The fortunes of listed investment company earnings have closely mirrored some of the key themes in the Australian market over the past 12 months: small- to mid-cap strategies are leading returns while internationally focused themes have faced volatile terrain.
Listed investment companies are a booming but still disparate part of the local investment scene. Because an LIC is a true company and not a unit trust, its managers control the flow of dividends and can smooth returns through cycles by retaining profits – which favours investors who rely on equities for income.
One of the biggest pitfalls of the LIC world is that sometimes the gap between the share price and the value of an LIC's assets proves stubbornly wide. In theory, those two values should be aligned. Some LICs exceed the value of their assets, but that comes with its own challenge: it means a new investor may be overpaying.
The sector oversees almost $30 billion in funds under management, according to adviser Seed Partnerships, which estimates the entire sector is trading at a 1 per cent premium.
Smaller LICs, especially those with market caps below $50 million, tend to have the bigger discounts, but there are factors beyond size that contribute to this.
Andrew Tang, an analyst at Morgans, points to the composition of earnings as a starting point for the environment in which listed investment companies are operating.
While 2015-16 earnings for the broader market look to have contracted about 8 per cent, outside of large caps "the picture looks better at 5 [per cent] growth, led by some impressive results from mid-caps such as Downer EDI, Ansell, JB Hi-Fi and Orora".
"We think this bodes well for LICs focused outside the top 20," Mr Tang said. "When the focus comes off company reporting season, we think some of the LIC discounts will close.
"Post-Brexit, international LICs were trading on average at a 10 per cent discount to NTA. That gap has closed to 8 per cent, reflecting an improved view on the global economic backdrop. The absence of volatility and supportive monetary policy will continue to support equities over the short-medium term."
That should help restore underperforming LIC share prices, he said.
The ASX's biggest listed investment company, Australian Foundation Investment Company, or AFIC, reported a 9.5 per cent decline in annual profit to $265.8 million off its $6.4 billion equity portfolio and a flat final dividend of 14¢ a share.
It has increased portfolio weightings towards healthcare and industrials, at the expense of banks and resources. Management noted AFIC's share price premium to net asset backing fell to 1.9 per cent from 4.6 per cent over 2015-16.
Platinum Capital, one of the international LICs run by fund manager Platinum, recorded a net loss of $18.8 million for 2015-16 on the heels of a $44.8 million profit the previous year, after its contrarian strategy failed to match its long-term record of above-market returns. The portfolio was underweight US equities in favour of China, Japan and European stocks.
Its final dividend was reduced to 4¢ a share, down from 6¢ in the previous corresponding period. The company's net asset value decreased by 7.28 per cent versus the flat return by the MSCI All Country index, in Australian dollar terms. Platinum Capital also trades at a premium to its asset value.
The Geoff Wilson-chaired WAM Capital, which has just raised almost $250 million, posted net profit of $98 million, up 81.5 per cent. The LIC's portfolio of small- to mid-caps outperformed the All Ords by 19.6 per cent in 2015-16, while maintaining an average cash allocation of 35 per cent.
WAM Capital declared a 7.25¢ final dividend, up from 7¢ in the previous year.
