Australian Listed Investment Company Report – Nov 2024

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Download related file: IIR-Monthly-LMI-Update_-7-November-2024

A Listed Investment Company (LIC) is a listed investment vehicle that offers investors access to a diversified portfolio of shares in other companies also listed on the stock market. Also known as Listed Investment Trusts or Listed Managed Investments.

For comprehensive comparative data tables for LICs please see the document attached (logon first).

State of Play with Premiums/Discounts
One of the features of listed closed-ended funds is that the trading price may dislocate from the portfolio value. Dislocations happen for a variety of reasons, however discounts can provide investors the opportunity to increase the return on an investment if the reason for the discount can be identified and confidence can be gained that the discount has the potential to narrow.

So what’s the state of play with premiums and discounts and what types of strategies are seeing demand…..

The below chart shows the market cap weighted average premium/ discount for a select group of LIC and LIT categories over the three years to 30 September 2024.

Fixed Income LITs is the only category that is trading at a premium to NAV. This category has experienced significant demand as increased interest rates delivered improved returns. The point where demand for this category of LITs increased is evident from June 2023. All but one LIT in the category was trading at a premium to NAV as at 30 September 2024.

KKC was trading at a discount of -7.3%, however this compares to a discount of- 18.7% as at 30 June 2023.

In recent months, there has been increased demand for Absolute Return strategies, with this category trading at a slight discount as at 30 September 2024. A number of the LICs/LITs in this category have delivered attractive risk-adjusted returns and with uncertainty in the market, the attractiveness of alternative strategies that potentially offer uncorrelated returns is hitting a cord with investors.

Over the last six months there has been demand for the largest LIC/LIT in the category, LSF. The discount for LSF has narrowed from -10.6% as at 31 March 2024 to just -1.3% as at 30 September 2024. The discount for RF1 has narrowed from -11.7% as at 28 February 2024 to be trading at par as at 30 September 2024 with the LIT delivering strong NTA and share price growth over this period.

A significant contributor has also been VG1, the discount of which has narrowed from -15% to -6.8% over the last six months.

For more info: see the full document attached.

Switzer Dividend Growth Fund (Managed Fund) ((SWTZ))
Switzer Dividend Growth Fund (Managed Fund) (ASX: SWTZ) (“SWTZ” or the “Fund”) is an exchange traded managed fund (ETMF) that seeks to provide an income stream that exceeds the S&P/ASX100 Accumulation Index (“benchmark”) over rolling 12-month periods with the potential for capital growth over the long-term.

The Fund is targeted towards retirees, with the Fund paying a monthly distribution franked to a material extent. In addition to an above market yield, the Fund seeks to provide lower volatility and downside protection in down markets. The Fund seeks to achieve this through investing in a concentrated portfolio of domestic equities with the portfolio typically comprising 20-40 securities.

In addition to the dividend/distribution income received from the underlying investments in the portfolio, the Fund will seek to generate additional income by writing options and through a dividend capture strategy. The Responsible Entity (RE) for the Fund is AGP Investment Management Limited, a wholly owned subsidiary of Associate Global Partners Limited, an ASX listed multi-boutique asset management company.

The RE appointed Vertium Asset Management Pty Ltd as the Manager of the portfolio, effective 28 March 2024. The change in Manager was aimed at improving the performance of the Fund, both from an income and capital growth perspective, with the Fund not consistently delivering on its investment objectives prior to the appointment of the new Manager.

Vertium is a specialist domestic asset manager that was established in 2017 and currently manages a single strategy, the Vertium Equity Income Fund (VEIF). VEIF is an equity strategy designed to deliver an above market distribution yield with lower volatility than the market and preserve capital in negative markets.

While there are some differences in the VEIF and SWTZ mandates, Vertium will be employing the same strategy and philosophy that is employed for VEIF. The fees remain unchanged with the Manager paid a fee of 0.89% p.a. (including GST and RITC). No performance fee is applicable.

