# Why do listed investment funds underperform?



## Pager (26 October 2007)

I have noticed that these types of shares don’t do as well when the markets running up as it has for the last few years, many of the listed investment funds like the various Wilson funds, Fat profits, Clime etc are trading well below there NTA, s with yields of around 4 or 5%.

Infrastructure as well, BBI has a 9% yield, most of the listed Macquarie funds also have good yields (MIG, MCG etc).

Anyone have a theory as to why this is ?

My own  is they are slow but less risky investments so when the market is very bullish investors can get much better returns through capitol gains elsewhere, but it wont surprise me to see when the market goes bearish these shares may outperform the general market, but i could be wrong .


----------



## Awesomandy (27 October 2007)

From my (limited) knowledge, when things are going well, people like to have a go at doing the work themselves, i.e. they buy/sell shares directly. During a bull market, virtually everything goes up, which reinforces people's confidence, and they would more and more so continue to use their own investment strategy (if any), rather than using a fund and paying the fees for someone else to do the work.

However, during bad times, people are uncertain, and the emotion of risk avoidance comes into play. They are losing money, and doesn't really have a clue on how to make it back, so during those times, people are more likely to entrust their money to the professionals. Therefore, during these times, we'll probably see the listed funds to trade above their NAV.


----------



## tech/a (27 October 2007)

My view.

They are like Elephants.
They are designed to out perform the market (The fund is,well thats the idea).Most dont purely because they cant move as fast as us retail guys.
They hold huge positions with algorithms they must apply.
You wont see a 30% move in a few weeks,as its performance as a company wont warrent it or that sort of interest.


----------



## stoxclimber (27 October 2007)

There's no rational explanation.


----------



## reece55 (27 October 2007)

Pager said:


> I have noticed that these types of shares don’t do as well when the markets running up as it has for the last few years, many of the listed investment funds like the various Wilson funds, Fat profits, Clime etc are trading well below there NTA, s with yields of around 4 or 5%.
> 
> Infrastructure as well, BBI has a 9% yield, most of the listed Macquarie funds also have good yields (MIG, MCG etc).
> 
> ...




Well, with LIC's, it's because the have a much lower volatility due to holding large portfolio's and move more like an index than any individual sectors etc....

You will note however that in times distress in financial markets, price is above NTA, reflecting the idea that the market is undervalued. They smooth out the peaks and troughs in the market place, so to speak.

There are additionally factors, like excess franking credits, whether the portfolio is managed or more a hold strategy, the MER, etc, etc......

I wouldn't put MIG/BBI/MCG in the same equation - these have a much larger correlation to say interest rates than the market. All of those investments performed exceedingly well (MAP and MIG some almost 3x fold returns) from 02 - 06 due to historically low interest rates. Now they are not fairing as well, specifically MIG (have a look at my posts in MIG to let you know how I feel about that little beast!).

Cheers


----------



## Julia (27 October 2007)

reece55 said:


> I wouldn't put MIG/BBI/MCG in the same equation - these have a much larger correlation to say interest rates than the market. All of those investments performed exceedingly well (MAP and MIG some almost 3x fold returns) from 02 - 06 due to historically low interest rates. Now they are not fairing as well, specifically MIG (have a look at my posts in MIG to let you know how I feel about that little beast!).
> 
> Cheers




Really useful comment, Reece.  Thank you.  Doesn't stop several analysts putting a Buy on them though, does it.


----------



## reece55 (27 October 2007)

Julia said:


> Really useful comment, Reece.  Thank you.  Doesn't stop several analysts putting a Buy on them though, does it.




Thanks Julia..... And no, it definitely doesn't stop the brokers from assigning buy ratings on what is clearly (in my view) an excuse for an investment bank to make super normal profits from superannuation funds legally.

I still can't believe however that MBL Funds management arm is allowed to write broker reports on MIG however - and you know what, in 6 years of reading them, I have never ever read a sell review from them - hrmmmm...... surprise surprise, no conflict of interest there at all!!!

