CaptiveCapital provides consultancy services on ASX Closed End Funds (CEFs) for investors only - chiefly investors seeking to exit them and find alternatives. Services are also available to activist funds targeting CEFs for wind up. No services are provided to CEFs, brokers or anyone involved in sustaining the existence of CEFs. No personal financial advice is provided (see Disclaimer).
In Australia, CEFs are referred to as LICs (Listed Investment Companies) and LITs (Listed Investment Trusts). There are 84 left worth covering on this site.
CaptiveCapital's mission is to ultimately eliminate all ASX CEFs by:
a. Providing the actual facts about CEF pros and cons versus an alternate passive ETF.
(No-one else does as they all make money from active management in some way)
b. Proving that almost no ASX CEFs have sustained, alpha-driven outperformance after expenses. And the exception funds and temporary periods aren't identifiable in advance.
(No-one else would as there is no money to be made by doing so)
c. Demonstrating the myriad leakages and pitfalls that make trading CEF discounts a fools errand.
(I've been burnt by them all and will save others from wasting their time)
d. Compiling the case for ASX CEF holders and activists to force wind-ups, conversions or mergers.
(No-one else has the combination of expertise and self-interest to do so)
e. Making money by timing entry and exit into the few CEFs at any time that are prime targets for exit near NTA (e.g. via activism)
(Capturing and publicizing these discount-driven profits embarrasses the CEF defenders and funds the work on this mission)
See: > CaptiveCapital's 95 theses on why ASX Closed End Funds should be eliminated
If you currently invest/trade in ASX CEFs and should consider alternatives, are an activist fund targeting CEFs, or a CEF-windup retail vulture, there are obvious services you may be interested in paying for. Everyone else, just follow along for free.
One way to gain an idea of the types of insights, expertise and services available is to read the Blog.
Q: Who runs CaptiveCapital? Do you have any conflicted connection with any competitor to CEFs?
A: Adrian Lobo. A professional, sophisticated investor whose active investments are solely in ASX CEFs, as that is the only area I can beat the market (CEFs are plagued by inefficiencies!). However, I am shifting more of my portfolio to passive, index ETF alternatives due to the CEF pitfalls and underperformance outlined on this blog, which takes a lot of time and skill to navigate.
This is an entirely independent endeavour. I never have, or will have, any undisclosed conflicts of interest. Indeed, I mostly suggest Vanguard ETFs as alternatives (VAS, VGS, VDHG, etc) due to typically being the cheapest, and it's easy to check that Vanguard doesn't pay to promote its ETFs. My posts on ASX CEFs aim to be based on facts, and I can be easily contacted to address any unintentional errors.
Q: Why start a CEF website and consultancy?
A: The catalyst was discovering that while my CEF investing has outperformed passive investing benchmarks, it has been with the huge handicap of almost all CEFs underperforming, and many of them severely underperforming. A lot of niche skill and time has been needed to make CEF investing worthwhile for me. Consequently, the vast majority of CEF investors are massively underperforming low-cost, systematic/passive ETF alternatives.
All other information and services about ASX CEFs are disseminated by those who make a living off sustaining the myths that CEFs are worthwhile investments and that active management outperforms. This is literally the only website with the grim truth about ASX CEFs, and, by extension, the active management myths that sustain it. By speeding up the elimination of most ASX equity CEFs, and killing off the myths, I aim to free current investors from the captive capital dungeon, and future investors from wasting endless hours trying to beat the market.
Q: Where is the evidence that active management underperforms after all expenses?
A: Basically, actual, sustained active management outperformance (after all expenses) is exceptionally rare. Critically, investors can't identify the managers and periods in advance. A minority of active managers at any stage appear to be "outperforming" but this is usually due to variation in asset or factor exposure - it is beta not alpha. Regardless, for the majority of active funds, even if "excess" returns are generated at times, they are mostly extracted by the manager (through fees) or burnt on expenses, they don't flow to investors in the long run. If you disagree with the above, read this book and post your arguments on a public website online which you can refer me to.
For further general information see: SPIVA, Larry Swedroe and everyone that has studied this honestly. I'll be summarising this on the blog. > See here, here, here and video1 and video2.
Specfically to ASX CEFs, simply see the Sharesight performance comparisons for each CEF I blog about.
Finally, just imagine you were a fund manager and discovered one or more ways to consistently beat the market after costs and do so with meaningful scale. Would you be seeking or retaining random investors to give the returns away to? Obviously not. The only active fund of scale I'm aware of that consistently beats the market after expenses is Renaissance Technologies. Unsurprisingly, only the founders and employees can invest in it; they booted out all clients!
Q: If you were a typical retail investor in ASX CEFs what would you do?
A: Unless I owned a CEF for which an exit closer to NAV is realistic in the near term, I would sell out and stay out. CaptiveCapital is going to gradually expose the entire CEF industry. This just adds to the inevitable trend that premiums will erode and discounts will widen over time for almost all CEFs. Due to the July 2020 ban on selling commissions, new CEFs of any scale will be rare, and thus long-term underperformance will dominate the industry.
