Strong sector returns, but some things are wrong

Strong sector returns, but some things are wrong

 

Interesting. Info tech up there again, just like the 2000's.

 

Is it bad to be itching for a "correction" to buy some cheap LICs?

 

Not necessarily. But best if one can keep emotions out of it. Not that I always succeed but that's the goal.

The annoying thing is that at times some LICs don't follow the market down by the same amount resulting in relatively large premiums. From memory I think the larger LICs traded at a premium of between 10 - 20% during the initial GFC crash.

What's your plan for that? What will be your emotions then?

 

Nope.

Things can't go on like they are forever. I am no expert of valuations or what will cause a correction, price growth has far exceeded revenue growth, lots of bets that future earnings growth will be strong.

 

VAS and arbitrage into LICs when everything returns to mean?

 

It's all about collecting the total number of shares for those dividends, so I don't mind paying a premium if I can get more of the shares

 

I will prolly lock myself in the study yet again and read motivated money, as well as Benjamin Graham intelligent investor and have a good refresher course and keep tipping into lic's! Benjamin Graham literature is top class!

 

I prefer the home brew cellar to the study. No internet connection and the beer's far more exciting than Ben Graham and Motivated Money.

 

The better the discount the quicker the journey to one's retirement income goal!

 

But after some fun in challenging other's little grey cells the main thing is to simply invest. The rest is just tinkering around the edges. Some beginners here probably pay more attention to NTA discounts / premiums than I have over the years. I'm just here to cause confusion.

 

This thread got me thinking, I am trying to take a look at what would have happened buying and switching between STW and AFI based on a couple of simple rules. Need to look more closely at the data to narrow the rules, thinking AFI premium hits 10% move all funds to STW, AFI discount reaches -5% move all funds to AFI.

Can't find a reliable price history for STW, google and yahoo won't go far back and Commsec seems to be a bit random in a bulk history download, I have AFI back to 2001.

 

One of the issue is you'll incur CGT upon switching. Worth it still you reckon?

 

You've been possessed by the evil trading bug. Damn addictive the world of investing is.

Unless held in tax free Super pension account CGT will no doubt take some of the gloss off it.

That said the strategy you mention is used by a number of wealth advisors who understand LICs. Particularly in an environment where CGT is not an issue eg Super pension. The advisor wants the client to have exposure to the overall market at certain times. They will use the larger LICs when cheap then sell when the premium blows out and move funds into STW to maintain market exposure.

Another reason STW is used in conjunction with or as an alternative to LICs is due to its excellent liquidity. When the market crashes even the large LICs can sometimes lack liquidity when panic strikes. Not so with STW. It offers a quick exit for those that need to sell whilst giving them time to look for a more favourable exit from the LICs if need be. Or it may be the case that the LICs are intended to be kept long term but STW allows the investor to easily reduce exposure to the Australian sharemarket if perceived risk increases without the issue of discounts / premiums.

Then there's the age old trading strategy of buying LICs when at a discount then selling them when at a premium. This is where knowing the historical average NTA discount / premium can potentially be useful. A number of LIC research reports provide this data.

Obviously there are an endless amount of trading strategies that can be used depending on your approach and circumstances.

Not for me anymore though. Much prefer to buy LICs at a discount then hold indefinately for the dividends. And importantly to make sure I'm not in the position of having to sell during a market crash.

PS: Whilst typing @Ouga already raised the CGT issue.

 

First need to work out how much the expected returns might be by back testing with a few variables and how many trade events might be triggered over a period. Then we can see if the strategy can overcome the CGT/cost hurdle.

Austing some good points. This is more an educational exercise at this point.

AFI I see as a good proxy for the index due to its diverse holdings including materials, AFI also uses options to produce extra cash which in theory may also soften it's landing during a crash and create a larger price differential between it and the index fund.

Liquidity is another consideration.

I believe some market neutral funds are doing a similar thing by trading pairs, like coke and Pepsi, which could be expected to experience similar share movements. Trading individual pairs and the use of options (rather than NTA premium/discount) adds a lot of complexity to the equation along with expanding the market and potential for profitable trades and losses. Am I correct with my thing here?

 

I think the points you mention @Hodor are very good ones. Particularly with smaller, less liquid LICs, then arbitrage opportunities do come up now and then.

But as people have noted, a potential issue is brokerage and CGT. As long as the "inefficiency" in the market outweighs those costs, and you can be bothered to do it... then I think its very worthwhile.

Of course once I get to @austing's level, I think Ill be firmly in the "can't be bothered" camp

 

Options trading will make bugger all difference to AFI during a crash because the trading portfolio is such a small part of the overall portfolio. The main reason for the potential AFI premium during a crash is because many of its shareholder base are retirees and charities etc who tend to buy and hold. So new investors looking to the perceived safety of the larger LICs have to pay a premium due to limited sellers ie supply and demand. Liquidity can effect both sides.

Traditional options trading for enhanced income has proven to be a relatively reliable strategy. But the investor will likely give up some of the upside in stronger markets. DJW and IML Equity Income Fund are a couple of examples.

Pairs Trading however is hedge fund territory. AEG and WMK being examples. I have no interest at all in these.

Pairs trading and other absolute return strategies appeal to investors who fear volatility. But there is usually a price to pay for potential capital protection.

WHICH IS WHY I INVEST FOR TRADITIONAL DIVIDEND INCOME. It removes the worst volatility (price) from the equation. This is the primary teaching of Peter Thornhill. Hence why pay some huge fee gouging hedge fund for supposed downside protection when you don't need it.

Not advice.

 

And speaking of Pairs trading I see just now that pairs trader Richard Fish has retired from Bennelong / AEG. Staying on as a Director.

Legendary pairs trader swims out of Bennelong

Another example of key person risk. May or may not impact future performance. Time will tell.

 

So I have put together some data, which admittedly isn't perfect/complete, dating back to 31/7/2007, so some buy/sells might be slightly off time or missed all together. I am ignoring dividends for this exercise, AFI and STW are both down around 3% 31/3/2017

Using a basic Arbitrage (purchase AFI when at 5% discount to NTA and purchase STW when AFI hits 9% premium to NTA) between the two you would be up either 36% or 51% depending on if you started off with your funds in STW or AFI, starting in STW provided the more favorable result. You would have made either 3 or 4 trades excluding your initial purchase and currently be invested in STW.

I am going to try and include some capital gains tax and trading costs to see where we end up. I'll tax it at 45% and include CGT discount when held for.

* Just had an eye ball. All bar the last trade is selling at a loss, so CGT isn't going to change the numbers much at all.