICs can get tempted to issue new shares!

I still own a fair few ALI though and not rushing for the exit door. I do acknowledge though it has had a tailwind of falling bond yields and AUD. Factors I am less convinced about continuing from here now that all the guru forecasters have jumped on these bandwagons.

On the buy side in June I purchased some 8IP Emerging Companies Ltd (ASX:8EC) and also Blue Sky Alternative Access Fund Ltd (ASX:BAF).

The former is not very interesting just hopefully a parking spot for me that beats cash returns as it goes through a wind up.

I might write some more on BAF later but I thought it offered a lot of value under 72 cents. Whether it gets rebranded under a different manager or even if it is wound up I think the returns should be good from that level.

5 thoughts on “ASX LIC Performance Comparison – Not A Happy FY19”

  1. 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.

    1. 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.

      1. 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.

  2. 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

    1. 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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s