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LICs In Australia: Impact & Recovery From Covid

Australia | Mar 03 2021

This story features Evans & Partners Global Flagship Fund, and other companies. For more info SHARE ANALYSIS: EGF

Download related file: Monthly-LMI-Update_February-2021

Independent Investment Research analyst Radek Zeleny sheds light on how Australia's listed managed investments fared during the pandemic

[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. These are variously also known as Listed Investment Trusts or Listed Managed Investments. They differ to Exchange Traded Funds in that they are close-ended, whereas ETFs are open-ended vehicles that are created and destroyed by the ETF sponsor based on demand/supply, akin to a futures contract.]

Note: For comprehensive comparative data tables for LICs and ETFs please see attached. The story below is part of IIR's monthly update on Listed Managed Investments (LIMs), which in its entirety is attached to this story.

Evans & Partners LITs cease trading on the ASX

During January, three of the Evans & Partners LITs ceased trading on the ASX after unitholders voted in favour of transitioning the funds from a LIT structure to an open-ended unit trust. The three LITs that ceased trading were the Evans & Partners Asia Fund ((EAF)), Evans & Partners Global Flagship Fund ((EGF)) and Evans & Partners Global Disruption Fund ((EGD)).

The decision to delist the funds and transition to open-ended trusts was based on changes to the market conditions. The investment manager and responsible eEntity felt the listed trust structure was no longer the best structure for unitholders. The units had been trading at a discount to NAV leading into the decision.

The open-ended trust structure will allow for unitholders to redeem units at the NAV (less a spread). The IIR ratings for the funds remain subject to a review of the new structure.

Shareholders taking advantage of NAC bonus options

In March 2020, NAOS Ex-50 Opportunities Company ((NAC)) completed a 1-for-2 bonus option issue for shareholders. The issue was conducted to raise funds to grow the investment portfolio. The manager believes the optimal portfolio size for NAOS is $200-$300m.

23.8m options were issued under the offer. The options have an exercise price of $1.03 and can be exercised on or before 31 Match 2023. Shareholders have been taking the opportunity to convert some of their options and buy NAOS shares at a discount to net tangible assets (NTA) with circa 580,000 options exercised at the date of publish of this update.

The company’s pre-tax NTA has been above the exercise price of $1.03 since June 2020 with a pre-tax NTA at 31 January 2021 of $1.23.

BTI’s discount at narrowest in 4 Years

On 31 January 2021,  Bailador Technology Investments ((BTI)) was trading at a discount to pre-tax NTA of 8.6%. This is the first time the LIC has traded at a single-digit discount since December 2016, based on month-end share prices.

The market is starting to appreciate the value of the portfolio of underlying investments.

Throughout 2020, the company traded at a discount to pre-tax NTA as high as 47% with the share price hitting a low of $0.49 in March 2020.  Bailador Technology Investments was trading at $1.28 per share at January-end 2021.

WAX trading at a significant premium

WAM Research Limited ((WAX)) was trading at a premium to pre-tax NTA of 43.9% at 31 January 2021. Over the 12 months to January-end, the company has traded at an average premium to pre-tax NTA of 33.6%.

The company’s ability to provide an increasing dividend stream to shareholders is proving very valuable to shareholders, particularly given the experiences in 2020 with some of the individual stocks that were relied upon for income by investors having to suspend or cut dividends.

The impact and recovery from the covid downturn

The jury seems out whether covid in 2020 was a true Black Swan event. Nassim Nicholas Taleb, the originator of the term, says that for an event to be classified as a Black Swan “nothing in the past can convincingly point to its possibility”. Given mankind’s history of pandemics, it has been argued that the covid pandemic probably wasn’t a totally unpredictable event.

While perhaps semantics the covid crisis was largely unforeseen and created a short sharp shock for the markets in 2020. To surmise, 2020 was a rollercoaster ride for global financial assets.

During January and February the markets seemed to be powering ever higher, March however saw a swift decline as the markets reacted to the covid pandemic finally absorbing the full implications of the crisis and consequent shutdowns.

After a short sharp sell-off in March, there was much speculation whether markets would see a V-shaped recovery or was it to be an L or even W shaped pattern. Yet about ten weeks after the low was hit 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 proved thus far to be a strong V-shaped recovery.

In the light of the markets again flirting with record highs, we look at how the LMIs (includes LICs and LITs) have coped with the crisis.

The traditional tool for measuring risk has been the standard deviation of returns, however, 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 in percentage.

We have examined the LMI sector drawdowns for the 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 graph below 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 previous highs.

Interestingly there seems to a regional bias with LMIs targeting the emerging market 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.

Note: For comprehensive comparative data tables for LICs and ETFs please see attached. The story above is part of IIR's monthly update on Listed Managed Investments (LIMs), which in its entirety is attached to 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.

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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.

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CHARTS

BTI EGF NAC WAX

For more info SHARE ANALYSIS: BTI - BAILADOR TECHNOLOGY INVESTMENTS LIMITED

For more info SHARE ANALYSIS: EGF - Evans & Partners Global Flagship Fund

For more info SHARE ANALYSIS: NAC - NAOS EX-50 OPPORTUNITIES CO. LIMITED

For more info SHARE ANALYSIS: WAX - WAM RESEARCH LIMITED