Listed Investment Companies (LICs) | Monthly LIC Update – Top Picks
This report contains a LIC sector update and performance review of our coverage list for the month of April 2020. The table on page two provides an update of the overall sector, as at 29 May 2020, with our estimated current NTAs derived from our model portfolios for the LICs.
Top picks: Our top picks refer to preferred exposures within each sector based on numerous quantitative and qualitative factors. However, they should not be treated as official stock recommendations but merely as a guide to where we would apportion funds at this particular point in time.
Traditional LICs: The All Ordinaries Accumulation Index (XAOAI) was up 9.5% for the month of April. On average, traditional LICs, on a Net Tangible Asset (NTA) basis, underperformed the index by 1.5% during this period. Australian equities continued to rally in April following the trough in mid to late March, aided by substantial fiscal and monetary stimulus as well as the continued success of COVID-19 containment efforts in Australia, as reflected by a decreasing number of new cases. On a total shareholder return (TSR) basis, traditional LICS in our coverage universe underperformed the XAOAI by 2.1% in April 2020. Our current top picks are Diversified United investment (DUI) and Milton Corporation (MLT). DUI is currently trading at an estimated 2.5% discount to NTA, while MLT is trading an estimated 2.2% discount to NTA.
Large capitalisation: Following weaker performance earlier in the year, L1 Long Short Fund (LSF) produced the best NTA performance of our large cap coverage, returning 23.2% during April. This translated to a strong TSR return of 22.5% in the month. This strong shareholder return continued in May with LSF returning 21.7% in the month. However, despite the strong returns, LSF continues to trade at an estimated discount of 23.2%. Management is focused on reducing the prevailing discount and has undertaken initiatives such as the previously announced buyback of up to 10% of shares. Given the continued discount to NTA and ongoing buyback, LSF is one of our value picks. Our second value pick this month is Perpetual Equity Investment Company (PIC), which is trading at an estimated 12.8% discount to NTA.
Small capitalisation and specialist: Our first small cap top pick is Acorn Capital (ACQ), which was trading at an 14.9% discount to NTA as at 30 April. ACQ offers investors a unique exposure to microcap (outside the top 250 by market cap) and unlisted investments (37% of the portfolio as at 30 April). ACQ has outperformed the Small Ordinaries index over 1, 3 and 5-year time horizons. 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 4.1% discount to NTA as at 30 April 2020. Hearts and Minds (HM1), which is trading at an estimated 10.2% discount to NTA, is our specialist top pick.
International: Overseas markets also continued to rally in April, with the MSCI World Index up 10.9%. On an AUD adjusted basis, the index rose 3.8%, with the AUD rallying 6.2% relative to the USD in April. Top pick Magellan Global Trust (MGG) is trading at an estimated 1.8% discount. Platinum Asia Investments Limited (PAI), trading at an estimated 10.9% discount to NTA, is our preferred pick for a regional exposure to Asia. PAI has a 71.9% exposure to the greater China region and 11.9% exposure to Korea. Click here to read full report