To win the Melbourne Cup requires a horse that is well trained, has a great jockey, and importantly hasn’t been hit too hard with a weight handicap from the stewards. To win the "Affluence LIC Cup", an LIC requires many of the same attributes...  

They require a great trainer (the investment manager), an opportunistic jockey (the individual portfolio manager responsible for investment decisions), and a favourable handicap (starting discount or premium to NTA).

Who would make the cut?

We have analysed the field of over 100 LICs, and the following are all in the top 25%. Here, in no particular order, are our 24 starters for the “Race that Stops the Investing Nation”.

Who would fill the top 3 places?

Like the Melbourne Cup, the Affluence LIC Cup is not a sprint. It’s a stayer’s race, so we’ve thought about who will be the best performing LICs over the next couple of years. Here are our picks.

Future Generation Limited (ASX code: FGX)

FGX has consistently been one of the largest holdings in our LIC portfolio.  It was established in September 2014 by Geoff Wilson with the dual purpose of an investment vehicle and providing funding to charities supporting children and youth at risk.  It is a fund of funds in Australian equities, and currently invests with 20 investment managers who have all agreed to charge no fees.  Instead, the LIC charges a 1% per annum annual donation which is then distributed to charities.

The portfolio construction is diversified by investment manager, strategy and style.  The underlying managers are some of the top echelon of Australian investors and many of their funds are closed to new investors or have high initial investment limits, putting them out of the reach of most. By investing through this vehicle, you are paying a low total fee, with the dual benefit of knowing all fees are going to charitable causes.

Performance since listing has been solid but not spectacular.  This was partly due to the options that were issued during the IPO being exercised which diluted the NTA.  We expect FGX to be resilient during market corrections, and through a whole cycle to produce superior risk adjusted returns. FGX is currently trading at a 4-5% discount to NTA, which is quite attractive. 

Monash Absolute Investment Company (ASX code: MA1)

This LIC is managed by Simon Shields and Shane Fitzgerald of Monash Investors. They started Monash in 2012 to target double-digit annualised returns after fees, over a full market cycle.  

MA1 provides shareholders with the opportunity to invest in a diversified portfolio of predominantly Australian securities (listed and some pre-IPO securities), through a long/short style of investing and a focus on capital preservation. The company listed in April 2016. At that time, the unlisted fund (similar strategy) had provided an impressive return of over 15% per annum since inception in June 2012. However, the launch of the LIC coincided with a poor period of performance.  The listing price was $1.00, and by May 2017 the NTA was down to below $0.86 and the share price hit a low of $0.74. 

No manager outperforms all the time, and most will go through soft patches.  The NTA has increased by over 10% this financial year, through their exposure to small/medium cap companies. Even with this recent strong performance, MA1 is still trading at a 13% discount to NTA.

WAM Leaders Limited (ASX code: WLE)

Interesting time for this LIC.  The options issued to investors at the IPO expire 17 November 2017, and they are currently in the money.  Perhaps with this in mind, we have seen a substantial increase in buying support recently.  Market cap is now well over $500 million, giving it good liquidity and scale.

Often with LICs, when the options expire the discount to NTA reduces as the potential for further NTA dilution is removed. It is currently trading at a 5% discount to NTA (2% discount if all the options were exercised). Some other WAM vehicles are currently trading at substantial premiums to NTA (WAM Capital 16% premium, WAM Research 19% premium, WAM Microcap 11% premium, WAM Active 5% premium).

WLE is now paying regular dividends, with a 2 cent fully franked dividend being paid in December 2017.  We expect the manager to be able to outperform over the cycle, and from this starting position we believe the combination of market outperformance plus a good chance of trading at a premium will make this one hard to beat.

Before you invest, read this!

We encourage you to do your own research before investing in any LIC. Remember, a great LIC and a great manager is only part of the story. We also like to make sure they’re trading at the right price and that the assets they are investing in are not themselves overvalued. We explain how we do this in our LIC Guide, but in the end it’s up to you to make the investment decision that’s right for you, in conjunction with your financial advisor if you have one.

Take care and all the best with your investing.

Disclaimer:  This article is prepared by Affluence Funds Management Limited ABN 68 604 406 297 AFS licence no. 475940 (Affluence). It is not an investment recommendation. Prospective investors are not to construe the contents of this article as tax, legal or investment advice. Neither the information nor any opinion expressed constitutes an offer by Affluence, its subsidiaries, associates or any of their respective officers, employees, agents or advisers to buy or sell any financial products nor the provision of any financial product advice or service. The content has been prepared without considering your objectives, financial situation or needs. In deciding whether to acquire or continue to hold an investment in any financial product, you should consider the relevant disclosure documents for that product which are available from the product provider. Affluence recommends you consult your professional adviser to determine whether a financial product meets your objectives, financial situation or needs before making any decision to invest.