Looking back on 2024 for listed managed investments
With the end of the year approaching, we take a look back at the performance of LICs and LITs over the year.
With the end of the year approaching, we take a look back at the performance of LICs and LITs over the year. In the attached LMI Monthly Update we also take a look at some of the key news items in November and December.
The performance of listed closed-end funds was a mixed bag. Below we take a look at the NTA/NAV and share/unit price cumulative total returns for the respective categories of LICs and LITs in 2024 to 31 October 2024.
Australian Large Cap
Australian large cap focused LICs and LITs all delivered positive NTA/NAV returns over the period. Industrials performed strongly with WHF delivering the highest NTA/NAV return of the vehicles in the category. The concentrated quality growth portfolio of FSI also delivered strong returns for the period. WLE lagged with its high conviction position in Star Entertainment Group (ASX: SGR) being a drag on portfolio performance.
As is highlighted by the below chart, there has been a significant discrepancy between the share/unit price performance and the NTA/NAV performance for some LICs/LITs. As we have written about often in our monthly updates, the reasons for dislocations differ for each vehicle, however are providing some attractive opportunities in the sector.
Australian Mid/Small Cap
Despite the positive return of the small and micro-cap indices over the period, there were some LICs and LITs with a small and micro-cap focus that struggled. The three LICs managed by Naos Asset Management (NAC, NCC and NSC) were the worst performers over the period from both an NTA/NAV and share price return perspective, with the portfolios falling materially across all three vehicles.
RYD bounced back to have the best performing NTA/NAV over the period. ECP, OPH and WAX all performed strongly, outperforming the broader market and the S&P/ASX Small Ordinaries Accumulation Index.
International Equity - Diversified & Emerging Markets
Global mandates had the wind behind them in 2024 with the MSCI World Index performing strongly, however returns were driven by a select group of large cap stocks known as the Magnificent 7. For those LICs/LITs not invested in this area of the market made the MSCI World Index a difficult benchmark to compete with. This was seen in the NTA/NAV performance of LICs and LITs in the category, which on average underperformed the MSCI World Index, with an average NTA/NAV return of 16.9%.
There were some strong performers in the category, including MFF and WQG, both delivering above-market returns. PIA and PMC portfolios both delivered positive returns but continued to lag the broader market.
For the most part, share price performance outperformed NTA/NAV performance over the period, with the narrowing of discounts for shareholders of HM1, MFF, PAI and WQG resulting in strong shareholder returns.
Specialist - International & Other
The varying asset classes and mandates in the Specialist category resulted in significantly different NTA/NAV performance for the 2024 period to 31 October 2024. Global listed infrastructure performed strongly on the back of declining interest rates in the US and the growing demand for certain infrastructure. This saw ALI shareholders benefit.
GFL also delivered strong returns with the passive exposure to Berkshire Hathaway providing another strong result for the Company.
There were two portfolios that declined over the period, D2O and LRT. Water prices were at an all-time low in 2024 which impacted those D2O’s portfolio performance, while falling commodity prices made for a difficult market for those exposed to resources.
Absolute Return
There was strong demand for Absolute Return LICs and LITs over the period, with the share/unit price returns of all vehicles in the category outperforming NTA/NAV returns. PGF and RF1 portfolios delivered the strongest returns for the 2024 period to 31 October 2024, with the NTAs/NAVs increasing 21.4% and 20.1%, respectively. VG1 delivered improved performance with the NTA increasing 13.9%.
The long/short mandates of the LICs and LITs in the Absolute Return category provides the potential for an element of capital preservation in down markets. Given markets continue hitting all-time-highs and with valuations in certain sectors appearing stretched, this was likely a contributor to demand for this sector.
Fixed Income
The Fixed Income LITs continued to deliver strong returns with an average NAV return of 7.5% for the 10-month period to 31 October 2024 and an average NAV return of 9.8% over the 12-months to 31 October 2024.
Fixed Income LITs have largely benefited from the increased interest rate environment which has seen a rotation by investors into this asset class. Demand for this asset class saw two new fixed income LITs come to market in 2024 (PCX and MRE) and both were well supported.
Over the 10-month period to 31 October 2024, GCI’s NAV delivered the highest return with KKC delivering the highest return over the 12-month period.
KKC and PCI unitholders experienced elevated unit price returns with the discounts for both these LITs narrowing over the period. KKC’s discount narrowed from -9.5% to -4.9% as at 31 October 2024 and PCI’s discount narrowed from -1.5% to a premium of 5.1%.
We expect demand to remain high while the portfolios are delivering strong risk-adjusted returns, however note that demand may soften in the event of greater than expected interest rate cuts in 2025.
Private Equity
2024 has been a tough year for private equity focused LICs/LITs, with limited market activity. This saw relatively muted portfolio performance across the category and limited demand as a result for some vehicles given the returns in other asset classes.
Market activity is expected to pick up in 2025, however it may be at a slower rate than hoped which may be reflected in the demand for vehicles in this category. In the event market activity does pick up, there are some attractive opportunities to take advantage of by investors in this category.
Outlook for 2025
2025 will no doubt be another interesting year for markets. With Trump to be inaugurated early in the new year, the policies that are enacted when the new President takes office will no doubt shape the markets for the year to come. On the home front, market concentration is becoming a concern. CBA has become the largest stock in the index with valuations looking stretched, although they have for some time. Many are waiting for a rotation from the banks to resources, however the continued weakness in commodity prices has stopped this from happening.
The direction of interest rates in 2025 will drive asset class returns. As we posted recently on Linkedin, the rolling 12-month correlation of the S&P/ASX 200 Accumulation Index and the change in the 10-year Australian Government Bond Yield has become highly negatively correlated meaning the bond yield is expected to be a key driver of equity market returns. Readers can view the post on the Independent Investment Research Linkedin page.
In the event interest rates decline as forecast in 2025, returns for fixed income LITs that are heavily exposed to floating rate securities will see a softening of returns, while we would expect this to have a positive impact on smaller cap and growth stocks. This of course will all be driven by the state of the economy, with weaker than expected economic growth likely to be a dampener on everyone’s parade, potentially triggering a reallocation to defensive assets.
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