Revisiting performances of ASX listed Debt LITs

While the Listed Investment Company (LIC) universe in Australia has generally had a rough period over the past 5 years, there is one subset that has fared much better. Listed Investment Trusts (LITs) with a focus on delivering regular distributions from a range of fixed income investments, have continued to be popular. These structures are now an ASX staple, promising reliable income, less volatility than equities, and access to high-quality credit and fixed income investment teams.

Last year, we took a look at whether the sector had delivered on its promises. Our conclusion was that they mostly had. They had delivered on regular income and NTA stability. The biggest challenge was the potential for share price fluctuations, which can materially impact total returns. We concluded investors needed to stay engaged, understand the risks, and avoid knee-jerk reactions to short term price moves if they want to capture the long-term benefits.

A lot has happened since we published that article, and we thought now is a good time to check in again and review the last years performance from the LIT cohort.

The sector continues to grow

The LIT sector has continued to be popular in the last 12 months. The gradual retirement of billions worth of bank hybrids in Australia is just one reason why more investors are looking for alternative sources of regular income. Higher interest rates have also driven more capital towards fixed income and in particular private credit, as yields look ever more attractive relative to other asset classes.

New LITs worth a combined $900 million came to market from Revolution (ASX:REV), La Trobe (ASX:LF1) and Kapstream (ASX:KIT). Several existing LITs also undertook secondary raisings.

Realm’s Dominion Income Trust (ASX:DN1) issued in February 2025 and proved to be a popular offering. While technically not an LIT, rather a listed note, it had many of the same features as LITs. In the last 12 months we’ve seen similar listed note offerings from Challenger (CIMHA), MA Financial (MA2HA) and Stonepeak (SPPHA). Together, they soaked up another $900 million of investor demand. Rather than the perpetual structures of the LITs, these listed note offerings are differentiated by having a fixed repayment date, generally 5-7 years from issue. Target call dates 1 year before expiry, with an interest step up after that date, encourage the issuer to deal with the notes in a timely manner.

Finally, we’ve seen several blended LIT offerings come to market in recent years. These comprise a portfolio of fixed income assets and a portion of another asset class. Examples include Metrics Opportunities (ASX:MOT) and Metrics Real Estate (ASX:MRE), combining corporate/real estate debt and equity in development/construction projects. More recently, WAM Income Maximiser (ASX:WMX) from the powerhouse Wilson Asset Management stable blends high quality debt with an Australian equity income portfolio.

Sentiment is not what it was

Over the past year, bonds and private credit have seen more than their fair share of negative press. Bonds were impacted by higher than expected interest rates, due to the threat of increased inflation. This particularly affected longer term fixed bonds, which suffered in March and April of this year in a mini repeat of 2022.

It’s also been a big year for private credit. We’ve seen several well publicised issues, mostly affecting offshore private credit managers. The majority of these we consider to be isolated instances of either fraud or poor underwriting. More recently, the impact of AI on software businesses has been a big topic of conversation. This is potentially a more serious issue. Luckily for Australia, the vast majority of AI and software debt exposure is concentrated in global markets, and most local portfolios are not seriously exposed to these sectors.

Private credit has also been a big area of focus from our regulator, with pressure on managers to improve in a range of areas, including disclosure and valuation policies. While we always welcome increased disclosure, we believe the overall standard of managers in the private credit space in Australia is very good, and we do not currently see signs of systemic issues that would concern us.

Income has continued to flow

We reviewed 11 major ASX listed fixed income LITs and listed notes to assess how they have performed over the last 12 months. Here’s the list. They range in size from $230 million (PCX) and $2.3 billion (MXT). We have excluded anything listed within the last year and vehicles smaller than $100 million.

Income over the last year has continued to be impressive. Most funds have yielded between 6% and 9% over this period, helped by increasing interest rates. Current yields are shown below.

Most LITs continue to deliver yields at a premium of 2-5% above the RBA cash rate. Income targets for individual LITs have been met, and in some cases exceeded. This is a major positive for investors relying on these vehicles as yield alternatives in a diversified portfolio.

It's worth noting that for most of these constituents, income is linked to variable benchmarks such as the RBA Cash Rate or BBSW rate, though sometimes with a lag. If we see changes in interest rates, it is likely that yields for most LITs will change accordingly.

Asset values have remained fairly constant

Most LITs have continued to preserve capital well. NTA stability is generally high. When considering the potential for NTA movements, it’s important to understand how each LIT invests. Many private credit LITs will have little variation in net asset value from month to month unless something were to go wrong with an underlying loan. Those which invest in publicly traded assets, particularly sub investment grade loans, may have more pronounced variation in reported NTA.

As we have pointed out before, what really matters over time is whether a portfolio sustains any substantial capital losses. LIT managers haven’t been fully tested by a cyclical downturn for a long time. But performance has held up pretty well during some less severe events in the past few years, including the interest rate volatility of 2022, tariff tantrum of 2025, and war in the Middle East this year.

The one area of disappointment

One of the key risks with the structure of LITs (including, to a lesser degree the listed notes) has always been their susceptibility to trading at discounts. A year ago, many LITs were trading at par, or at a slight premium to net asset value. Over the last year, some of the sentiment issues we noted above have impacted share prices. This has seen many LITs move away from trading around net asset value a year ago, to small discounts currently.

And it doesn’t take much to impact total returns. Here’s the 1 year total returns for the LITs we studied.

Standout performers were DN1, GCI, MA1 and PCX, which have continued to trade consistently around net asset value.

Others, such as MRE, QRI and WMX have seen slight dips in traded prices compared to last year, and this has impacted overall performance.

Disappointments were KKC, MOT, MXT and PCI. The Metrics stablemates have seen significant discounts open up. In our view, this is likely related to investor concerns around their property development exposures, particularly for MOT. PCI is a slightly different situation. It’s moved from a decent premium a year ago, to a small discount currently.

Investors in LITs must be prepared to stomach at least some price volatility. As we’ve seen above, while a manager may do a respectable job of preserving capital and delivering income, that doesn’t guarantee a particular share price outcome.

In general, we believe most LIT managers are doing what they can to manage price volatility. For a few, additional disclosure around portfolio metrics would be useful. More information can go a long way towards helping markets assess value. Continuing pressure from the regulator might see further improvement in this area.

Another feature we’re watching closely is the various buyback mechanisms employed by some LITs. They have helped to limit price fluctuations. But several have come up against statutory caps in place, which limit buybacks to around 10% of capital each year without shareholder approval. No doubt if asked, shareholders would readily approve any initiative to buy back greater amounts of stock when trading at a material discount.

Our Verdict

The LITs and listed notes we have studied have continued to largely deliver on their promises. Income returns have been in line with expectations. Net asset values have been preserved, though managers haven’t yet been fully tested, which can only happen during a period of tough economic conditions.

But all that doesn’t stop the odd market tantrum or other event from hurting share prices from time to time. Those investors with a tolerance for some risk (including us) may view discounts in some LITs as attractive right now. Others may prefer to look at those where share prices have held up better.

Whatever your preference, debt focused LITs can be a valuable portfolio tool. But they’re not "set and forget". Monitoring discount levels, manager updates, and credit exposure trends is key to ensuring these investments

Important information

We encourage you to do your own research or consult your financial advisor before making any investment decision. Remember, a great LIT and a great manager is only part of the story. We also like to make sure they are trading at the right price and that the assets they are investing in are not themselves overvalued.

We’ve been investing in LICs and LITs for over 10 years, via our Affluence LIC Fund. You can access information about the Fund here, or download our LIC Guide to understand more about what we look for when assessing LICs.

Take care and all the best with your investing.