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Watch premiums and discounts in LICs

Independent Investment Research (IIR) has released its December Quarter 2016 review of the LIC sector, sometimes called Listed Managed Investments (LMI). A summary of the performance of the 34 LICs included in the Report is presented below. The full paper with more detailed coverage is available here. As this full review is of the previous quarter, investors should check latest prices which may have moved significantly.

Overall equities performance

For the December 2016 quarter, the S&P/ASX200 was up by 5.2% following the US market rally after Trump’s election. Large cap equities, and especially resources stocks, contributed most to this performance. Small caps, down 2.5% for the quarter, still managed an overall gain for the year of 13.2%. For the 12 months to December 2016, the S&P/ASX200 was up 11.8%.

LIC performance

IIR’s analysis uses two different measures. The first is total returns (share price gain or loss plus dividends) which represents the actual return received by shareholders from their investment. The second is pre-tax NTA plus dividends, which is better for evaluating manager performance.

Using this second metric, the best performing fund for the December quarter was Global Master Fund (ASX:GFL) with a 15.5% increase in portfolio value due to a strong share price performance of its core holding, Berkshire Hathaway. As the overall market performed well, so too did the majority of LICs included in the Review. However, some small cap LICs had negative returns.

If using the first metric, Westoz (ASX:WIC) was the best performer for the quarter with an 8.1% total return in share price and dividends due to its resources focus. This reduced the discount to pre-tax NTA from 16.8% at 30 September 2016 to 9.4% at 31 December 2016.

Premiums and discounts

As at 31 December 2016, 12 of the 34 LICs covered were trading at a premium to pre-tax NTA. The largest of these was Mirrabooka Investments (ASX:MIR) at 25.8%, followed by WAM Capital (ASX:WAM) and WAM Research (ASX:WAX), each at 20.7%.

At the other end of the scale, Global Master Fund (ASX:GFL) was trading at the largest discount to pre-tax NTA at 22.3%, widening from 15.8% as at 30 September 2016. Over the past three years, GFL’s discount has averaged 14.4%.

The table below shows the quarterly performance for each of the 34 funds as measured by both metrics mentioned above, along with their premium/discount to pre-tax NTA:

Leisa Bell is Assistant Editor at Cuffelinks.

March 23, 2017

One should also be aware that LICs use a number of different ways are used to report their performance to their shareholders. While all LICs publish monthly a pre and post tax NTA, that's where commonality ceases.

At the conservative end of the spectrum, some managers report performance as change in post tax NTA adjusted for dividends paid. This is in my opinion the best measure of the change in value of the long term shareholder’s investment. Other managers will adjust this for tax paid and/or fees paid. Still others will use a portfolio return, again possibly adjusted for fees and taxes. I was surprised that the one year portfolio return (before taxes and fees in the fine print) of over 15% reported by one manager, equated to only a 2% increase in the after tax NTA adjusted for dividends paid.

Portfolio return is undoubtedly a useful method for comparison against a benchmark index, though one has to ensure the benchmark is appropriate. Why one dedicated microcap manager would benchmark against the All-ords index (primarily large banks, miners and retailers) beats me.

Cat Daddy
March 23, 2017


What part did I miss. The article under sub heading LIC performance reads "(share price gain or loss plus dividends)"

Graham Hand
March 23, 2017

Hi CD, good pick up but we changed the previous wording after receiving Ashley's comment. We left his comment after the article as a way to explain one of the headings in the table, which we did not change.

March 23, 2017

Its kind of pointless to even reference the movement in the NTA as the investor into the LIC structure never receives that performance. The assumption that is made is the share price will move according to the movement in the NTA. But the real performance the investor receives is just the performance in the share price (what they bought it for and then what they sell it for/what it is currently trading at) + dividends. The structure itself is flawed and surely will be replaced with active ETFs if more providers come to market to offer choice!

March 23, 2017

The table describes returns in terms of “share price including dividends”. Is that different from ‘total returns’ which is a widely understood term? (or even “total returns including dividends”). Share price does not ‘include’ dividends. It should say ‘share price gain/loss plus dividends’, which is the same as total returns.


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