Let’s focus on the ‘Listed Investment Companies’ referenced as LICs. There is a whole sector dedicated to active investment in the wider ASX, International market.

These companies exist for the sole purpose of investing broadly in the market utilising their expertise, methodologies, resources and documented investment mandate at scale. Providing an alternative with liquidity advantages (for shareholders) over managed funds and gaining exposure directly to the ‘smart’ money. But is it really?

For the novice investor and/or non-professional investor the theory of ‘piggy’ backing off a market professional with performance that can be measured sounds like a pretty good idea. I mean these managers are experts, with resources and teams at their disposal. They have many more tools to outperform the market than you the novice, right?

Taking a look at a list of the dedicated list of ASX LICs (listed investment companies) certainly tells a different story. In fact, you may come to surmise where is the value in LICs? Or worse still, why would I invest in LICs?

Here is the current (31/08/20) best and unfairest! A snapshot from the 108 LICs listed on the ASX.

These tables show how the Investment managers are faring against their own share price and that of their NTA (Net Tangible Asset – Value).

To be fair I have only highlighted one comparable, NTA value. There are numerous other factors such as yield, capex (growth funds), irregular valuation of non-listed assets that in a comparison such as this could unfairly represent a funds true position.

In simple terms there are more discounts to NTA value than premiums. Some downright scary trading discounts exist to the NTA value of their assets.  Here in the table below is what I am talking about, the ASX ‘Top 10’ best and worst! Note there some common parties in both tables.

The Best! (Premium to NTA after Tax)
Listed Investment Company Premium (%)
AIQ – Alternative Investment Trust 35.43
WAX – WAM Research Ltd 33.45
8IH – 8IHoldings Ltd 21.69
AFI – Australian Foundation Investment Company Ltd 21.24
WAM – WAM Capital Ltd 19.27
DUI – Diversified United Investments Ltd 16.76
AUI – Australian United Investment Co. Ltd 16.33
ARG – Argo Investments Ltd 14.72
MIR – Mirrabooka Investments Ltd 10.13
ECL – Excelsior Capital Ltd 8.86

 

The Painful! (Discount to NTA after Tax)
Listed Investment Company Discount (%)
SVS – Sunvest Corporation Ltd -60.66
AIB – Aurora Global Income Trust -56.00
AUP – Aurora Property Buy-Write Income -51.70
MMJ – MMJ Group Holdings Ltd -48.02
CD3 – Cordish Dixon Private Equity Fund III -47.67
BEL – Bentley Capital Ltd -45.79
CD1 – Cordish Dixon Private Equity Fund I -44.61
CD2 – Cordish Dixon Private Equity Fund II -44.59
CDM – Cadence Capital Ltd -32.67
TGF – Tribeca Global Natural Resources Ltd -32.25

Source: Morningstar as of 31/08/2020. See the full list here.

 

My consistent message throughout is ‘keep things simple.’  The reasoning may be borne out in this very table. Of the NTA ‘high achievers’ only two have any degree of International exposure whilst in the naughty corner where your share price is decidedly less than the NTA value are heavily represented with Funds with exposure to International shares, derivatives, the complex strategies that sound all very impressive at IPO time have largely destroyed value.

Seems the more you get away from a vanilla direct ASX listed position, the more likelihood the strategy is going to fail. The data does not lie. And in the case of the few managers that have the favour of the market, it may be the case that the premium is too high due to the fact that we have ‘crowding’ towards those that can actually retain the value. There is nothing wrong with following the ‘good’ managers that have a proven long-term track record, but is paying 30%+ premium above asset value good buying? Would the premium be so high if we had a sector that was full of successful managers?

The logic and practical purpose that LICs presented when they first came to prominence in the market decades ago was simple in that it presented an option for investors to get diversification.

If you still have all your hair and it is not grey you will not know but last century there was no CommSec (or other discount brokers), nor was there (are you sitting down to believe this one?) internet. The first ‘Contract Note’ I got (1986, I was 17 not even sure if that is legal these days?) came from Cortis & Carr Stockbrokers. It came in the mail with an Invoice to pay (I actually think it was 14 days to pay! Maybe someone can confirm what it used to be out there?). Point being, things don’t stay the same.