The Trust is targeted towards retirees, with the Fund designed to deliver a regular income stream, franked to a material extent. The Fund is designed to reduce sequencing risk through providing an enhanced yield and providing a portfolio that experiences lower volatility than the market and preserves capital. This is designed to reduce the amount of capital investors need to drawdown to maintain their required income stream and reduce the level of capital erosion in the portfolio over time.

While there is the potential for capital growth over the long-term, the Fund has underperformed the market over the long term, which is often typical of income focused funds. The Fund has introduced the use of derivatives to generate additional income with the appointment of the new manager.

The use of derivatives has additional risks to long investments in equities. Investors should be comfortable with the use of derivatives if considering an investment in SWTZ. IIR has assigned a Recommended rating the Switzer Dividend Growth Fund (Managed Fund) (ASX: SWTZ). We view the appointment of the new Manager as a positive for the Fund with the expectation that under the new strategy being implemented by the Manager, the Fund will deliver on its investment objectives on a consistent basis, something which the Fund has not delivered prior to the new Manager being appointed.

These expectations are based on the performance of VEIF, the strategy which is being implemented for SWTZ, which has delivered on its investment objectives consistently over its seven year track record. We do note that there are some differences in the mandates of SWTZ and VEIF with regards
to the maximum level of option exposure and cash exposure and the benchmark. As such, the Manager will need to deliver on the investment objectives under the SWTZ mandate to reconfirm our confidence.

For more industry news and info: see the document attached.

Independent Investment Research, “IIR”, is an independent investment research house based in Australia and the United States. IIR specialises in the analysis of high quality commissioned research for Brokers, Family Offices and Fund Managers. IIR distributes its research in Asia, United States and the Americas. IIR does not participate in any corporate or capital raising activity and therefore it does not have any inherent bias that may result from research that is linked to any corporate/ capital raising activity.

IIR was established in 2004 under Aegis Equities Research Group of companies to provide investment research to a select group of retail and wholesale clients. Since March 2010, IIR (the Aegis Equities business was sold to Morningstar) has operated independently from Aegis by former Aegis senior executives/shareholders to provide clients with unparalleled research that covers listed and unlisted managed investments, listed companies, structured products, and IPOs. IIR takes great pride in the quality and independence of our analysis, underpinned by high caliber staff and a transparent, proven and rigorous research methodology.

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This publication has been prepared by Independent Investment Research (Aust) Pty Limited trading as Independent Investment Research (“IIR”) (ABN 11 152 172 079), an corporate authorised representative of Australian Financial Services Licensee (AFSL no. 410381. IIR has been commissioned to prepare this independent research report (the “Report”) and will receive fees for its preparation. Each company specified in the Report (the “Participants”) has provided IIR with information about its current activities. While the information contained in this publication has been prepared with all reasonable care from sources that IIR believes are reliable, no responsibility or liability is accepted by IIR for any errors, omissions or misstatements however caused. In the event that updated or additional information is issued by the “Participants”, subsequent to this publication, IIR is under no obligation to provide further research unless commissioned to do so. Any opinions, forecasts or recommendations reflects the judgment and assumptions of IIR as at the date of publication and may change without notice. IIR and each Participant in the Report, their officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any opinion contained in the Report is unsolicited general information only. Neither IIR nor the Participants are aware that any recipient intends to rely on this Report or of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether opinions or recommendations (if any) contained in this publication are appropriate to their investment objectives, financial situation or particular needs before acting on such opinions or recommendations. This report is intended for the residents of Australia. It is not intended for any person(s) who is resident of any other country. This document does not constitute an offer of services in jurisdictions where IIR or its affiliates do not have the necessary licenses. IIR and/or the Participant, their officers, employees or its related bodies corporate may, from time to time hold positions in any securities included in this Report and may buy or sell such securities or engage in other transactions involving such securities. IIR and the Participant, their directors and associates declare that from time to time they may hold interests in and/or earn brokerage, fees or other benefits from the securities mentioned in this publication.

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