FY2019 will be associated with one word when market participants look back, and that is volatility. Bookended by relatively benign first and last quarters, the second and third quarters of FY19 took both domestic and international asset managers on a proverbial roller coaster ride. Quarter two saw a large sell-off in the equity markets globally as markets fretted about rising global interest rates, trade wars, slowing Chinese growth and indeed slowing global growth. Then into the third quarter of FY19 (and first quarter of calendar year 2019) and equity markets came roaring back. Markets rebounded strongly on global interest rates now possibly falling, which would provide a fillip to global growth, trade tensions easing and a general air that things aren’t that bad really. So while the indices on the face of it might suggest FY19 was a reasonably good year, this understates the significant market gymnastics that occurred in the space of 12 months and will certainly go down as one of the more difficult years asset managers have had to navigate in recent times.
The other small notable point from the year was the increase in special dividends that were paid out by LMIs in FY19. This was largely driven by potential franking credit changes proposed by the ALP ahead of the Australian general election. LMIs actively responded to the possibility of the changes negatively affecting their investors and looked to distribute some of their franking credits to their investors ahead of any changes, which ultimately didn’t come to pass given the election result.
Whilst the markets started FY20 well with a reasonably good run in July, key indices have fallen through August with the S&P/ASX down 3.9% from its 30 July peak at the time of writing. With a number of uncertainties facing global markets investors may be in for a rough ride through the first half of FY20.
The following text provides some brief commentary on LMI performance over the past 12 months. Refer to our detailed tables on the following pages for full performance numbers out to five years for the LMI universe.
Large caps enjoyed a good year
On average, the large-cap listed managed investment (LMI) cohort performed better than either the small-cap or the international group. The median large-cap LMI managed a pre-tax NTA return of 9.0% for FY19 and a very similar total shareholder return of 9.2%. The S&P/ASX 200 Accumulation Index returned 11.5% for FY19 ahead of what most large-cap LMI’s achieved. The best performing large-cap focused LMIs in our coverage in FY19 (on a pre-tax NTA basis) were Diversified United Investment Limited (ASX:DUI), up 11.8%, and its sister LIC Australian United Investment Company Limited (ASX:AUI), up 11.2%, which was in a tie for second with Plato Income Maximiser Limited (ASX:PL8). DUI, in particular, making the podium for the second year running having finished on top of the rostrum in FY18.
On the flip side some of the large-cap LMI ‘s which had a less than stellar year on a pre-tax NTA basis include AMCIL Limited (ASX:AMH) up 4.1%, and Djerriwarrh Investments Limited (ASX:DJW) up 6.5%. We note that even the bottom 3 still produced positive absolute returns so not a particularly bad result when compared to other years which have produced negative absolute returns.
As always, the standing caveat is that one should not judge the merits of an investment strategy or the relevant investment manager over short time frames and that performance should be judged over a reasonable time frame. Performance should also be judged in the context of the performance of the broader asset class and the strategy itself as asset classes and strategies can go in and out of vogue over time.
Whilst most of the large cap focused LMIs produced returns lower than the S&P/ASX 200 Accumulation Index for the 12 months, this also needs to be looked at in the context of their investment mandates. For instance, many of the large cap focused LICs deliberately underweight the resources sector and this was one of the better performing market sectors in FY19, with the S&P/ASX Materials Accumulation index up 19.4% for the 12 months.
its latest LMI Monthly Update, Independent Investment Research takes a look at
the performance of the listed managed investment sector through FY2019 and
highlights some of the better performing LMIs over that period. We also shine
the spotlight on WAM Leaders, a large cap focused listed investment company trading
at a discount to pre-tax NTA.
DUI is a hybrid LIC with both Australian stocks and International ETFs so shouldn't be compared with the other Australian large cap LICs