LIC & LIT Listed Investment Companies - Fundamental Analysis

I will think about it. One thing LICs do not lack is asset liquidity. If you are concerned about erosion of capital you will have been warned when long term DPS starts to exceed EPS.

 

I am currently working on DJW. I am curious to know whether it deserves it's huge premium. followed by MIR and then possibly BKI.

 

You may have been thinking of this


Under the current accounting standard you are being warned that dividends are being paid out of capital when DPS exceeds EPS.

 

Have just arrived.

It was more about what reserves are on hand to smooth dividends in difficult times not about erosion of capital. For example WHF maintained their dividend through the GFC I assume by drawing on reserves. Of course it has meant the dividend has been flat since then. The size of the dividend reserves gives some indication of whether a LIC can maintain its dividend in the medium term. Eureka Report did an article recently highlighting those LICs that had squirrelled away generous reserves meaning the future dividends for the next couple of years was assured regardless of what happened in those years.

Cheers

 

The issue with cash on hand is that you cant be sure what it will be used for, but at least MLT for example provides some commentary around that. As always history is a pretty good guide though @austing and I'd be looking well beyond 3-5 years (as you do).

@jhmtaylor well done for running the exercise.

 

I don't think reserves play a significant role (other than liquidity) under the current accounting standards. All gains and losses realised or otherwise including provision for tax is booked through the income statement and immediately becomes NTA (after tax). If the directors pay DPS which is higher than EPS the difference comes out of previou NTA. So it comes down to how long are the directors prepared to allow DPS to erode the NTA. They might not express it this way by saying it comes out of "accumulated profits" but is is the same issue whether the LIC has been operating for 2 years or 20 years. My two pennies worth!

 

Check out Note 12 on page 27 of Platinum's preliminary annual report in relation to their "dividend profit reserve":

http://www.asx.com.au/asxpdf/20160819/pdf/439fzsxt6hr0m3.pdf

This is not just cash on hand to do as they please with but cash set aside for future dividends!

To be honest the dividend reserve data is not of that great an interest to me but for some who are dependent on a reliable dividend their main concern is not what's happening to NTA as much as "am I going to get a dividend at all"? Most of the LICs I invest in generally just pass through dividends received from the underlying investments. And I maintain my own cash buffer. But if a "trading" LIC such as PMC has a bad year then without anything in the "dividend profit reserve" the poor investor may not get a dividend at all that year! Hence this sort of information might be useful to these investors who are heavily reliant on dividends in the next year or two. So perhaps a "dividend profit reserve" does play a significant role for them.

Being on a break I'm just quickly squeezing these posts in without a huge deal of thought. Am I making any sense?

 

A couple of points I would like to make
- Prior to 2010 a business could only pay dividends from accumulated profits. That requirement was removed in 2010.
- When DPS exceeds EPS the difference comes out of the previous years NTA whether funds are recorded in a special account or any other account, the result is exactly the same.
- All LICs that pay significant DPS hold most of their portfolio in investments which can be converted into cash within three working days. So the issue is do you want your LIC holding cash earning 2.5% or invested otherwise earning 8%+. Some LICs will want to hold cash for investment reasons and IMHO that is good but hopefully not so that they can pay DPS for the next 3 years.
NB. There are some special purpose LICs like BTI which may not hold highly liquid assets but no one should own them if they want dividends in the foreseeable future.

 

DJW analysis has been delayed. The most confusing set of accounts I have come across so far so need to double check

 

I have decided not to publish DJW. The accounts are a mess, performance is highly erratic, NTA is down by 15% over 5 years, it sells at a ridiculous premium, DPS is down 7.7%. Current share price is $3.55. If the price drops to around $2 to $2.20 I will have another look then.

 

Good decision. Detailed analysis is not needed to come to a conclusion on DJW. Another yield trap. Using options in an attempt to boost income but it has been at a substantial expense of capital. I got it cheap a long term ago at a discount and had let it run its course into hefty premium territory. But when they announced the inevitable recent dividend cut I dumped it immediately. Those that hung in there for the dividend are probably regretting it. DJW is not something I would own again.

 

Great job

 

Yes, agreed. Thank for the detailed explanation. I did a quick refresher and of course it's not generally cash allocated to reserves.

I admit I'm quite rusty in this area as detailed analysis is not something I've looked at for a very long time. I suppose it's because I've been investing in a number of the older LICs for so long now I've seen them perform through good and bad times. As long as there are no major changes in their investing "process" I remain very confident in them. They really are simple things to understand. And a long history of performance is very important to me especially with value Mgrs.

My only reservation about this and one that I and @The Falcon are in strong agreement on is that 3 - 5 years is way too short as a timeframe for analysis in many cases. Especially for the more long term buy and hold LICs. The underformance of large caps in recent times and the freak bull market in small / mid caps and bond proxy sectors is going to lead to false conclusions for the long term investor.

HOWEVER, I do believe this excellent analysis by @jhmtaylor is extremely useful in cutting through the spin of mostly "new breed" LICs with their complex trading strategies and huge fees. These LICs are not easy to understand unlike the older LICs so this analysis is very valuable. It's highlighting what many of us investors accept as fairly reliable heuristic. That is, high yield through active trading and other strategies (options etc) is generally at the expense of capital. And importantly huge fees overtime are often a killer. And in the case of buy and hold LICs favouring Industrials over Resources will lead to outperformance.

But that said, I'm enjoying this thread immensely. Having a resident analyst here in @jhmtaylor is an incredible asset. I for one am very grateful and appreciative of his skill and hard work in compiling this data into a standard format. The lack of standard performance reporting in the LIC sector is disgraceful. Thanks again @jhmtaylor.

 

@jhmtaylor - mate thanks for the huge effort in putting this together. I know it has helped me as a novice and am sure it will help others just starting out. If I could buy you a beer I would.

 

BKI Investment Company

 

Hunter Hall Global Value (HHV)
NB HHV have 15% of portfolio in gold and precious metals.

 

Those fees looked too low to me for HHV so I checked. There were management fees of $5.096 Mil. I think you missed these?

HHV is one LIC I would not extrapolate recent performance as a guide to the future!

 

You are right about the fee. They change the presentation in 2014 and I did not pick up that management fee was a separate item.

It affects the allocation but not the bottom line. (Because they are all so different I have to work backwards from the Statutory profit to calculate Revenue. Ie Statutory Profit + taxes+expenses+unrealised gains=Revenue) I will fix.

 

Correct HHV. Thanks @austing , you are an excellent proof reader

 

Yes 2015 (post 2014) expense figure also looks incorrect after a quick look so makes sense. Honestly mate you're doing a fantastic job. I would be cross-eyed by now after looking at all the reports you have. Wouldn't it make life easy if they all followed a standardised reporting format! Thanks.