Introduction I have started this thread to encourage analysis of listed investment company managers performance using fundamental data compiled from hard copies of Annual Reports and which have been lodged with the ASX. Part of the job of an LIC manager is to promote the fund so that the share price is at least near the NTA per share. Unfortunately some get carried away and start to use “boastful numbers” which can easily misinterpreted. Examples - “Profits rise by 40%” and buried in the annual report 35% more shares were issued so that the profit for each share rose by a mere 4%. - “Cash profit” rises 7% per share, but in small print the value of investments declined by 8% meaning a real “gain” was minus 1%. These spreadsheets cuts through the “boastful comments”. All LIC’s have differences in the way they report financial information. What the spreadsheet attempts to do is capture this information and report in a uniform way. Typical areas for variance are Revenue. Some include profits made on investments, others prefer to like to show profits made on investments as a separate line item. It does not make any difference to the statutory profit, earnings per share or NTA. Taxes are another area where they diverge. Some show provision for unrealised as a separate item, others state that unrealised gains are after providing for tax. This affects the line item Tax but not the statutory profit, earnings per share or NTA. Where Tax can be readily identified, it is listed. Classifications used in the following spreadsheet(s). Total revenue comprises dividends, interest, profit/loss on the sale of investments and any other miscellaneous income except for tax refunds. Tax refunds are credited to the tax category. Expenses comprise management fees, directors fees, brokerage, custody fees, ASX fees, share registry fees, office expenses, interest paid including interest on preference shares and convertible notes, dividends on borrowed stock. Taxes includes taxes paid plus provision for tax on unrealised gains/losses. Cash profit after tax. I am going to delete this in future spreadsheets because it does not tell us much about the business. Unrealised gains(losses). This comprises the change in value of investment currently in the portfolio. Even though the gains (losses) have not materialised yet, LICs have to report the change in the “Statement of Comprehensive Income” including a provision for any tax payable or refundable. Statutory Profit. This is how much money the business made after everything has been paid for including provision for unrealised gains, losses and taxes. This method is consistent with the Australian Accounting Standards. NTA – All LIC’s prefer to use NTA before deduction of tax as a standard measure. The argument being that they have no plans to sell the investment and therefore tax which may be payable in years to come should not be relevant now and therefore should not be included in performance calculations. Because they all record this figure I use it here too. Commentary The LIC Fundamental Analysis spreadsheet is purely about assessing the business and therefore the investment managers performance on what they have work with. Ie the Net Tangible Assets. A growing EPS with a sensible dividend distribution program will result in a rising share price over time. Under this scenario the share price of an LIC may sell at a premium to the NTA. The premium in some ways reflects investors opinion of the job the Manager is doing. The opposite is also true. No or insignificant growth in EPS combined with an erratic or unsustainable dividend distribution program will result in a falling share price and in all likelihood the shares will sell at a discount to the NTA. The best LIC managers try to retain some of the EPS for capital growth and to provide a steady growth in future dividends, which many investors will find attractive. An LIC manager that is regularly paying out more in dividends than EPS will erode NTA and destroy wealth. Under this scenario an LIC is likely to sell at a discount to NTA. I look at EPS over a 3+ year period. It includes trading profits, realised and unrealised investment gains after tax and usually has the bonus of a franking credit. The 3+ year period is usually sufficient to even out a one-off bad year. I don’t use share price in calculations because the data will be obsolete by the end of the next business day. Beside share price is a measure of supply and demand, not underlying business performance. I do not add NTA to yield get portfolio performance because it does not give a true snapshot. As a long term investor I will rarely look at the share price provided the Earnings and Yield are increasing. I get concerned when; - NTA are not growing at an acceptable rate over a 3 and 5 year timeframe. Some investors suggest a longer time period but I am not that trusting. - The 3 and 5 year yield is higher than the 3 and 5 year EPS. I become cautious when - Expenses exceed 25% of total revenue. (The manager is greedy. But if the manager is producing exceptional EPS growth over 3 and 5 years, the DPS is rising at an acceptable rate he may be worth it) - EPS is wildly erratic from year to year. The risk management is poor or the risk factor is above normal. - DPS is not increasing over 3 and 5 year periods. I check the EPS over the same period and if it is also flat, consider alternative investments. I am alert for - Large increases in the number of shares where there is no corresponding increase in EPS over the next year. Except for when options are expiring, it can mean the LIC manager raised more funds without a very good reason. (The manager often earns fees as a percentage of assets under management. I do not want to pay the first 1 or 2 percent of Earnings to have money sitting in a bank account) I would not pay a large share price premium to NTA for a LIC because the share price for most LICs has historically fluctuated from a premium to discount and vice versa over a 7 to 10 year period. When the premium does fall it can wipe out the equivalent of 2 to 3 years earnings.