Market Update
The market capitalisation of ASX Listed Investment Companies (LICs) and Listed Investment Trusts (LITs) dropped by 23.9% to $40.5bn over the first quarter of 2020. The extreme volatility in the market and subsequent large equity sell-off resulted in no new listings in the sector, whilst secondary offerings were limited to $1.9m.
The majority of LICs were sold-off regardless of the underlying portfolio exposure. This resulted in large widespread discounts, causing both concern and eventually great buying opportunities for investors. Large cap domestic mandated LICs were strongly held over this period. A major benefit of a LIC over a trust is the ability to carry forward earnings over reporting periods. This assists LICs in delivering shareholders a smooth and sustainable dividend over the long term and these larger LICs with strong profit reserves and franking credit balances has so far provided a haven for income seeking investors.
Top Investment Picks
MFF Capital Investments Limited (MFF): Large cash balance presents opportunity
Global equity mandate that has provided shareholders with a net return greater than 17.7% p.a. (incl. dividends) over the past 10 years from investments that have attractive business characteristics at a discount to their assessed intrinsic values. The portfolio is highly concentrated. Top holdings as at March 2020 were Visa (18.6%) and MasterCard (17.2%), whilst net cash as a percentage of investment assets and cash had grown to 43.6% at 15 May 2020. MFF paid a 20cps fully franked special dividend in February and continues to pay large tax instalments as the result of profitable realisations of investments. Tax payments will decrease the NTA. However, shareholders will benefit from the pass through of franking credits attached to future dividends. We calculate MFF’s indirect cost ratio at ~0.41% and the Company does not incur a performance fee.
Magellan Global Trust (MGG): Access to large global companies with attractive yield
MGG is a LIT that seeks to invest in a focused portfolio of outstanding global companies and seeks to purchase investments when they are trading at a discount to their assessed intrinsic value. Magellan undertakes extensive fundamental analysis on the individual companies and the industries in which they operate. MGG aims to invest in 15 to 35 of the world’s best global stocks whilst targeting a 4% cash distribution yield. As at 30 March, MGG had outperformed the MSCI World NTR Index (AUD) by 2.4% p.a. and could be bought on a trailing yield that equaled the target cash distribution. This provides investors with income diversification whilst still maintaining a current exposure that is weighted towards some of the largest internet & eCommerce, technology, and payments companies.
Australian Foundation Investment Company Limited (AFI): Sustainable income
AFI hasn’t cut the dividend for 32 years and despite currently trading at a ~5% premium to the pre-tax NTA is currently on a trailing 12 month net and gross yield of 4.1% and 5.9%, respectively. AFI had a $1.1bn profit reserve at the end of 2019, approximately 93cps. At the end of FY19 AFI had $208m of franking credits. AFI is in a strong position to maintain the current dividend, whilst still providing investors with exposure to large-cap Australian equities. The MER of 0.13% is low and competitive with ASX 200 ETFs.
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