Cheers


----------



## battiwallah (28 October 2007)

I have seen the following explanation for the performance of LIC's and find it quite plausible:

In times when the market is performing well investors feel confident and are more likely to invest directly themselves.  This tends to make LIC's less attractive and drives their prices down.  However, when the market falls investors get nervous and are more likely to buy into LIC's and let the LIC managers take over the responsibility of running the investments for them adn the LIC prices rise (relatively). This is much as posted by Awesomeandy above.

Disclosure: I have some shares in Clime.  These have appreciated over 50% in the last 12 months.  I bought at a large discount to NTA and the gap has narrowed since then.  So a discount to NTA is not necessarily a sign of underperformance.


----------



## nizar (28 October 2007)

tech/a said:


> My view.
> 
> They are like Elephants.
> They are designed to out perform the market (The fund is,well thats the idea).Most dont purely because they cant move as fast as us retail guys.
> ...




Hahahaha.
This one is up there with your snails of the universe comment.

I do hold one, LRF its not doing too bad.
Though i just bought it, its up about 70% this year.

There are exceptions to every rule.


----------



## drmb (31 October 2007)

Pager said:


> I have noticed that these types of shares don’t do as well when the markets running up as it has for the last few years, many of the listed investment funds like the various Wilson funds, Fat profits, Clime etc are trading well below there NTA, s with yields of around 4 or 5%




If you notice a trend and think you can profit from it, do it! However, I think the LICs are a long term hold, and I only buy the major ones. 

I hold 4 LICs in my SMSF and they form a core holding for longterm. Whenever I get a bit of cash back from speccie I try to plough some back into the LICs. I hold ARG, AFI, ALR and DUI. The advantage of the first 2 is liquidity while DUI and ALR are both illiquid but outperform the other LICs that I have held. ALR also pays the better divies, and I like very much its holdings 

Have a look at top ten ALR holdings, and you'll see that it covers blue chips so I can focus on speccies.

BHP Billiton 10.5 11.5
Rio Tinto Ltd 8.3 2.4
QBE Insurance Group 7.4 2.3
ANZ Banking Group 7.2 4.3
Westpac Banking 6.7 4.1
Westfi eld Group 4.9 2.9
Woodside Petroleum 4.7 1.7
Woolworths Ltd 4.6 2.8
Commonwealth Bank 4.4 5.7
Suncorp Metway 4.0 1.5

ALR also posts a monthly fact sheet which is very intersting and I have attached the Oct 2007 FYI.

If you are also aware of the illiquid nature of some, and want to accumulate (as I do in the SMSF) then you can exploit impatient holders by putting in a buy order below the usual discount to nta and just wait. Someone will come in and sell at market. 

Another accumulation is the regular offer of shares (usually every 6 months) with discount to the market and free of broker's fees, limited to about 5k per year. By having several LICs you can maximise this since the 5k is limited no matter your holding.

See comments on this forum "ARG" for more information on its holdings and strengths, and also ClarkKent on HC quote "I own *each* of ARG, AUI, DUI, MLT, CHO, BKI in *each* of the various family accounts (self, wife, joint, SMSF, 3 kids, and two special purpose). This gives me more than 50 distinct opportunities to participate in SPP's, Rights etc. There is always a need to commit capital to investment and I can pretty much allocate a fair amount this way on favourable terms automatically, without too much thinking.

Why those particular 6 LIC's ?
I have said before that most other LIC's are a waste of space (although you can talk me into agreeing that AFI are OK now).
The plain fact is that those 6 LIC's have good quality portfolios and very small management expense ratios 0.1 - 0.3% and getting smaller." etc

I have posted a chart comparing my LICs to each other and to DJIA (couldn't get ASX200 up) and you can see they outperform this market indicator. If I wanted to get another LIC it would be AUI, the companion LIC to DUI

Good luck


----------



## tech/a (31 October 2007)

nizar said:


> Hahahaha.
> This one is up there with your snails of the universe comment.
> 
> I do hold one, LRF its not doing too bad.
> ...





That elephant needs to be swabbed.


----------

