LIC's vs ETF's Historical Performance

Discussion in 'Share Investing Strategies, Theories & Education' started by Realist35, 8th May, 2017.

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  1. Simon Hampel

    Simon Hampel Founder Staff Member

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    Actually, most of my investments right now are in the super fund - so "sell for a profit" doesn't ever come into it. That being said - I'm a bit more tactical in my asset allocation and will move into and out of some of my more targeted investments based on long term trends (I'm talking perhaps one or two moves per year - rarely more).

    But I am still in accumulation phase and so are primarily looking for growth rather than income at this point.

    I guess it comes down to the thought process of "if you were forced to sell down today ... what would your investment be worth" ... it's a theoretical exercise based on what you would actually achieve (regardless of what you actually intend to do) - but not based on what the assets the investment manager holds are currently worth (because sentiment).

    But if you never intend to sell, then surely the NTA still becomes meaningless and it's the absolute value of income paid out for a given initial investment which is the most reasonable comparison point?

    At the end of the day - you're not earning NTA growth (not directly), you're only earning the actual income paid out.

    I recognise that the reality is more complicated than that, since ETFs with higher churn may generate higher amounts of (capital gains) income, while LICs can also suffer the opposite problem with them deciding not to distribute income in the short term but hold that for future capital investment.

    My point with the share price vs NTA is to decide based on actuals, not theories. NTA is a point in time valuation of their assets, but that is not realisable by you in any form - whether share price or income - it has no real direct correlation, so I'm not sure what the value in tracking it is beyond showing growth.

    I'm not saying it is completely useless as a comparison point - and all else being equal, it does make sense to track NTA as a measure of growth ... but I'm suggesting that not all things are actually equal - and the nature of the underlying fund or the decisions made by the managers will have a direct impact on your earnings (or the share price) which may well be largely separated from the movements in NTA.

    Either way - it's all conceptually much easier with managed funds because you remove market sentiment from the equation completely. If you were to sell tomorrow, the money you would receive has a direct correlation to the asset valuation (minus transaction fees). Similarly, because it's a unit trust - all net income MUST be paid out by the end of each financial year. Of course, none of this solves the churn issue - just as much an issue with managed funds as it is with other structures.
     
    Last edited: 29th May, 2017
    Simon Hampel, 29th May, 2017
    #61
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  2. Nodrog

    Nodrog Well-Known Member

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    When I refer to NTA I mean with dividends reinvested which is Total Portfolio Return (TPR) as opposed to price with dividends reinvested which is Total Shareholder Return (TSR).

    TPR is the only "honest" figure when comparing LICs. Big discounts can turn into big premiums then revert resulting in TSR being all over the place relative to the underlying portfolio. Thus comparing LICs based on TSR at a point in time can be wildly misleading if you don't take into account the LIC's long term "average" NTA.

    More importantly TPR tells me which LICs are genuinely growing their portfolio and not paying out income at the expense of capital. This is far from clear if using TSR.

    Again TPR tells the "true" story about a LIC's performance. If a LIC during a performance period of say 5 years has gone from a 40% discount to a 20% premium then an investor buying that LIC based on TSR could be in for a lot of future pain when the LIC reverts to its long term NTA average.

    By all means do what @Simon Hampel suggests but be aware of its dangers. I'll stick with the LIC industry standard of using pre-tax TPR for "honest" comparison between LICs.
     
    Last edited: 29th May, 2017
    Nodrog, 29th May, 2017
    #62
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  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    I'm not sure if "honest" is the correct term to use here. I get your point - but like I said - I would assert it's just as "honest" to look at returns you can actually achieve (cash in hand) based on share price - fully recognising that sentiment plays a part in determining that value.

    But I'm not saying you're wrong!

    At the end of the day, I think your points are well made and we ignore the NTA at our peril.

    I think it is probably worthwhile to actually compare both values - since you'd want to have a good understanding of both how sentiment affects your potential buy-in prices when making future investments (even if never selling!), but also how those share prices differ from the underlying NTA (ie is the share price currently "expensive" or "cheap" compared to the value of what you are buying).

