The 60 Listed Investment Companies (LICs) under Bell Potter coverage collectively increased 3.2% over the September quarter to $38.4bn, making up 91.9% of the $41.8bn Australian LIC market. Here we review the activity across the sector for the quarter, and provide a one page snapshot of each LIC under coverage.
Domestic Equity LIC Summary
LICs with a domestic equity focus collectively rose 3.1% (incl. dividends) over the September quarter. The best performing company was Clime Capital (CAM) which produced a share price return of 13.6% compared to a pre-tax NTA return of 6.0%. The best performing mandate was Small/Micro in part due to the return from Acorn Capital Investment (ACQ) which returned 9.1% over the quarter and 32.5% for a 1 year period.
The domestic equity LICs ended September trading at an equal weighted average discount to pre-tax NTA of 3.5%. A weighted average discount of 0.5% is heavily skewed to the premium/discount of AFIC (AFI) and Argo Investments (ARG) which collectively make up 48.8% of this group. They ended the quarter trading at premium of 0.6% and discount of 1.5% respectively. The highest dividend yield based on dividends paid over the last 12 months was from NAOS Small Cap Opportunities (NSC) with a net yield of 8.6%. Over the past 5 years the group have collectively returned 44.4%, calculated on a monthly equal weighted basis
Global Equity LIC Summary
Global equity LICs collectively rose 3.9% (incl. dividends) over the quarter to a market cap greater than $7.1bn. MFF Capital (MFF) returned 10.9% for the 3 months to be the best performing LIC based on pre-tax NTA (incl. dividends). Magellan Global Trust (MGG) was the best performing for share price return with 8.8% in the quarter. It is to be noted that MGG is an LIT and is required to pay out all profits generated whereas an LIC can retain earnings for distributions in future periods. When analysing these securities over a shorter time frame it can tend to give a bias to LITs in the event the NTA is trading at a discount.
Asian equity focused companies underperformed other global mandated LICs which was representative of the global market returns with the S&P500 having it’s best quarterly return (in USD) since 2013, increasing by 7%. The global equity LICs had an equal weighted pre-tax discount of 3.3% which was relatively similar to the domestic equity focused companies. The highest dividend yield based on dividends paid over the last 12 months was from Platinum Asia Investments (PAI) with a net yield of 8.4% fully franked. The global LICs have collectively returned 57.3% over the past 5 years, calculated on a monthly equal weighted basis.
Specialist Strategy LIC Summary
The specialist strategy LICs are compromised from long/short mandated companies as well as LICs when its performance may not be best compared to a broad domestic or global equity index. These companies will prove to have a little correlation to those outside of their mandate as shown by the scatter plot in Graph 8. Of the group, the best performing strategy for both pre-tax NTA and share price return was from Duxton Water (D2O), 9.1% and 16.8% respectively over the September quarter. Sandon Capital Investments (SNC) had the highest dividend yield over the last 12 months with 7.2% net yield that was fully franked.
The specialist strategy LICs have returned 19.7% collectively over the past 5 years, calculated on a monthly equal weighted basis. However, it should be noted that of the 16 companies only 3 have a performance history of at least 5 years and the collective group are not to represent an underlying market trend for comparative purposes as can be the case with domestic and global mandated LICs.
Dividend Reserves & Franking Credit Balance
In comparison to a trust structure, Listed Investment Companies (LICs) have an advantage in being able retain earnings through periods to build up a dividend reserve. This assists LICs in maintaining a smooth and sustainable dividend over a long term that is often fully franked as opposed to trusts that are required to distribute all earnings to the underlying unit holders. Given they are a company structure, LICs are also required to pay company tax on corporate profits which adds an additional source of franking credits than can be passed onto shareholders in addition to receiving franked dividends from the underlying holdings. Therefore, when comparing dividend yields between LICs it can assist to look at the profit reserves and franking credit balances to analyze the future sustainability of the current dividend.
LICs generally source income from either dividend income from the underlying holdings or from capital appreciation and realisation of the holdings. Income that is heavy relied on from capital appreciation will tend to be more volatile and, as a result, having a stable level of profit reserves dedicated to the future distribution of dividends can assist LICs in maintaining a dividend through periods of poor market performance. The same methodology is applied with maintaining a franking credit balance.
Many LICs will differentiate their dividend reserves from their profit reserves which are likely to include unrealised gains and losses from investments which may not be actually realised at the current values. We have therefore chosen to report only the specified dividend reserve when provided to give a more accurate measure of the reverses being held for the future distribution of dividends.
The dividend reserve cover represents how many years the company could continue its last 12 month dividend with the dividend reserves held. Both the dividend reserve and franking credit balances have been sourced from the LICs 2018 Annual Reports and have been adjusted for the 2018 final dividend when the adjustment was made in the reports. Where dividend reserves have not been individually reported we have marked with an asterisks (*) and highlight that these figures may not accurately represent the company’s ability to pay dividends in the future as it is likely to include unrealised profits.
Read on for the full report, including a one page overview of each of the 60 LICs under coverage: Access report here.