ASX LIC Performance Comparison – Not A Happy FY19

Having said that, at this point in time I am happy at least I didn’t rush in buying more LICs about a year ago after some modest discount widening at the time. A message I hope I have got across in blogging about LICs is that paying large premiums to NTA can be risky. Likewise committing money to LICs at IPO stage. The increased supply of LICs has weighed on the sector. A year ago I made a blog post looking at some of the themes in the ASX LIC space I expected over the year ahead.

Are LIC discounts that wide?

An old rule of thumb I have heard with ASX LICs is since outperforming the benchmark can be a mugs game for active managers we should expect discounts. For example some believe if fees chew up 1% of the NTA then a 10% discount is normal. Many LICs easily leak 2% in fees when all costs are considered so using that theory a 20% discount might be considered normal in some cases.

In the absence of specific catalysts to close the discount gap that sort of thinking might still be a good rule of thumb.

ETF vs LIC performance

It is not only the discount widening that has hit returns in 18/19. Many funds managers have simply underperformed with their stock picking.I can relate to that as my own picks have also done relatively poorly versus the index. This will continue to leave in many cases their longer term performance record (even after their “creative” reporting of performance) to be looking fairly poor.

This comes at a time of increasing choice and competition from ETFs.

Catalysts for ASX LIC discounts to tighten

Obviously there is future performance to improve but that can be difficult to predict. There are some areas I believe that are worth watching that are not as difficult to forecast.

The IMA I see as an important area. This can often be a stumbling block for shareholders to organise to capture value by winding up a LIC at near the NTA. As the newer LICs get in the back half period of usually 10 year IMAs then things could get more interesting.

Pre GFC the LIC sector climbed from about 40 to over 60 from memory. As discounts widened many didn’t survive and the number fell back to near 40. Now I recently read we have around 114! In time a significant number will not survive in their current form. I might explore which ones in a later blog post (well perhaps explore some of a rather big bunch anyway).

Shareholder Activism, buying ASX LICs at a discount

Activists getting above the 5% threshold in LICs. I have already seen some examples in recent months and expect more of this to occur.

Situations also become more interesting where the fees of the LIC are not too large whilst you potentially have to wait for a catalyst. I refer to instances where the company might add say 1.5% to the NTA each year via a buy back policy which potentially can cover nearly all of the fee drag. Also cases where the manager is a long way from their “high watermark” in terms of future performance fees.

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