LIC & LIT Listed Investment Companies (LICs) 2020

I wasn't joking. It will bring my income back to where it was around a decade ago. Can do on that.

As well as I have said previously the payout ratios of LICs have been on the high side. My preference was, and still is, between 50% to 60% with the rest retained for investment opportunities. But, hey, I am only one shareholder. Others have a different level of greed and avarice.

 

That is the paradox: 'we' invest big in companies that encourage less responsible behaviour (AfterPay pre-CV capitalisation anyone?). I can remember the times when credit card companies used to increase limits without being asked and would send out unsolicited cards.

 

Taken from AFB comments

"Luke on March 20, 2020 at 10:43 pm
Why LICs – I would not base your investment decisions off of one persons viewpoint – especially considering that LICs have huge flaws – Peter has done well – but times have changed

Peter Thornhill on March 25, 2020 at 5:21 pm
Luke, please tell me what has changed. I invest in a LIC that was first listed in 1891. In 130 odd years do you know how many staff changes they have had? In the meantime, my last annual report informs me that the dividend for 2019 is the 53rd year of consecutive dividend increases. What have they dealt with over the last 130 years huh? World Wars, depressions umpteen pandemics but enough all ready. I am only interested in an investment company that has a very clear philosophy that has been followed religiously for decades; come hell or high water. However, if you can enlighten me I will pass it on to them.

Random Fat Guy At A Keyboard on March 26, 2020 at 2:56 pm
There’s nothing inherently wrong with LICs, but they’re nothing special either.

Active management has been well and truly debunked. As much as the idea that actively selecting stocks to outperform the market sounds appealing, the reality is that only a tiny selection of professionals can do it, and over a sufficiently long period of data tracking it’s less than 20%. Take a look at all of the grandfather LIC’s over the past 3, 5, and 10 years relative to doing nothing besides holding the index for example.

This fallacy of being able to select companies who will do well also includes the fallacy of the ability to find companies that will continue to increase dividends into the future. You look backwards and use companies that have in the past intended to – and succeeded – to grow their dividends, but if you were to look forward this data is meaningless because looking forward you can not exclude those companies that intend to but then fail to do so.

Besides the active management fallacy, there are a range of other reasons that you put forward that are also easily debunked.

The idea that because LIC’s smooth dividends that they can be relied upon. LIC’s hold cash for their smoothing – there’s nothing magical about it. In fact this is a downside. A young person shouldn’t want any money in cash, it’s a drag on returns and any cash they need they can get from their future decades of employment income. In fact if they lose their job, they can’t even access the cash held in their LIC. A retiree should want more than what the LIC holds because if there is an extended bear market the LIC could easily run out of cash leaving those who listened to you and thought the income was reliable depleting more of their assets than if they had their own buffer of safe assets that suited their stage of life.

And this doesn’t even get to the fact that you simply make up stories that aren’t based on any fact whatsoever. You put forward the idea that REITs are no good because it has no “human endeavour”. I mean you just pulled this out of your ass. The data shows that REITs more than hold their own over the long term. You make it sound that since REITs are legally required to pay out 90% of their income as dividends to mean the value cannot grow, and leave out the fact that REITs still grow due to leverage just like many industrial companies use leverage. Whether there is any “human endeavour” is completely meaningless, not to mention completely made up.

Then there is the idea that mining provides poor returns. Your famous graph that you show repeatedly just happens to begin at the peak of a massive boom, so obviously going forward from that point it will appear to underperform as it reverts to it’s long running mean. You can see this is false with longer data from the RBA on page 12.
https://www.rba.gov.au/publications/rdp/2019/2019-04.html

I don’t consider the grandfather LIC’s to be particularly bad investments, but there’s nothing special about them either. The real problem is not with LIC’s at all, but rather with the misinformation you put forward about them, and this misinformation is spread throughout new investors who don’t have the knowledge to figure out if it is fact or not."

PT has not responded to date but we can only hope.

 

Uncle Drew

happy to stand corrected but i am pretty sure that LICs do not hold cash to smooth their dividends
the profit reserve is an accounting fiction on the balance sheet like retained earnings is for a normal company
nobody would suggest that retained earnings are just sitting there as cash
neither is the profit reserve
but it is previous profits from which dividends can be paid (fully franked if there are enough franking credits )

Thanks dunno for pointing out that franked dividends are way more valuable for a zero tax investor than selling shares to fund your living expenses

 

Well some of it will have to be cash. To what extent is the portfolio sitting as cash is the issue here. It's not 0%.

The accounting journal for dividends paid is:

Code:

Dr  Retained earnings
    Cr  Cash at bank

A reduction to cash + a reduction in retained earnings.

 

mtat

Well some of it will have to be cash. To what extent is the portfolio sitting as cash is the issue here. It's not 0%.

agreed

my point is that some people are putting it about that if a company has 3 years worth of dividends in the profit reserve then all of this money is sitting in an account somewhere and none of it is being invested

this is not how dividend smoothing works

but as i said i am happy to be corrected if i am wrong

 

Hi Mark

looks like you have doubled p on your membership to PC

LICs can pay dividends from the capital returns they produce as well as from the dividends they receive from the investments, some also engage in options trading
The Grandfather LIC's (AFI, ARG, WHF, MLT) seem to save excess profits during good years to smooth out the dividends in leaner years.