Since July 2020, 34 out of 123 ASX CEFs have already been eliminated. The danger for current investors is that many remaining ASX CEFs (and almost all of the ones with net assets under $150m) have entrenched major holders who've accummulated blocking stakes so they can hang on to the fees. These CEFs are still abject failures, but failure won't be winding up in the near term, it will just be massive discounts.
See: > Tracking the elimination of ASX Closed End Funds
Q: Are there any ASX CEF exceptions that have a legitimate reason to exist and continue? Or which have no superior low-cost, systematic ETF alternative or better unlisted trust structure?
Yes, but less than 12. The fixed income CEFs (GCI, PCI, MXT, MOT, QRI, KKC, NBI, PGG) are the main exceptions. Their assets typically don't suit the daily liquidity of being listed. Yet, the convenience and accessibility of listed investments is desirable. Nevertheless, the benefits of daily liquidity on the ASX have to be weighed up against the downsides of CEFs. In 2023, PGG and NBI both decided the persistent discount weren't worth the ASX-listed benefits and that better demand existed if the products traded at NAV as unlisted open end funds (with redemption constraints if needed). KKC (high yield product) may join them. The other fixed income CEFs are large, liquid and run by well-regarded managers; they trade near NAV and suit those seeking to buy and sell on the ASX. Almost all have open end versions too.
Private equity is the other main asset class where the illiquidity of the asset doesn't match daily listed buying and selling. The CEF structure provides listed, daily access, with the discount/premium acting as a safety valve allowing the market to react even though NAVs are lagged. However, almost all PE CEFs have enormous (mostly undisclosed) Total Expense Ratios (e.g. PE1) that mean retail investors receive only a minority of the returns. For this reason, and their complexity, I don't consider almost any PE CEFs as suitable ASX-listed products. They can run as unlisted funds with redemption constraints (intervals, limits).
So, CaptiveCapital's mission is to eliminate almost all ASX CEFs. Identifying genuine exceptions, and analysing key factors like their TERs, current NTAs and worthwhile discount entry points, can be a valid source of excess returns for experts. Be careful though, it's a zero sum game!
Q: Didn't Stockspot already try to kill off ASX CEFs?
A: Yes, the Stockspot Blog and YouTube channel does a fantastic education job, and does expose the overall underperformance of LICs/LITs vs ETFs, but they don't have the time, interest or expertise to focus on details for individual CEFs or collate long-term data. This site is for those invested in ASX CEFs already. If you aren't, and just need simple explainers on why you shouldn't bother with active funds, please see these Stockspot articles: Popular active funds; Fees; Portfolio management; ETFs vs Managed Funds; Paradox of skill; Can't beat the market
Q: If all actively managed funds are the problem, why are you picking on CEFs?
A: There are thousands of Australian actively managed funds (unlisted and listed) but the rest are open-end and thus trade with unlimited liquidity at a slight spread around NAV. I wouldn't invest in any of them either. But the key CEF problem doesn't exist for open-end funds: if you want to exit, you can fully exit at NAV.
The underperforming open-end funds fade away as funds are withdrawn, and thus new ones are constantly launched. The majority of open-end managed fund FUM is in recent funds precisely because active management underperformance becomes obvious over the long run.
Now that the Australian and overseas index ETF universe is expansive, accessible (and for passive: low-cost), the persistence of CEFs is an anomaly. Their much higher Total Expense Ratios (TERs) and inability to outperform necessitate them trading at greater discounts. Australians can access over 1000 U.S. listed ETFs on Stake with a brokerage cost of $3 or 0.01%.
CEFs boomed in Australia only because stockbrokers and financial advisers were paid commissions to recommend new LICs/LITs to their clients. This was banned in July 2020, and all of a sudden LICs and LITs virtually stopped launching. If active management could outperform, this wouldn't be the case. Precisely for that reason, if I can help demystify and eliminate ASX CEFs, it is a valuable way to undermine the entire active management industry.
Q: Doesn't the Barefoot Investor recommend LICs like AFI and ARG?
A: Scott Pape did recommend them for a long time but they haven't outperformed cheap index funds (e.g. VAS, A200) and simply can't do so. Scott Pape has since changed his tune and no longer recommends them. Scott Pape also used to sell a service called Barefoot Blueprint that offered stock picks (i.e. active management) and this has also been closed (it didn't outperform either).
Q: What about Closed End ASX REITs? (Real Estate Investment Trusts)
A: I don't plan on covering ASX-listed Closed End REITs except to note that most of the structural issues with Closed End funds also affect Closed End REITs. In particular, the ability to raise capital at huge discounts to NTA (and discounts to already heavily-discounted share prices). Indeed, there are no limits on the NTA and earnings dilution possible. I made an example of 360 Capital REIT (TOT) to warn investors.