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LIC update: benefits of international exposure

Australian equities rose marginally during the September quarter with the S&P/ASX 200 Accumulation Index up 0.7%. The performance for the 12 months to 30 September 2017 was a solid 9.2% driven by a good performance from large caps and strong gains in the resources sector with the S&P/ASX 200 Materials Index up 17.3% for the 12 months.

International LICs performing best

However, the best performing LICs for the 12 months to 30 September 2017 were those with an international focus reflecting the strong performance of international equity markets, with the MSCI World Index (Local) up 17.9% for this period. The top four performing LICs were PM Capital Global Opportunities Fund (ASX:PGF) up 30.4%, MFF Capital Investments (ASX:MFF) up 22.5%, PM Capital Asian Opportunities Fund (ASX:PAF) up 22.2% and Platinum Capital (ASX:PMC) up 20.7%. (IIR does not cover these four LICs and we make no recommendations in relation to these LICs.) The strong performance of these LICs over the past year, which significantly beat the returns of the Australian market, highlights the benefits to investors of a diversified portfolio with a proportion in international equities.

The best performing LIC in our coverage universe was also an international focused LIC, Global Masters Fund (ASX:GFL). GFL invests in quality international shares, but its largest exposure is to Berkshire Hathaway, at 73.8% of its portfolio. Berkshire Hathaway shares rose around 30% for the 12 months to 30 September 2017 helping drive GFL’s 18.6% growth in pre-tax NTA. The reason the pre-tax NTA growth did not match the growth in the Berkshire Hathaway share price was that GFL’s investment in Flagship Investments (ASX:FSI) achieved limited share price growth and the Australian dollar rose over the same period. GFL was also the best performing LIC in our universe over a five-year period delivering a pre-tax NTA return of 17.7% p.a., again, reflecting the strong performance of Berkshire Hathaway shares over the period. GFL has also delivered strong share price returns of 52.9% over 12 months and 28.7% p.a. over five years reflecting elimination in the discount to pre-tax NTA. Our rating for GFL is Recommended Plus, however, the shares now look expensive trading at roughly a 10% premium to pre-tax NTA.

Emerging Markets Masters Fund (ASX:EMF) also delivered a strong 12 month performance with a portfolio return (pre-tax NTA plus distributions) of 13.2%, although this was below the MSCI Emerging Markets Index, AUD return of 17.5%. This reflects EMF’s bias to sectors leveraged to what it believes are growth sectors such as consumer staples and healthcare. These sectors have not performed as well as 'value' sectors of the market over the past year. Over the past three years, this LIT has outperformed the benchmark with a return of 8.6% p.a. compared to the benchmark return of 8.1% p.a. EMF provides domestic investors with exposure to a professionally managed portfolio of emerging market funds, a unique proposition on the ASX. From a country perspective, the largest allocations are to China (26.9%) and India (16.9%). A significant portion (18.5%) is also invested in what the company refers to as Frontier Markets. The portfolio is significantly overweight India and the Frontier Markets relative to the benchmark. At 30 September 2017 EMF securities were trading at a 1% premium to pre-tax NTA, a reasonable entry point for long-term investors looking for emerging markets exposure. Our rating for EMF is Recommended Plus.

Cadence Capital (ASX:CDM) and Perpetual Investment Company (ASX:PIC) which both have blended portfolios of Australian and international equities also delivered returns above the domestic market return. CDM delivered a portfolio return of 10.3% and PIC delivered a portfolio return of 10.2%. Our rating for CDM is Recommended Plus and PIC is Recommended. At 30 September 2017 CDM was trading at a 12.3% premium to pre-tax NTA while PIC looked reasonable value at a 4.7% discount.

Australian large cap LICs underperform over 12 months 

The five largest Australian large-cap focused LICs delivered an average portfolio return of 8.0% for the 12 months to 30 September, below the S&P/ASX 200 Accumulation Index return of 9.2%. This largely reflects underweight positions in resources, a sector which has performed well over the last 12 months. Over a five-year period these same LICs have delivered an average portfolio return of 9.1% p.a. versus the market benchmark return of 10.1% p.a.

