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Market Update

The market capitalisation of ASX Listed Investment Companies (LICs) and Listed Investment Trusts (LITs) grew 6% to $46.8bn in the September 2020 quarter. The report now features 69 of the 110 LIC/LITs which accounts for 92.6% of the sector’s overall size. Ellerston Global Investments (EGI) was removed from our coverage and the ASX following investor pressure that saw the LIC restructure by way of an unlisted unit trust. Monash Absolute Investment Company (MA1), despite strong performance, also took significant steps to address the persistent discount to NTA. While still yet to be approved by shareholders, the proposed change would see the company reinstated as an Exchange Traded Managed Fund (ETMF). LICs/LITs also continue to acquire shares pursuant to extensive buy-back schemes.

Top Investment Picks

L1 Long Short Fund (LSF): Positioned for rising equity markets and a COVID normal

Long/short domestic focus with the capacity for global securities on up to 30% of the portfolio’s gross exposure. The bottom-up investment process combines valuation (primarily DCF modelling) with qualitative considerations (e.g. management quality, industry position and business trends) to identify attractive opportunities and mispricings. With COVID-19 research being a large consideration for this calendar year, the investment manager has conducted over 100 meetings/calls with leading clinicians and pharmaceutical companies. As at the date of publication, there are currently 3 vaccine manufacturers with strongly positive levels of efficacy. LSF is positioned to benefit not only in the immediate near-term, but set for a rise in equity markets and a rotation into value as vaccines roll out. The portfolio has averaged a net long exposure of 104% since March. Historic global fiscal deficits and quantitative easing may also assist with appreciation and accretive trajectory of equities.

MFF Capital Investments (MFF): Long-term performer with share price/NTA differential

Global equity mandate with a total net shareholder return of 17.7% p.a. over the past decade. Magellan Asset Management provides investment research and administrative services to the company in accordance with the Service Agreement. We calculate MFF’s indirect cost ratio at 0.44% for FY20 with no attributable performance fees. MFF was a profitable net seller for much of the financial year with $129.4m in taxes paid. Franking credits took a substantial jump with directors declaring a 3 cent final fully franked dividend in respect to 30 June 2020. Despite this the share price was down -4.2% for the quarter while pre-tax NTA returns were 1.5%. There continues to be frequent and sizable oscillation of the premium/discount to NTA which makes for an attractive point of entry into this reputable LIC.

MCP Master Income Trust (MXT): Capital preservation with superior distribution returns
MXT provides exposure to the Australian corporate loan market with a portfolio diversified by borrower, industry and credit quality. The trust’s target return is the RBA Cash Rate plus 3.25% p.a. (net of fees) through economic cycles with distributions paid monthly. MXT continues to deliver on its investment objective with NAV remaining consistent at ~$2.00 and distributions paid in excess of the target rate. Over the past 12 months the trust has yielded an additional 1.5% in excess of the benchmark. MER is 0.61% p.a. (incl. GST less RITC).

Other Information

It is important that clients are aware that the share price of a LIC/LIT is impacted by the oscillation of the discount or premium to NTA/NAV, which should be taken into consideration when investing in LIC/LITs. We therefore advise clients to view this report in conjunction with the Bell Potter Weekly Indicative NTA. For further information please speak to your Bell Potter Adviser.

Authored by Hayden Nicholson – Specialist Exchange Traded Funds & Listed Investment Companies at Bell Potter Securities, 24 November 2020
Important Disclaimer—This may affect your legal rights: Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives, a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the proper authority of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. This is general investment advice only and does not constitute advice to any person.
Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended.