Listed Investment Companies (LICs) | June 2020 performance review and update
Top picks: Our top picks refer to preferred exposures within each sector based on numerous quantitative and qualitative factors. They should not be treated as official stock recommendations but merely as a guide to where we would apportion funds at this point in time. The table on page 3 provides an update of the overall sector, as at 29 July 2020, with our estimated current net tangible assets (NTAs) derived from our model portfolios for the LICs.
Traditional LICs: The All Ordinaries Index returned 2.3% in June, bringing the total return for FY20 to -7.2%. The traditional LICs returned 2.6% on a pre-tax Net Tangible Asset (NTA) basis, slightly outperforming the All Ords, and returned -0.8% on a total shareholder return (TSR) basis. Going into FY21, the backdrop of lower interest rates has continued to diminish yields available from fixed income and other asset classes. With earnings from listed equities impacted by COVID-19, as well as more conservative dividend payout policies, income is becoming increasingly scarce. LICs have the ability to maintain higher payout ratios through utilising profit reserves to supplement the dividends paid from underlying investments. In this context, we see the yields available in the LIC sector as attractive. Top pick AFIC (AFI), which is trading at an estimated 3.2% premium to NTA, has maintained its 14 cent final dividend. Milton Corporation (MLT), trading at an estimated 3.6% discount to NTA, conservatively chose to reduce its final dividend by c.18%. It does, however, have reserves to continue to pay dividends in FY21.
Large capitalisation: WAM Leaders (WLE) increased its full-year dividend by 15%, despite the challenging market backdrop. Since inception, WLE has increased its final dividend every year and also outperformed its benchmark. Trading at a 3.4% discount to NTA, WLE is a top pick. Our value top pick, L1 Long Short Fund (LSF), is trading at an estimated 24.2% discount to NTA. LSF has bought approximately $25m in shares through the ongoing buyback, which has helped the discount narrow from c.40% since the buyback was announced. LSF’s senior investment team also intends to purchase more shares during the trading window in August.
Small capitalisation and specialist: Our small cap top pick, Acorn Capital (ACQ), was trading at a 23.9% discount to NTA as at 30 June. ACQ has maintained its outperformance versus the Small Ordinaries index over 1, 3 and 5-year time horizons. ACQ offers investors a unique exposure to microcap (outside the top 250 by market cap) and unlisted investments (36% of the portfolio as at 30 June). ACQ, despite investing in microcap companies, intends to pay out a dividend yield (post-tax NTA) of at least 5%. Our second small cap top pick is WAM Microcap (WMI), which was trading at a 7.0% discount to NTA as at 30 June 2020. Hearts and Minds (HM1), which is trading at an estimated 11.2% discount to NTA, is our specialist top pick. Given HM1’s strong outperformance since inception, we believe the discount should narrow.
International: Overseas markets, as measured by the MSCI World Index, rose 2.7%. On an AUD adjusted basis, the index fell 1.0%, with the AUD appreciating 3.5% relative to the USD in June. Top pick Magellan Global Trust (MGG) is trading at an estimated 5.2% discount, a slightly larger discount compared to its one-year average of 2.5%. MGG’s largest regional exposure is the US (41%) and its largest sector exposure is Internet/Ecommerce (23%). Platinum Asia Investments Limited (PAI), trading at an estimated 13.1% discount to NTA, is trading at a larger discount than its three-year average of 1.8%. PAI has a 66.2% exposure to the greater China region and 8.9% exposure to Korea. Click here to read full report