The LIC Tear-Down
Which active managers (LICs) are leading the ASX and why? The LIC Tear-Down.
In the current market conditions active managers are realising the perfect environment to show case their skills to separate the ‘good’ from the ‘average’.
The last 12 months on the ASX has provided a lot of volatility with limited annual return (calendar year 2016 and FY 15/16). In the competitive space of active managers and Listed Investment Companies (LICs) on the ASX these are the ideal market conditions to stand out, and the best way to do that is to consider their share-price performances.
Here’s a quick look at:
- Who is leading the LICs (it’s not who you’d expect);
- What makes a LIC leader right now;
- What makes the leaders different; and
- Can they stay at the top?
Who is leading?
The coveted ranking of number 1 always comes with the caveat that requires an ‘apples with apples’ comparison. Before the lead is handed out, we quickly need to look at the context and universe of Active Managers / LICs that is being compared.
For LICs, the comparison is dependent on which index the LIC is trying to beat, this is called the ‘benchmark index’. This is a little like the ‘family sedan’ category for cars; it’s normally fine to compare a Holden and a Ford, but not really to the new Tesla super-sedan that’s four times the price.
When looking for the leader amongst the LICs, we need to be mindful of the comparing the blue-chip focused LIC against a LIC that only holds micro-caps. This won’t work as a fair comparison.
Below are main benchmark performances over the last year. The point to note is there are two benchmarks that performed better than the other three.
The top two performing benchmarks are:
- Mid-Caps; and
- Small Caps
(read the Week in Review more explanation on the market and sector groupings).
What makes a LIC leader right now?
Looking at the leading benchmarks most would expect the LICs that focus on the Small and Mid-caps only to be the outright leaders with an unfair advantage – the Telsa super-sedan. Although this was not the case.
The Mid-Cap specialist on the ASX is Mirrabooka (MIR), but they came in at fourth place.
The Small-Cap specialist on the ASX are Naos Emerging Opportunities (NCC) and Glennon Small Companies (GC1), but they’re down 6.3% and 4% respectively (year to date).
Surprising the winning LICs provided the best performances despite their benchmark index not being the strongest on the market. The Top 5 LICs over the last year are:
- WAM Research Limited (WAX), +14% for the last year;
- WAM Capital (WAM), +8.8% for the year;
- Cadence (CDM), +6.7% for the last year;
- Mirrabooka Investments (MIR), + 4.5% for the year; and
- BKI Investment Company (BKI), +0.29% for the year
Their benchmarks are respectively All Ords Accumulation (Top 500), ASX Top 300 Accumulation, All Ords Accumulation (Top 500), Mid-Caps Accumulation and ASX Top 300 Accumulation.
Note: Accumulation means the index includes dividend payments.
What’s even more impressive is just how much growth the top three LICs have provided over the last year. Have a look at the chart below to see the magnitude of their lead – despite the ‘handicap’ provided by their benchmark index. You’ll note that the majority of the LICs have lost money this year, just like the major indices on the ASX.
What Makes the Top 3 LICs Different?
- Focus on undervalued small caps with a near-term catalyst to promote growth;
- Normally only hold around 10% of ASX Top 200 shares
- 50% holds WAX and 50% holds WAA
- WAA is another Wilson Asset Management LIC with high turn-over and focuses on market events like IPOs etc
- Have international exposure as well and shorting and leverage; and
- Have been (and still were at last report) actively been short RIO and WPL
Why are they at the Top and can they stay there?
These three LICs have three leading features in common;
- They are true ‘Active’ managers. Meaning the managers seek opportunities based on their merits, not their market cap;
- Investments focus on leading Market Themes. The managers keep their portfolios focused on the shares keeping ahead of the market and actively reduce or drop those that fall behind; and
- They have a strong history of sound performance which provides shareholders with comfort from experience.
Only time will tell whether these leaders will stay at the top or not, but all three have been holding a premium to their monthly reported values of around 8% for almost six months. This premium suggests that shareholders are very happy to keep buying these leaders above their real worth (Net Tangible Assets) – even as the market has been volatile over the last few months.
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Christopher is head of equites at Spring Financial Group. Christopher has over 10 years' experience managing equities desks with thousands of retail clients and responsibility for maintaining and servicing retail and wholesale relationships.