Last month, we set out why the worst performing funds in recent times can be amongst the winners in the future. In summary, Research Affiliates showed that the top 10% of US managed funds over a three year period went on to underperform over the next three years by 0.6%... Show More
If I told you that your best chance of finding an investment fund that is going to outperform in the future would be to screen for the worst performing funds in the past, you might think I was crazy. But one of the things we like to see when we’re... Show More
What attracts us to the LIC sector is the opportunity not only to access a range of very good investment managers, but also to potentially buy some LICs at very attractive discounts to NTA value. Show More
The LIC sector is a fascinating market to operate in. Sometimes IPOs are well supported and discounts to NTA narrow, and at other times (such as now) the overall sector feels soft and many LICs trade at greater than average discounts. Show More
We are proud to present our second annual form guide for the 'LIC Cup'. This race is even bigger than the Melbourne Cup! There is approximately $35 billion of gamblers' (investors') money at stake in this sector, so the stakes are certainly a lot higher! Show More
Much has been written about the plan by the Federal opposition (likely to be the next Government) to abolish franking credit refunds. Along with removing negative gearing for existing housing and a 30% minimum tax rate on family trust distributions, this amounts to a three-pronged attack on Australian investors. Show More
LICs continue to rise in popularity, and luckily for investors, the number, and variety, on offer continues to increase. Some of the more recent prominent IPOs include WAM Global Limited (WGB), L1 Long Short Fund (LSF) and the Gryphon Capital Income Trust (GCI). Together, these three LICs account for around... Show More
There are now over 100 LIC’s (plus some Listed Investment Trusts, or LITs) on the ASX. The main difference between a LIC and a LIT is tax: LITs help to avoid the great "Labor Franking Credit Grab". In this wire, we examine this theme, as well as four other important... Show More
While we believe that over the longer-term, smaller companies provide more opportunities to outperform compared to larger ones, rarely have we seen such a large performance gap between the two as we have over the last 12 months. Show More
At the start of February, markets reminded investors that shares don’t always go up in a straight line. The Australian market dropped over 5% from its recent highs, and the US market dropped over 10% from its top. Considering the gains in the market over the past year, these are... Show More
Hi all. Some great comments here. It's clear that LICs and franking credits are hotly debated topics. I'll respond to a few questions briefly. Rodney, yes we agree URB has been good value recently. It's one of our top 10 holdings at the moment because of the discount. We expect the manager is in a good position to do something about this over time. We're less sold on their potential as investors to outperform the market, but time will tell. Robbie, no not related to Geoff Wilson, but we are big fans of the WAM team - exceptionally talented managers. To the John's and Neil - thanks for pointing out the extra "than" in the article - it was a mistake and has been corrected. To John Bird and Neil - essentially any franking credits received in a year by an LIT can be passed through in that year (they are included as a tax credit available for the investor in the tax statement sent to all holders at the end of each tax year). The LIT manager has some flexibility as to when the cash from a dividend received can be distributed by the LIT - see the comment below. The tax benefit arises from the LIT not having to pay tax on profits. I'll look to write more about how this happens, perhaps with an example in a future article. To Ed, I'm not a tax expert, but as I understand it, converting to an LIT means the LIC effectively sells everything for tax purposes and unrealised gains turn into realised gains, tax is paid and franking credits distributed. So this can be a problem for LICs with a large amount of unrealised gains or losses. The gains cause tax to be paid in order to convert (probably offset to a degree by a franking credit paid out to investors). Any tax losses are likely to be lost on conversion, so that can be a negative. As an LIT, the idea of a profit reserve is irrelevant. One of the benefits of an LIT is the manager is essentially free to determine the level and timing of distributions, which makes it easier to smooth them over time. Luke, there are quite a few LICs we could have chosen from for this article. SEC stands out partly because of the discount and partly because of the excellent long term track record of the team (including a long period before forming Spheria) despite fairly average short term performance. You are right in that they do not come cheap, but in our experience, very few managers who have a genuine chance of outperforming by a reasonable amount, ever charge a low fee. Of course, you never know exectly when a better performance period will come along, or when a discount will start to close up, and we may well just end up being wrong. To Simon, while activism is not our style, we try to encourage and talk with managers where we think there are things they can do better. We think we will see more examples of activist investors entering the space if these discounts persist. Thanks for all your comments. Keep them coming.
Hi Ian. You raise a very good point. Much like property and infrastructure, there tends to be a lag between valuations for PE businesses and market pricing. This can work in your favour when markets are going well, but the reverse is true in downturns. It can also be useful to review the valuation policy of the manager. Overall, we tend to look for a bigger discount than normal for any LIC investing in illiquid assets such as private equity.
Hi Tony. The LICs I referred to were the Asian Masters Fund (EAF) which was previously AUF. The Australian Governance Masters Index Fund (AQF) has also recently approved a similar restructure. Both are part of the Dixon/Evans and Partners stable of LICs.
Hi Peter. There are some ETF's that are short the market (e.g. Betashares Equities Bear Fund, ASX code: BEAR), but no LICs that we are aware of. Some LICs, such as ALF or CDM could potentially be net short at times, but I would say it would be rare.
Some great comments in here and it’s probably worth highlighting how we assess the likely winners. Certainly, to be first over any extended period in the LIC space, you need to have good investment performance from the manager. So, every one of our 24 runners are ones we think can outperform markets over the long term. But to come first, second or third needs something extra. In the case of LIC’s, that extra usually comes from positive changes in the discount/premium to NTA. For example, if a LIC goes from a 5% discount to a 5% premium, the total return for a shareholder is improved by 10%. Our favourites are those we believe have the best combination of potential for good investment performance AND potential for improvement in the NTA discount/premium. These are unlikely to be last year’s winners, nor those already trading at decent premiums to NTA.
Michael, I think there's merit in both. Both ETFs and LICs continue to grow strongly. We like LICs because of the price inefficiencies we can exploit. But you're right about ETFs - there's more choice and price/NTA certainty. We sometimes use ETF's as an alternative if we just want pure market exposure. Each investor will have their own preferences and it's good to have a choice.
Thanks Jordan. It's certainly something we try to keep a very close eye on. A decent fall in house prices is probably going to have a very big impact on our economy. We want to know about it as early as we can..
Thanks Adam. We're about to make the Affluence Fund available to retail clients in the next few days and we're targeting research for later this year.