'Captive capital' key to understanding LIC dividends



There are fundamental differences in the way income is drawn from listed investment companies versus managed funds, explains Morningstar's Andrew Miles.

In a recent webinar about Listed Investment Companies hosted by Morningstar, one viewer asked a question about how LICs pass on capital gains as dividends.

To answer the question, you need to compare the different structures of the two investment vehicles.

In a managed fund, investors pool their capital with other investors. The combined capital is invested by a fund manager on their behalf. Investors receive dividends and any realised capital gains from the fund's underlying investments.

In a listed investment company, investors buy shares in a listed company whose business it is to invest in a range of companies and other assets. Because LICs are incorporated companies, the board can choose to distribute dividends out of its after-tax profit to shareholders.

How LICs are formed

When an asset manager wants to create a listed investment company, they turn to the market to raise capital via an initial product offering (IPO).

When the IPO is fully subscribed, they list the company on the ASX and issue shares to the participants. The funds raised from the IPO are then invested in a portfolio of securities which are managed by a professional fund manager.

The value of the underlying investments forms the basis for the net tangible assets (NTA) of the LIC. The funds are considered 'captive' in the sense that the assets are closed-in for the manager to invest and cannot be redeemed.

For investors who didn't participate in the IPO, they can buy and trade shares in the LIC on the ASX off other market participants.

This type of closed-end structure can be advantageous for listed investment companies. Because the assets are closed, the portfolio manager doesn't have to worry about investors pulling money out of the fund.

"In an open-end structure, you can usually redeem your money every day," Miles says.

"This can create difficulties for an investment manager. If they take a very long-term time horizon on their investments, actually being in a closed-end structure can be helpful because they've locked that captive capital in and they don't have to worry about exiting a position at an inopportune time because a handful of investors are looking to redeem."

How do LICs dividends from a market crash work? : AusFinance
www.reddit.com

 

Not to be confused with a Return of Capital which requires an ATO Class Ruling on the tax consequences.

 

Dividends can be paid if the company has +ve net assets (and therefore equity) immediately before and after the payment of the dividend. There is also the solvency or going concern test that the payment of the dividend will not impact on the company’s ability to meet other liabilities as they become due. A company can fund it out of cash or leverage as bhp we’re going to do some years back if memory serves

 

Thanks for the reply, that just seems bizarre to me how it can be out by quite a few percentage points

 

Let me check ARGO. Hopefully my thinking is sort of right.

ARGO dividends last 12 months were a total of $0.33 per share. With around ~714M shares on issue that totals to a yearly dividend of $236M.

ARGO at 30 Jun 2019: (as per their annual report)

• Franking account balance = $226M
• Therefore they could pay a dividend of max. $528M before their franking account is depleted
  
• Retained earnings = $503M

Therefore yes, their "reserves" could cover about 2x years of dividends. As you say, they don't hold that much in cash. But it's still a sizeable amount at $219M (as at 30 Jun 2019), which would cover about 1x year of dividends.

I did a quick estimation and based on their 29 Feb 2020 NTA, I think they hold a similar amount in cash after accounting for their recent dividend. ($236M)

The next 6 months might be very telling whether these big LICs will be able to keep dividends steady over the next 2 years.

 

Thankyou for your reply.

Below is very informative link regarding on the differences as you outlined above for anyone interested.

Time-Weighted vs Money-Weighted Rates of Return | Sharesight

 

True. There is (as always) anther possibility where the board decides while the company can pay say, 30c per share dividend, it decides it's better overall to withhold 10c of it. Basically adjust the payout ratio.

We'll know when we know and not before then really.

 

BKI Quarterly Report

 

I sold VGS to buy VGAD. Why?

1. Tax-loss harvesting.
2. Given they are the same underlying instrument with currency hedging being the only difference, and VGS dropped 10% less from the 20/2 high than VGAD, it was like buying VGAD at a discount and selling VGS at a premium (IMO).
3. AUD/USD could go down further (I did this at 0.59), but in the long-run, this is on the lower end of the spectrum (IMO).
4. From this point, I plan to buy VGS/VGAD (or IWLD/IHWL if there are tax issues) in proportions that get me back to my strategic asset allocation.
5. Hamish Douglas recommendation: International Shares - Hedged vs Unhedged? [International]

In Super, I rebalanced to a higher international hedged (~VGAD) allocation.

 

Create a LIT thread.

 

Like most other reports I assume. Cheery, bright and advising "We are strategically placed!"

And they could well be right.

 

Certainly escalated handouts quickly, be interesting how this aspect plays out and how much more ammo there is for developing and unforeseen problems. Whenever there is intervention like this there seems to be some kind of surprise development as a result.

 

Went shopping today, picked up some juice boxes

 

I dance like that when i buy toilet paper these days...

Crazy times!