    Having more data (and understanding what that data means) is almost always better than having less data (analysis paralysis notwithstanding).
     
    Simon Hampel, 29th May, 2017
    #63
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  4. Nodrog

    Nodrog Well-Known Member

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    Yes I agree that "honest" was the wrong word. When I typed that I was thinking of the LIC media reporting where they will choose TPR or TSR depending on what looks best at the time, quote "before" fee performance and many other misleading information to make their performance look better than it is. There is no standard reporting requirement unfortunately so bullsh*t is a plenty in the world of LICs.

    I like TPR because it cuts through all this hype to get to the LICs portfolio performance after fees and without any "out of the norm" NTA changes which might have occured during a given performance period thus distorting TSR.

    I also agree with you that price can't be completely ignored as even in our case we are looking to realise capital for some more extravagant retirement expenditure at a later stage. So it would be silly of us to ignore Share "price" all together.

    Which is why I generally avoid purchasing LICs above their long term NTA average. I'm trying to reduce the risk of a potential relative loss in capital growth due to long term NTA mean reversion.

    It's also why we're intending to reintroduce an ASX cap weighted index ETF (STW / VAS) into our portfolio at some opportune time. Owning the ETF eliminates NTA issues if wanting to realise capital at some stage should LICs be at an unacceptable discount at that time. It also has the added advantage of having the option to buy the ETF when LICs are at a premium (more frequent post FOFA) and LICs when at a discount.

    LIC Research Reports such as the following (page 4) provide data showing the impact that normalisation of NTA might have on share price which can be useful in avoiding being caught out by an unrealistic current TSR due to abnormal NTA premium:
    https://cuffelinks.com.au/wp-content/uploads/Indicative-NTA-20170529.pdf

    And for those who like to see TPR and TSR side by side quarterly research reports such as this one (page 10) do this:
    https://cuffelinks.com.au/wp-content/uploads/LIC-201703.pdf

    Great debate. I admit I can be quite strong and passionate in my views when it comes to my pet area of LICs so hope no offence was taken:). I appreciate you challenging my long held beliefs, it keeps me on my toes and helps reduce the risk of me becoming set in my ways due to pig headedness rather than valid reasoning. Whether you succeeded I'm not sure:D.

    And a warning to all as per my avatar:
    IMG_0250.JPG
    :D:D
     
    Last edited: 29th May, 2017
    Nodrog, 29th May, 2017
    #64
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  5. Possumcreek

    Possumcreek Well-Known Member

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    A newbie when it comes to ETF's and LIC's I am interested in putting in about $10,000 and adding say $100 monthly. Want to KISS.
    Read a bit. Never been interested in shares only IP's.
    Thinking VAS and VGS as options.
    My main issue (other than being uninformed) is the contribution and exit cost of VAS at $1750:eek:
    Why so much?
    With regard AFI or ARG are they as simple to get into as the options Vanguard provides?
     
    Possumcreek, 16th Jul, 2017
    #65
  6. Snowball

    Snowball Well-Known Member

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    With $100 a month to add you maybe well suited to a vanguard managed fund (Oz-VAS or international-VGS). Can open account with 5k and bpay in $100 at a time. Fees are a bit higher this way but it's great for small regular contributions.

    To buy LICs you would generally want to do it in lumps of 1k minimum since you're paying brokerage each time.

    I'm not sure where you're getting those high entry/exit costs from... Maybe someone else can chip in there?
     
    Snowball, 16th Jul, 2017
    #66
  7. Redwing

    Redwing Well-Known Member

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    Thinking VAS and VGS as options.
    [​IMG]
     
    Redwing, 16th Jul, 2017
    #67
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  8. Possumcreek

    Possumcreek Well-Known Member

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    Hahaha. Thanks Snowball and Redwing for your replies.

    I see the mistake I made was looking at this section of distribution and withdrawal fees.

