The impact and recovery of LMIs from the COVID-19 downturn

Claire Aitchison

Independent Investment Research

This month we take a look at the impact and recovery of listed managed investments (LICs and LITs)  from the COVID-19 downturn in 2020. 

2020 was certainly a rollercoaster ride for global financial assets. During January and February the markets seemed to be powering ever higher, but March saw a swift decline as investors finally the full implications of the COVID-19 crisis and consequent shutdowns. 

After a short sharp sell-off in March, there was much speculation on whether markets would see a V-shaped recovery, or whether it would be an L- or even W-shaped pattern. But about 10 weeks after the low, and despite the fact that COVID was still rampant, around 80% of the losses were recovered. 

We have now reached almost a year since the onset of the crisis and it has so far proved to be a strong V-shaped recovery. 

As markets again flirt with record highs, we look at how the LMIs (including LICs and LITs) have coped with the crisis.

The traditional tool for measuring risk has been the standard deviation of returns, but the measure that perhaps provides a better assessment of security and portfolio risk is drawdown. 

Drawdown measures the difference in value from the most recent peak to the most recent trough in the market, measured as a percentage. We have examined the LMI sector drawdowns for calendar year 2020 using the peak reported pre-tax NTA/NAV prior to the crisis (in January/February) and then the lowest reported pre-tax NTA/NAV after that (invariably March). 

The below graph shows the average drawdown of the various LMI sectors based on reported pre-tax NTAs/NAVs. 

The group averages show that the pure equity-exposed LMIs overall fared the worst. Unsurprisingly, LMIs primarily exposed to fixed income had the lowest average drawdown while Australian mid/small-cap equity orientated LMIs fared the worst. However, Fixed Income LMIs have recovered the slowest over the year while the mid to small-cap equity LMIs have not only recovered but in many cases surpassed their pervious highs. 

Interestingly there seems to a regional bias, with LMIs targeting emerging markets appearing to fare better on the drawdown measure than LMIs targeting the traditional markets; but we note the small sample size (three emerging market LMIs) may play a factor.

Average Pre-tax NTA/NAV Drawdowns

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Claire Aitchison
Head of Equities & Funds Research
Independent Investment Research
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