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Monthly Listed Invested Trust Report – October 2020

Australia | Nov 02 2020

Download related file: Monthly-LIC-Report-October-2020

A Listed Investment Company (LIC) is a listed investment vehicle that offers investors access to a diversified portfolio of shares in other companies also listed on the stock market.

Note: For comprehensive comparative data tables for LICs and ETFs please see attached.

By Rodney Lay, analyst Independent Investment Research

The LIC/LIT sector copped a lot of criticism over the last 12-months in relation to the apparent mis-selling of new issues and conflicts of interest. We have no interest in revisiting the debate, other than to say that it is one thing for market participants with vested interests in promoting their own non-LMI investment vehicles and opportunistic investors pushing for a wind up of supposedly poor performing managers (e.g, APL – which we discuss this later in this piece), but it is another thing entirely for a market regulator to do so partly on the basis of a flawed research methodology that highlighted a poor understanding of the very products it is charged with overseeing.

But let the facts speak for themselves. We have assessed risk and return over the last 12-months of all LMIs and compared LMIs issued over the last 2 years by way of material broker led IPOs with all other, older vintage LMIs. We have also assessed this cohort relative to its relevant unlisted unit trust sector peers.

The former analysis is contained in the chart below with the X-axis measuring volatility and the Y-axis returns over the last 12-months. Those marked in Red represent the last 2-year IPO cohort.

Clearly higher returns combined with lower volatility represents a superior outcome. In the chart, broadly those LMIs to the right of the X-axis exceed the peer median. As evident, the last 2-year cohort as an average have performed materially better. While this cohort represents only 19% of the total LMI sector by number, we note that the top three LMIs and six of the top ten LMIs by returns belong to this cohort. We also note five of the ten lowest volatility LMIs also belong to this cohort.

The latter analysis is contained in the three scatter charts below, which are divided into three peers groups: international equities; absolute return strategies, and; public debt investment strategies.

In international equities, the growth-oriented strategies have performed particularly well relative to peers. Only the VGI Partners product, VG1, has underperformed the peer median, an aberration relative to its strong historic track-record.

In the absolute returns space, the Regal strategy, RF1, has shot the lights out post-March-April, and is the top-performing strategy in the peer group. LSF has regained prior losses, and now credibly is in-line with its peer median, albeit with materially higher volatility.

In the listed public debt space, results are mixed, but IIR maintains a high degree of confidence with respect to the likes of Partners Group (PGG) and KKR (KKC).

In short, the above illustrates that recent vintage LICs/LITs have largely outperformed both LMI and unit trust peers. Are we surprised? Not at all. This cohort includes some of the stronger managers IIR has reviewed, both the few equities IPOs (Magellan, VGI Partners, Regal) and universally the debt LITs. The irony is that it was the level of due diligence that Joint Lead Managers (JLMs) had to perform and the significant efforts by issuers and distributors to educate the market (in relation to debt and private equity) meant that IPO scale was necessary for 1) the JLMs to back an issue and 2) fund managers to make the exercise feasible. The JLMs were only considering highly regarded managers.

Private debt is the hottest sector amongst HNWs currently, and for good reason. There is hardly a single investment manager out there currently contemplating to coming to market by way of a LIT/LIC for a host of reasons and it's not related to track-record, ability, quality, etc. Bear in mind, while equity vehicles will move in the direction of active ETFs, private debt or private equity cannot utilise such vehicles and only do so in a unit trust form with materially lock-up periods. So, there are two asset classes closed off to retail investors in terms of new managers.

The criticisms directed to debt LITs were particularly ill-informed. For the public debt LITs, criticism was directed to NAV drawdowns. Sorry, did anyone bother to check the historic returns profile of high yield bonds and bank loans?? There was also criticism directly at private debt NAV stability (can’t win either way, it seems). Again, completely bogus and reflecting a lack of understanding that private debt is held to maturity and when it is direct debt, as opposed to Broadly Syndicated Loans, it makes very little sense to factor in public debt pricing by way of the bank loans markets.

The above is an excerpt from IIR's October update. For more – see attachment near the top of this story.

Independent Investment Research, “IIR”, is an independent investment research house based in Australia and the United States. IIR specialises in the analysis of high quality commissioned research for Brokers, Family Offices and Fund Managers. IIR distributes its research in Asia, United States and the Americas. IIR does not participate in any corporate or capital raising activity and therefore it does not have any inherent bias that may result from research that is linked to any corporate/ capital raising activity.

IIR was established in 2004 under Aegis Equities Research Group of companies to provide investment research to a select group of retail and wholesale clients. Since March 2010, IIR (the Aegis Equities business was sold to Morningstar) has operated independently from Aegis by former Aegis senior executives/shareholders to provide clients with unparalleled research that covers listed and unlisted managed investments, listed companies, structured products, and IPOs. IIR takes great pride in the quality and independence of our analysis, underpinned by high caliber staff and a transparent, proven and rigorous research methodology.

INDEPENDENCE OF RESEARCH ANALYSTS

Research analysts are not directly supervised by personnel from other areas of the Firm whose interests or functions may conflict with those of the research analysts. The evaluation and appraisal of research analysts for purposes of career advancement, remuneration and promotion is structured so that non-research personnel do not exert inappropriate influence over analysts.