    Standard or Custom Basket Applications:


    VAS: $1,750

    VAP: $300

    VHY: $725

    VLC: $450

    VSO: $1,450
    (Not that I know what that even means)

    instead of Cash Applications :Nil

    I also have another query.
    I notice that the VGS has another similar EFT fund which is the same in many ways except that it is Hedged (VGAD) and costs a little more in management fees (0.03 more) yet VGS seems more popular here on the forum.
    Wouldn't your money be more secure if the fund was hedged against changes in currency? Are there disadvantages to hedging? Am I missing something?
     
    Possumcreek, 17th Jul, 2017
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  9. Zenith Chaos

    Zenith Chaos Well-Known Member

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    The pros of hedging are not offset by the additional costs. I also like the fact that I can buy more when the AUD is stronger all things considered. If you wanted to remove currency risk by all means hedge with VGAD.
     
    Zenith Chaos, 17th Jul, 2017
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  10. Redwing

    Redwing Well-Known Member

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    There's a couple of posts re: hedging here in the ETF thread starting with a query from @jaybean
     
    Redwing, 17th Jul, 2017
    #70
  11. Possumcreek

    Possumcreek Well-Known Member

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    Thanks for your replies.

    I will look at that thread thanks Redwing.
     
    Possumcreek, 17th Jul, 2017
    #71
  12. The Falcon

    The Falcon Well-Known Member

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    Unhedged also typically provides some portfolio downside protection due to AUD historically being procyclical - AUD will typically collapse during global sell off.
     
    The Falcon, 17th Jul, 2017
    #72
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  13. Nodrog

    Nodrog Well-Known Member

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    Yep totally agree. Even as a retiree I choose unhedged International. In our case It's also insurance incase Australia turns to cr*p. Australia goes bad, ASX tanks so AU$ drops and our unhedged International index fund jumps in value when it's needed most. Anyhow in dummy speak which is all I'm capable of that is how I see it.
     
    Nodrog, 17th Jul, 2017
    #73
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  14. John Ferguson

    John Ferguson Well-Known Member

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    Also new to LIC's. Are there any charts showing how the LIC's performed during the 2008gfc?

    I am curious how much of a hit your holdings take if the share market has a crash. As an LIC plays a balancing game with individual stocks etc. compared to an etf. So for example if you had $1m invested in MLT and the market fell 30% in a week how would that compare to holding one million in VAS or VGS etf?

    Also can you setup for the dividends to be reinvested into the LIC automatically as long term you will be buying the LIC at highs and lows and this way you can invest passively as it should balance out over time and when the capital is large enough the dividends can be used for income replacement etc.

    Cheers

    John
     
    John Ferguson, 17th Jul, 2017
    #74
  15. John Ferguson

    John Ferguson Well-Known Member

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    Spot on.

    A Fidelity study of the best classes of investors based on performers: Dead people and those who lost their accounts! So don't try and Time he market don't try and beat the market. Just invest regularly and don't touch.



     
    John Ferguson, 17th Jul, 2017
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  16. Nodrog

    Nodrog Well-Known Member

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    Dead or dead drunk. I find the second category more enjoyable.
     
    Nodrog, 17th Jul, 2017
    #76
  17. MTR

    MTR Well-Known Member

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    MTR, 17th Jul, 2017
    #77
  18. Redwing

    Redwing Well-Known Member

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    Redwing, 17th Jul, 2017
    #78
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  19. MTR

    MTR Well-Known Member

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    I really need to get my head around the US stock market, I suspect this may be best performer this year???? no idea?? but it seems all asset classes in US going nuts at the moment.
     
    MTR, 17th Jul, 2017
    #79
  20. John Ferguson

    John Ferguson Well-Known Member

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    What's driving the US US stocks? Bonds and savings accounts can't outperform inflation, to much funny money in he economy. Pretty crazy times. When will it end?
     
    John Ferguson, 20th Jul, 2017
    #80
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