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Listed Investment Companies - Fundamental Analysis

Discussion in 'Other Asset Classes' started by jhmtaylor, 11th Sep, 2016.

  1. jhmtaylor

    jhmtaylor Well-Known Member

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    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.

    Abbreviation n Formula.jpg
     
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  2. jhmtaylor

    jhmtaylor Well-Known Member

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    Australian Foundation Investment Company (AFI)
    AFI.jpg
     
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  3. jhmtaylor

    jhmtaylor Well-Known Member

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    Australian Leaders Fund
    ALF.jpg
     
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  4. jhmtaylor

    jhmtaylor Well-Known Member

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    Future Generation (FGX)
    FGX.jpg
     
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  5. jhmtaylor

    jhmtaylor Well-Known Member

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    Magellan Flagship Fund (MFF)

    MFF.jpg
     
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  6. jhmtaylor

    jhmtaylor Well-Known Member

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    Milton Corporation (MLT)

    MLT.jpg
     
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  7. jhmtaylor

    jhmtaylor Well-Known Member

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    QV Equities (QVE)

    QVE.jpg
     
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  8. jhmtaylor

    jhmtaylor Well-Known Member

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    WAM Capital (WAM)
    WAM.jpg
     
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  9. jhmtaylor

    jhmtaylor Well-Known Member

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    Whitefield (WHF)
    WHF.jpg
     
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  10. austing

    austing Well-Known Member

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    @jhmtaylor,

    Amazing effort. I've been following LICs on numerous forums for a couple of decades now. Never before have I seen anyone put this much effort into providing in-depth analysis.

    All very exciting for LIC diehards. Will have to start working my way through all of this when I get back from our break at the end of the week.

    A big thank you.
     
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  11. austing

    austing Well-Known Member

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    In the middle of packing.

    Had a brief look. Is the NTA Growh for AFI correct Ie -100% across 1,3,5 years?
     
  12. jhmtaylor

    jhmtaylor Well-Known Member

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    Damn, damn, damn! The last years NTA was missing

    I am packing too. Next week off the South Africa for 3 weeks so it may be a bit quiet around here for a while

    AFI.jpg
     
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  13. Anne11

    Anne11 Well-Known Member

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    A lot of effort creating this spreadsheet. Thank you @jhmtaylor .

    In the later version of Excel you could insert a spark line to show the trend over time for say Revenue, Expenses and few other line items.

    Very comprehensive spreadsheet in deed. One thing i notice is MLT and AFI expenses are low compared to Revenue while ALF expenses are so high in comparison.
     
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  14. jhmtaylor

    jhmtaylor Well-Known Member

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    I agree. ALF have been flying under the radar with their expense ratio for a long time, which has taken a terrible toll on portfolio returns. On a personal note I bought ALF earlier this year based on the broker "research" and have now sold.
     
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  15. austing

    austing Well-Known Member

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    ALF's fees are obscene. Similar to WAM but ALF @ $390 Mil Vs WAM @ $1.05 Bil! Crazy.

    I think it's good that @jhmtaylor is separating income from capital. I'll probably draw fire but I'm old school in that I believe yield at the expense of capital growth is a dangerous game in the long term. ALF's had a good run with trading skill plus luck providing strong trading profits and hence a high yield. The volatile environment post-GFC has been fertile ground for them. But it would appear that there's been little expansion in the capital base.

    And it seems Hedge Funds are popping up everywhere. They're almost getting like bums in that everyone's got one. I'd feel very nervous pinning my financial future purely on the skill of a trader(s) in an increasingly crowded environment. Give me old fashioned genuine lower yield on an "expanding" capital base as a conservative means to wealth creation. Each to their own of course but I still believe a Stockmarket is about investing in real companies and growing with them vs treating it as a casino! One is based on the real world whereas the other is based on part skill but just as much luck.

    Another interesting view I read about recently. Given that trading is a zero sum game the experts profit at the expense of ameteurs. But with the massive growth in passive index investing (retail and institutional) there are less and less active amateurs on the other side of the trade. Hence it's becoming a case of more and more experts Vs experts (including algorithmic trading). Therefore going forward winning may be likely to become more difficult! Hence why I feel safer investing in LICs who invest in the growth of quality companies rather than the skill of some hot shot trader who won't be around forever.

    And this view comes from a person who was a fanatical trader in their youth.
     
  16. pippen

    pippen Well-Known Member

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    Amazing work @jhmtaylor, excited to see bki as well as argo's performance!

    Once again unreal work!
     
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  17. Redwing

    Redwing Well-Known Member

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  18. austing

    austing Well-Known Member

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    Hey @jhmtaylor,

    Was just thinking another valuable addition to your spreadsheet would be "Dividend Reserves" expressed as an amount and percentage. This would give investors some idea of how safe the dividend is in bad times.

    About to head off now.

    Thanks again and Cheers
     
  19. ErYan

    ErYan Well-Known Member

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    Fantastic analysis @jhmtaylor.

    I'd be interested in analysis of MIR, AUI and/or DUI if you get the time.
     
  20. austing

    austing Well-Known Member

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    Oops just quickly. Franking credits might useful also.

    Cheers