Supervision and reporting lines: Analysts who publish research reports are supervised by, and report to, Research Management. Research analysts do not report to, and are not supervised by, any sales personnel nor do they have dealings with Sales personnel

Evaluation and remuneration: The remuneration of research analysts is determined on the basis of a number of factors, including quality, accuracy and value of research, productivity, experience, individual reputation, and evaluations by investor clients.

INDEPENDENCE – ACTIVITIES OF ANALYSTS

IIR restricts research analysts from performing roles that could prejudice, or appear to prejudice, the independence of their research.

Pitches: Research analysts are not permitted to participate in sales pitches for corporate mandates on behalf of a Broker and are not permitted to prepare or review materials for those pitches. Pitch materials by investor clients may not contain the promise of research coverage by IIR.

No promotion of issuers’ transactions: Research analysts may not be involved in promotional or marketing activities of an issuer of a relevant investment that would reasonably be construed as representing the issuer. For this reason, analysts are not permitted to attend “road show” presentations by issuers that are corporate clients of the Firm relating to offerings of securities or any other investment banking transaction from that our clients may undertake from time to time. Analysts may, however, observe road shows remotely, without asking questions, by video link or telephone in order to help ensure that they have access to the same information as their investor clients.

Widely-attended conferences: Analysts are permitted to attend and speak at widely-attended conferences at which our firm has been invited to present our views. These widely-attended conferences may include investor presentations by corporate clients of the Firm.

Other permitted activities: Analysts may be consulted by Firm sales personnel on matters such as market and industry trends, conditions and developments and the structuring, pricing and expected market reception of securities offerings or other market operations. Analysts may also carry out preliminary due diligence and vetting of issuers that may be prospective research clients of ours.

INDUCEMENTS AND INAPPROPRIATE INFLUENCES

IIR prohibits research analysts from soliciting or receiving any inducement in respect of their publication of research and restricts certain communications between research analysts and personnel from other business areas within the Firm including management, which might be perceived to result in inappropriate influence on analysts’ views.

Remuneration and other benefits: IIR procedures prohibit analysts from accepting any remuneration or other benefit from an issuer or any other party in respect of the publication of research and from offering or accepting any inducement (including the selective disclosure by an issuer of material information not generally available) for the publication of favourable research. These restrictions do not preclude the acceptance of reasonable hospitality in accordance with the Firm’s general policies on entertainment, gifts and corporate hospitality.

DISCLAIMER

This publication has been prepared by Independent Investment Research (Aust) Pty Limited trading as Independent Investment Research (“IIR”) (ABN 11 152 172 079), an corporate authorised representative of Australian Financial Services Licensee (AFSL no. 410381. IIR has been commissioned to prepare this independent research report (the “Report”) and will receive fees for its preparation. Each company specified in the Report (the “Participants”) has provided IIR with information about its current activities. While the information contained in this publication has been prepared with all reasonable care from sources that IIR believes are reliable, no responsibility or liability is accepted by IIR for any errors, omissions or misstatements however caused. In the event that updated or additional information is issued by the “Participants”, subsequent to this publication, IIR is under no obligation to provide further research unless commissioned to do so. Any opinions, forecasts or recommendations reflects the judgment and assumptions of IIR as at the date of publication and may change without notice. IIR and each Participant in the Report, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any opinion contained in the Report is unsolicited general information only. Neither IIR nor the Participants are aware that any recipient intends to rely on this Report or of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether opinions or recommendations (if any) contained in this publication are appropriate to their investment objectives, financial situation or particular needs before acting on such opinions or recommendations. This report is intended for the residents of Australia. It is not intended for any person(s) who is resident of any other country. This document does not constitute an offer of services in jurisdictions where IIR or its affiliates do not have the necessary licenses. IIR and/or the Participant, their officers, employees or its related bodies corporate may, from time to time hold positions in any securities included in this Report and may buy or sell such securities or engage in other transactions involving such securities. IIR and the Participant, their directors and associates declare that from time to time they may hold interests in and/or earn brokerage, fees or other benefits from the securities mentioned in this publication.

IIR, its officers, employees and its related bodies corporate have not and will not receive, whether directly or indirectly, any commission, fee, benefit or advantage, whether pecuniary or otherwise in connection with making any statements and/or recommendation (if any), contained in this Report. IIR discloses that from time to time it or its officers, employees and related bodies corporate may have an interest in the securities, directly or indirectly, which are the subject of these statements and/or recommendations (if any) and may buy or sell securities in the companies mentioned in this publication; may affect transactions which may not be consistent with the statements and/or recommendations (if any) in this publication; may have directorships in the companies mentioned in this publication; and/or may perform paid services for the companies that are the subject of such statements and/or recommendations (if any). However, under no circumstances has IIR been influenced, either directly or indirectly, in making any statements and/or recommendations (if any) contained in this Report. The information contained in this publication must be read in conjunction with the Legal Notice that can be located at http://www.independentresearch.com.au/Public/Disclaimer.aspx.

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