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Listed Managed Investments Monthly - February 2021 - Independent Investment Research LIC/LIT/ETF Research Scheme

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Evans & Partners LITs Cease Trading on the ASX

During January, three of the Evans & Partners LITs ceased trading on the
ASX after unitholders voted in favour of transitioning the fund from a LIT
structure to an open-ended unit trust. The three LITs that ceased trading
were the Evans & Partners Asia Fund (ASX: EAF), Evans & Partners Global
Flagship Fund (ASX: EGF) and Evans & Partners Global Disruption Fund
(ASX: EGD). The decision to delist the funds and transition to an openended
trust was based on changes to the market conditions which the
Investment Manager and Responsible Entity felt the listed trust structure
was no longer the best structure for unitholders. The units had been
trading at a discount to NAV leading into the decision. The open-ended
trust structure will allow for unitholders to redeem units at the NAV (less
a spread). The IIR ratings for the funds remain subject to a review of the
new structure.
Shareholders Taking Advantage of NAC Bonus Options
In March 2020, NAC completed a 1-for-2 bonus option issue for
shareholders. The issue was conducted to raise funds to grow the
investment portfolio. The Manager believes the optimal portfolio size for
NAC is $200-$300 million. 23.8 million options were issued under the
offer. The options have an exercise price of $1.03 and can be exercised on
or before 31 Match 2023. Shareholders have been taking the opportunity
to convert some of their options and buy NAC shares at a discount to NTA
with ~580,000 options exercised at the date of publish of this update.
The company’s pre-tax NTA has been above the exercise price of $1.03
since June 2020 with the pre-tax NTA at 31 January 2021 of $1.23.
BTI’s Discount at Narrowest in 4 Years
At 31 January 2021, BTI was trading at a discount to pre-tax NTA of
8.6%. This is the first time the LIC has traded at a single digit discount
since December 2016, based on month-end share prices. The market is
starting to appreciate the value of the portfolio of underlying investments.
Throughout 2020, the company traded at a discount to pre-tax NTA as
high as 47% with the share price hitting a low of $0.49 in March 2020.
BTI was trading at $1.28 per share at January-end 2021.
WAX Trading at a Significant Premium
WAX was trading at a premium to pre-tax NTA of 43.9% at 31 January
2021. Over the 12 months to January-end, the company has traded at
an average premium to pre-tax NTA of 33.6%. The company’s ability to
provide an increasing dividend stream to shareholders is proving very
valuable to shareholders, particularly given the experiences in 2020
with some of the individual stocks that were relied upon for income by
investors having to suspend or cut dividends.
The Impact and Recovery from the COVID-19 Downturn
The jury seems out whether COVID-19 in 2020 was a true Black
Swan event. Nassim Nicholas Taleb, the originator of the term, says
that for an event to be classified as a Black Swan “nothing in the past
can convincingly point to its possibility”. Given mankind’s history of
pandemics it has been argued that the COVID-19 pandemic probably
wasn’t a totally unpredictable event. While perhaps semantics the
COVID-19 crisis was largely unforseen and created a short sharp shock
for the markets in 2020.
To surmise, 2020 was a rollercoaster ride for global financial assets.
During January and February the markets seemed to be powering ever
higher, March however saw a swift decline as the markets reacted to the
COVID-19 pandemic finally absorbing the full implications of the crisis
and consequent shutdowns. After a short sharp sell-off in March, there
was much speculation whether markets would see a V shaped recovery
or was it to be an L or even W shaped pattern. Yet about ten weeks after
the low was hit and despite the fact that COVID was still rampant, around
80% of the losses were recovered. We have now reached almost a year
since the onset of the crisis and it has proved thus far to be a strong
V shaped recovery. In the light of the markets again flirting with record highs, we look at how the LMIs (includes LICs and LITs) have coped with
the crisis.

The traditional tool for measuring risk has been the standard deviation of
returns, however the measure that perhaps provides a better assessment
of security and portfolio risk is drawdown. Drawdown measures the
difference in value from the most recent peak to the most recent trough
in the market measured as percentage. We have examined the LMI
sector drawdowns for calendar year 2020 using the peak reported pre-tax
NTA/NAV prior to the crisis (in January/February) and then the lowest
reported pre-tax NTA/NAV after that (invariably March).
The below graph, shows the average drawdown of the various LMI
sectors based on reported pre-tax NTAs. The group averages show that
the pure Equity exposed LMIs overall fared the worst. Unsurprisingly,
LMIs primarily exposed to Fixed income had the lowest average
drawdown while Australian Mid/Small Cap Equity orientated LMIs fared
the worst. However, Fixed Income LMIs have recovered the slowest
over the year while the Mid to Small Cap Equity LMIs have not only
recovered but in many cases surpasses their pervious highs. Interestingly
there seems to a regional bias with LMIs targeting the Emerging Market
appearing to fare better on the drawdown measure than LMI targeting
the traditional markets; but we note the small sample size (three
Emerging Market LMIs) may play a factor.