Over the longer-term we would expect these LICs to perform broadly in line with the market. At 30 September 2017 Australian Foundation Investment Company (ASX:AFI) and Milton Corporation were trading at slight premiums to pre-tax NTA and Australian United Investment Company (ASX:AUI) was at a slight discount. All look reasonable value for long-term investors looking for exposure to a diversified portfolio of Australian large-cap shares. Our rating for AFI and MLT is Highly Recommended and our rating for AUI is Recommended Plus. Diversified United Investment (ASX:DUI) was the best performing large-cap focused LIC over the 12 months to 30 September 2017 beating the market with a portfolio return of 13.5%. Its five-year return of 11.2% p.a. also beat the market benchmark return of 10.1% p.a. At 30 September DUI was trading at a 3.3% discount to pre-tax NTA, a good entry point for investors looking for exposure to a diversified portfolio of Australian large-caps shares. We note that DUI also has a small exposure to international shares and also Australian small caps. Our rating for DUI is Recommended.

Whitefield (ASX:WHF) was the best performing Australian large-cap focused LIC on a five-year basis. Whitefield primarily invests in Australian industrial shares meaning that it does not have exposure to the volatile resources sector. Whilst WHF underperformed the industrials benchmark over the past 12 months, its five-year return of 12.9% p.a. was slightly better than the 12.7% p.a. return from the S&P/ASX 200 Industrials Accumulation Index. At a 6.8% discount to pre-tax NTA at 30 September, WHF’s shares represent good value for investors looking for exposure to Australian industrial shares. Our rating for WHF is Recommended Plus.

 

Peter Rae is Supervisory Analyst at Independent Investment Research. This article is general information and does not consider the circumstances of any individual.

 

11 Comments
Carlos
March 29, 2019

makes no sense to me that you don't cover MFF,
which not only is one of the largest global LICs ,with a market cap well over 1 Billion, and also has been by far and away the best outperformer, with returns of 20% per annum over the past 10 years ( as of end of Feb 2019 ) !! (Editor's note: the article does cover MFF).

Graeme
December 02, 2017

Following on from Alex's comment, I would be interested in general on what criteria IIR apply when choosing which LICs to cover. It does seem rather random.

Alex
November 30, 2017

Nice article Peter.

May I ask, why don't you cover MFF or PGF ?

carikku
November 30, 2017

If it was a product push, there would have been some mention of how Argo Investments (ASX:ARG), the LIC on whose board Chris Cuffe sits, outperformed.

Note: PM Capital Global Opportunities Fund is ASX:PGF not PFG as stated. That is Prime Financial Group. Just in case anyone is looking at buying (am proud shareholder).

Ian A
November 30, 2017

Peter Rae,

Keep up the great work. There are many SMSFs and personal investors in LICs who find the information very useful.

john
November 29, 2017

SMSF Trustee, the title of the article is clearly in relation to LIC's, with the article then talking about how LIC's with international exposure performed well. I, for one, get a lot of value from Cuffelinks LIC reports. A bit unusual that you took this article as a "product push". It's clearly nothing of the sort. And by the way, its silly to think that LIC's are a waste of time simply because they contain companies that one can invest in on their own. LIC offer the benefit of a managed fund, whilst often not carrying the high fees that usually accompany such funds. There is a reason why LIC's have become more and more popular in recent times.

Rob
November 30, 2017

Absolutely agree with everything you said, John.

SMSF Trustee
December 01, 2017

Clearly I misread the article, but my comments are also now being made to say much more than they did or were intended to say. I didn't say and don't believe LICS are a waste of time. I most certainly understand the investment case for them, but my main points are totally valid. The strong performance of global LICS is not because they're LICS but because they were invested in global markets. And you can get exposure in other ways, though I can now see how the article was intended to focus on comparing domestic and global LICS.

Can we call a truce now?

SMSF Trustee
November 28, 2017

Not at all, but the opening paragraph is about the Australian market and then the body of the article says that global LICS did better. As if it was being in LICS rather than in global that made the difference. Perhaps all that was needed was another sentence in the opening paragraph that referenced Australian market LIC returns - something not done until the end of the article.

SMSF Trustee
November 28, 2017

Hmmm, how to turn an asset class discussion into a product push. You don't have to be in LIC's to get the performance of global shares. Traditional international equity funds will also do the trick! Nothing special about LICs, they're just a vehicle that obtains the performance of the asset class in which they invest.

Graham Hand
November 28, 2017

Hmmm, SMSF Trustee. Are we not supposed to cover LICs and ETFs (of which there are $65 billion on the ASX and of interest to many of our readers) simply because exposure can also be obtained via unlisted funds? Our readers want to know about alternatives, it's not a product push.

 

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