Retail investors had no access to information and brokerage was a significant cost (2-3%) that made true diversification for someone with limited funds unachievable.

This is not a fund manager bashing exercise and believe me there is nothing wrong with following the long-term high achievers, but they are few, and the cost to access their IP seems expensive to access relative to alternatives.

Of the 108 funds the majority are in negative territory, this must be unsettling if you are an investor. Even in the case of highest-ranking stock AIQ it is illiquid and a small $33m market cap.

If you were to buy any significant volume that premium goes through the roof even further. (based on the next parcel of shares available for sale).

It’s ranking at number 1 is largely an anomaly and irrelevant. Which is the point of this piece, let’s look at the sector and see if it’s a relevant and savvy place to be invested.

The LICs were a modern, smarter way to assist the retail investor achieve some diversification and undoubtedly there have at times been solid standalone investments. But my point being the market is always evolving it never stays the same and it certainly is more efficient.

And with these efficiencies, cost, timeliness of execution, transparency, that we all enjoy then perhaps there is a better way of doing what the LICs originally offered?

As we can see from the table the attempt to evolve, be more relevant, sophisticated on face value hasn’t worked. The fund managers that have deviated further away from the more generic fund holding a basket of ASX shares have in general terms seen the worst result for the investor.

So to be consistent with the theme of simplicity here are some simple ways to achieve diversification for less cost that gives you one thing the LICs don’t, flexibility.

 

ETFs (Exchange Traded Funds)

 

If you are after exposure from anything from the top 20 – 500 ASX companies then you can achieve this diversification by purchasing your preferred ETF. If you want to track true market performance then you need to purchase what is termed a ‘passive’ ETF.

Meaning one that has no bias and simply duplicates the performance of the market/sector. Most popular being ASX, (XJO, XAO etc.) Vanguard (VAS, etc.), State Street (STW etc.) products there are many more providers and many more index specific products.

The active ETFs have more specific exposures (sectors. Market Cap, commodities) and can have currency risk too. This is all good if you have a specific view on something but can carry the whole performance of a singled-out sector or commodity which is not much good to you if you get it wrong! They are similarly managed like the LICs so you are reliant on the expertise of the manager, and being actively managed they have more inherent costs.  And as the above LIC table outlines (underperforming NTA table) some professional managers have simply outsmarted themselves in an attempt to ‘stock pick’ and employ a more sophisticated methodology. So tread warily.

 

Buy the shares directly yourself!

 

This is another simple alternative but it takes more work so most find it too hard.

Simply pick out your preferred Managers and get on to their website. There is full disclosure of what stocks they hold and buy them yourself. Understand that they have already taken their position but in the event of a market correction you could perhaps accumulate at a discount? You can also reweight the holdings to your preference and it may in fact be a more tax efficient way for you to hold shares.

The Individual investor out there have perhaps the biggest advantage over the institutional scale participants and that is flexibility and timing. You can buy and sell at any time.

For example a Professional Manager may have the investment mandate to invest in a particular stock. The practical exercise of accumulating the stock may in fact take weeks/months to acquire and achieve the desired weighting. Simply due to the sheer weight of funds being deployed. We could be talking in the vicinity of tens of $ millions. The individual investor this is not the case. A timelier (usually immediately) position can be taken with the advantage of not having too much due influence on the prevailing share price. It enables you also to take advantage of opportunistic price windows without creating demand on the ‘buy’ side and thus instigating price appreciation in the process.

More importantly you can get out of a position immediately if the market or stock sentiment turns against you.

It really is hard for the LICs, Managed Funds to be opportunistic. Use your flexibility, timeliness as key tools that help you outperform. Those little percentage wins here and there really do add to your overall performance and being a small fish in a pool of big players is, believe it or not, advantageous to you.

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New to investing? Read about How to keep your investment decisions simple.

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Disclaimer:
This article does not take into account the investment objectives, financial situation or needs of a particular person or entity. Before acting on any investment strategy or advice you should first consult with your current ASIC accredited investment professional or seek out a compliant investment professional for such. 

1 Comment

  1. Brian Roberts

    Loving this guy! Making a lot of sense.