Better Equity Markets Drive Solid LMI Returns

Following the decline in the latter part of 2018, equity markets have staged a strong recovery in the first few months of 2019 with the S&P/ASX 200 Accumulation Index up 13.5% for the four months to 30 April 2019 delivering a respectable 12-month return to that date of 10.4%.

Small cap stocks performed strongly over the four months to 30 April with the Small Ordinaries Accumulation Index up 17.2% delivering a 12-month return of 7.2%. The domestic market has also risen in May with the re-election of the Morrison Government and the removal of the threat to abolish franking credit cash refunds for some investors. US markets have also performed strongly this year with the Dow Jones up 14.0% for the four months to 30 April, for a 9.6% 12-month return. The NASDAQ returned 22.0% for the four months to 30 April and 14.6% over 12 months.

The average 12-month portfolio return (pre-tax NTA plus dividends) from the Australian large cap focused LICs was 9.5%. This was below the 10.4% return of the S&P/ASX 200 Accumulation Index, but Flagship Investments (ASX:FSI) and Diversified United Investment (ASX:DUI) delivered returns above the index. These two LICs have also delivered the best returns in the Australian large cap focused sector over the past five years.

The average 12-month portfolio return from the mid and small-cap focused LICs/LITs to 30 April was 1.3%, below the 7.2% return of the small-cap index. The sector return was dragged down by a number of LMIs that delivered negative returns, some quite significant. Of the small-cap focused LMIs under our coverage, Barrack St Investments (ASX:BST) delivered the best portfolio return for the 12 months at 21.6%. Although its 12-month return of 5.0% was below the small-cap index return, WAM Research (ASX:WAX) has delivered the best portfolio return of the small-cap focused LICs in our coverage for the five years to 30 April 2019. Its five-year return of 9.5% p.a. slightly beat the 9.1%p.a. return from the small-cap index.

There were mixed returns from the international focused LMIs with a number of negative returns driving down the sector average return for the 12 months to 30 April 2019 to 5.9%. The best 12 month portfolio returns of the international focused LMIs under our coverage were 29.9% from Global Masters Fund (ASX:GFL), 20.2% from WCM Global Growth (ASX:WQG), 19.7% from Magellan Global Trust (ASX:MGG) and 16.9% from Evans & Partners Global Disruption Fund (ASX:EGD).

Whilst the LMI sector has generally delivered good returns over the past 12 months, there remain a number of uncertainties that could affect global market returns in coming months including the US/ China trade tensions, Brexit and general expectations for lower global growth.

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Peter Rae

About Peter Rae

Peter Rae joined Independent Investment Research as a supervisory analyst covering listed managed investments in March 2016. Peter has 35 years' experience in the banking and finance industry, including 15 years as an equities analyst.

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