Income Report / Income Report: Do you have specific questions on LICs? (ALF, XARO)

By Market Matters 02 October 19

Income Report: Do you have specific questions on LICs? (ALF, XARO)

Market Matters Income Report 2nd October 2019

The local market is embracing the sell-off in overseas stocks that played out overnight with the ASX 200 currently off by -94pts  / -1.4% at 6648. A decent move lower although easy to comprehend given we also experienced a +50pt rate cut induced rally yesterday afternoon that wasn’t enjoyed in other markets.

Banks are feeling the heat today, from both the Federal Treasurer and from the market itself, NAB down ~3% the worst on the announcement of further remediation costs while ANZ is off by -1.50%,  the best relatively speaking. While rate cuts are designed to support the economy which is important for banks, lower rates also put pressure on bank margins which is a negative for earnings – a double edged sword. When banks are weak, the market will struggle.  

Overall, the ASX 200 is currently trading down -94pts or -1.40% to 6648.

ASX 200 Chart

The Income Portfolio was up +0.28% in the week with NBI & MXT trading ex-distribution while Stockland (SGP) was the only real positive mover in terms of equity holdings, up +3.14% on the week. The portfolio is now up +3.54% financial year to date, versus its absolute return benchmark of +1.26%. Since inception the portfolio is up +20.77% vs the benchmark of +12.18%

For those interested in investing for income in a low rate environment, Market Matters manages the investments for the Market Matters Active Income portfolio offered under Praemium SMA. The portfolio is based on the MM Income Portfolio. The SMA has now passed its first anniversary and performance has remained sound, the August update can be viewed – Here. September another strong month adding +2.90% overall, with the monthly report due later in the week.

1 A good move by ALF + a new defensive addition planned for the Income Portfolio

We’ve had a number of questions in the last couple of days about the Australian Leaders Fund (ALF), a position we held previously in the MM Income Portfolio. We added ALF, which is a listed investment company (LIC) to the portfolio in December of 2017 on the expectation that poor performance would improve and that would in term allow them to re-start dividends and trade up closer to the net tangible asset (NTA) value of their underlying portfolio. That didn’t really happen  and we cut the position having bought at $1.06, we sold at $1.02 plus we also received 2cps dividend + franking – we booked a loss of 1.43%, however that’s not the point we’re getting at today. On Friday they launched a buy-back, however the structure is different and good (for holders) and its worth discussing today.

More broadly, we get a lot of questions about listed investment companies so to address these in one forum, next week’s Income Note will focus on the sector with a video answering specific subscriber questions on LIC’s. Please send in questions specific to Listed Investment Companies (LICs) and I will answer them in a video next Wednesday.  Email [email protected] using LIC Question in the subject line.

Circling back to ALF,  today they’re trading at 97c and have just launched an innovative off market buy-back program (subject to shareholder approval) which I view as a very positive / unselfish move by the manager. Essentially, the deal allows holders of ALF to tender up to 20% of their existing holding and be paid the equivalent of NTA for them.

At the end of August the underlying portfolio NTA is $1.17 after tax, and the proposed deal would mean that holders can at least realise appropriate value on a 5th of their shares – ultimately being paid somewhere around $1.17 (depending on market fluctuations before the payment is made, tax on holdings and expenses to the offer).  This is a positive move by Justin Braitling and Watermark Funds and more funds should do it, although they probably won’t.

My understanding is that buying back stock at NTA the manager is essentially reducing the funds they manage by 20% and because of that, they’ll be paid less. In this case, they’ll buy back up to $45m worth of the LIC and liquidate the equivalent amount of stock in the portfolio to fund it.  They then pay back shareholders who have participated the value of the liquidated positions.

It’s a way of trying to get the fund to trade closer to the value of their assets and it’s a more aggressive approach than some LIC’s are rolling out at the moment. Some managers are buying stock in their own name to try and entice others to do the same while others have launched on market buy backs through the LIC itself. The move by ALF is akin to the one wood versus the token pitching wedge being used by a lot of managers – and looks appropriate given the distance ALF is from the green.

While we won’t be buying ALF because we simply believe we’re better stock pickers,  MM is very positive on the approach they have taken

Australian Leaders Fund (ALF) Chart

2 ActiveX Ardea Bond Fund $26.47

We are looking to add a new defensive position into the MM Income Portfolio that needs some explanation. We had the managers of the ActiveX Ardea Real Outcome Bond Fund in to Shaw last week and they’ve got an interesting strategy which is available through a listed vehicle on the ASX under code XARO. 

If you’re looking for returns of +5% or more then probably stop reading, however for those looking for a defensive, alternative style strategy where not losing capital is king while still producing reasonable returns (nearer 4% over time) no matter what interest rates do,  then this is one to investigate. 

They use a relative valuation strategy targeting high quality government bonds with 70+% exposure in Australia. They actively manage exposures through buying relatively cheap bonds and selling relatively expensive bonds, therefore eliminating risks around interest rate duration which is obviously a major consideration when investing in bonds at this low point for global interest rates.

The managers have a strong track record over the past 10 years, they manage around $13b across fixed income markets and many well-known Australian Institutions invest with them.

Below is the fund overview although we would add the ASX listed version with code XARO

Source: Ardea

While performance over the past 12 months has been very strong at +7.5% over cash, that level of returns should not be expected over time. A more realistic return expectation is nearer 4% after fees, with distributions paid quarterly.

At Market Matters we’re about active management and looking at returns on a risk adjusted basis, the team at Ardea have a similar approach, although clearly this is a lower risk, lower return offering.

We plan to add the XARO into the MM Income Portfolio with a 7.5% weighting, with the intention of reducing our equities exposure to fund it.

NB: When we penned this note the market had rallied +50pts yesterday, however given the US weakness overnight, and subsequent sell off today we are holding fire on this switch in the very short term.

Ardea Active X Bond (XARO) Chart


The structure of the ALF deal is a positive one for long suffering shareholders, and more LIC’s that are trading at steeps discounts could / should do this  

Please send through specific questions on LIC’s for coverage in a video next week.

We will add XARO to the portfolio by trimming at equity position.

Watch for alerts

Have a great day 

James & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


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