The latest Listed Managed Investments Monthly for July 2020 focuses on the implied default rates of each debt listed investment trust and compares these figures to historic averages in the aggregate high yield and loans markets. 

The conclusion: implied default rates of all debt listed investment trusts (LITs) are not correlated with historical rates, neither at the broad market nor manager levels. 

For example, Gryphon Capital Investment’s (ASX:GCI) 7.5% discount to NTA at 31 July 2020 (now 11%) implies a default rate (as opposed to loss-given-default) of around 150%, assuming a recovery rate of 95% across its Residential Mortgage Backed Security (RMBS) book. We remind investors, Australian RMBS has never experienced a single default. 

We also put the spotlight on GCI and the state of play in the Australian RMBS section and Regal Investment Fund (ASX:RF1) following a volatile performance period. 

A PDF containing the full report is available below.

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Darryl Middleton

Rod, do you think that the proposed restructure of MA1 will close the discount to NTA ?

Rodney Lay

Hi Darryl. It has to, by definition of converting into an ETMF.

Rob Sharp

It is the management fees that gobble up an ever increasing share an LIT's, or LIC's for that matter, income that creates the absolute necessity of purchasing the security at a discount to NTA. A if the LIT is generating a 4% p.a. yield on gross assets a one percent p.a. management fee means the security needs to be at a 25% discount to NTA to give the investor the same return as buying the basket of underlying securities. It really is that simple.

Rodney Lay

Hi Rob. Have you glanced at the running yields on debt LITs recently? That’s money in one’s pocket