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.
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