LIC & LIT Listed Investment Companies (LICs) in 2017

MLT especially and BKI are also fine.

AUI has a history of occasionally deeply discounting SPPs and Rights Issues below NTA at times. As long as one can afford to participate this can be a great opportunity. From memory AUI does have a buy-back program in place though which is a positive. For a very long term dividend focused investor I still like AUI and own it accordingly.

But I appreciate @oracle's point of view in discussing WHF's latest SPP which could be argued also applies to AUI to some degree? From memory @oracle I thought you liked AUI or am I getting you confused with someone else? Would be interested in hearing your view.

Thanks

 

Hi Austing,
I was thinking of a 'set and forget' type investment (if there is such a thing).
The Thornhill thread had me thinking LIC's were the answer, and they may be.
However, what I want to do is to make one or two major investments and just leave it at that. Hopefully collecting the dividends and never giving purchases, DRP's, SPP's etc a single thought again.
I know ETF's like VAS are not the best in a market sell off, but by their nature they will at least hold their own as far as I can tell. Whereas with a LIC you are being diluted with every new issue of shares. Thornhill (who I respect) doesn't seem to address this in his book though.

 

Yes, I like AUI more than WHF simply based on it's performance history and management fees compared to WHF.

I am a pretty new AUI shareholder (< 1 year) and haven't seen any SPP during that time. But you are right if they announced one now I wouldn't be too happy and would certainly be questioning managements rationale behind it. If they do hugely discounted SPP going forward I would seriously re-consider my holding in AUI.

Cheers,
Oracle.

 

I agree..the more I think about ETF/index vs LIC and try and predict the future I feel more and more inclined to go down the ETF/index route as core portfolio and LIC as income smoothing vehicles.

One of the main reason being is almost everyone agrees if investing in diversified market like US indexing is the best option without a doubt. Now if you think in future ASX should become more and more diversified (just look at the growth in Healthcare and IT sectors) than indexing strategy will be the right one to get best possible returns since beating the index will become harder and harder.

Let's put it another way, there is a very good chance some LIC might underperform the index over the long term while others might slightly outperform. But it's impossible to know which LIC will fall in which category. So you try and buy few LIC's to spread the risk. But by doing so you now most likely will also own some LIC which will under perform the index and cumulatively any outperformance of some LIC will be cancelled out by underperformance thereby giving your overall portfolio returns at best same as index. So why not just own the index and be satisfied knowing that sure you might own some crappy stocks which are part of the index but at the same time you will also own the winners which is all that matters. The winners over the long term will take care of decent portfolio returns in-spite of few losers.

Cheers,
Oracle.

 

These are fair comments and for the record over time I've moved in to your camp

What does exist within the ASX cap weighting is a really crazy concentration at the top end, which we all know about. I'm unhappy with the stock and sector specific risk presented by this concentration so favour adding a tilt to small + value factors for which there are a couple of vehicles that provide this. I think from a risk mitigation standpoint tilting away from cap weight is much more important in Oz than say the US market imho.

 

I would have thought over weighting the underrepresented sectors and underweighting the overrepresented sectors would be even better.

The more I have thought on these things the less desire I have to put more thought in however. The more learn the more compelling keeping it simple seems to become

 

Would love to hear you you came to this decision?

 

Vexing issues abound here. Even with the best thought out plan, there is no guarantee it will beat the cap weight index.

In the end, LICs vs ETF, cap vs alternative weights etc
doesnt really matter all that much....investOR behavior matters far more..oh and costs and tax....they really matter too.

 

Good points there.

I would still prefer LICs even with equal returns, as we can diversify right now with small mid cap LICs instead of waiting 20 years for VAS to rebalance that way, away from top 20 & financials

Also the income smoothing is perhaps my favourite feature of all. This reason alone I prefer LICs.

I think in the US there aren't really dividend focused investment vehicles with such a long decent track record like we have here in Oz.

I don't know.. That's what I come up with.

 

Rightly or wrongly I will sleep better with better sector balance...better than current Oz weighting anyway.

Having said that there is probably a cutoff point in the future for each individual when indexing in Oz may well be more attractive.

 

Ok guys, I am still trying to figure out whether to participate in this WHF SPP. As per Austing's guide, it's important to understand the reason behind the SPP offer and whether there are any deeper issues within the company:

"Rights issues can be used by companies who are cash strapped and who need to cover debt or by solid companies with clean balance sheets to fund acquisitions and growth. So it's important to look at the reason behind the raising."

According to the March Bell Potter report, the cash/debt position of the company is:
"Cash/Debt: $8.9m Cash (31 Mar '17), $0.0m Debt, $41.5m Hybrid (30 Sept '16)"

So what is the reason for the SPP offer this time, 1 or 2 from below?
1. The company is cash strapped and needs to cover debt or
2. To find acquisitions and growth.

 

3. Increase fee earning funds for the manager... The manager is external so they win either way by the offer

I don't mind WHF and I think they do these semi regularly. Motivations are probably benign. Maybe a bit of 1,2 and 3!
The discount is decent if you were planning to buy more anyway.

 

Thanks mate. I have just reached the target for my offset as a buffer. The idea is to eat into the buffer only if a very good opportunity comes up. Not sure if this is one of them.. Major market correction would certainly be a better one.

 

But it's not just about equal returns. You are taking on additional risk to achieve equal returns. Remember LIC are just another company that is run by managers who can make poor decisions that end up costing shareholders. You are also betting future managers will be as good as current managers in picking the right stocks. Yes, most of the old LICs have done very well for their shareholders and have proven their worth. At the end of the day it boils down to SANF in which vehicle you invest in and have most confidence about it's future when you are in retirement and rely on it more than anything else. @austing prefers to keep most of his investments in LICs, I have tossed between index ETFs and LICs and think I have finally settled on having core portfolio of index ETFs (including overseas exposure) and small but descent portfolio of LICs which I already own but am not planning to add anymore.

Regarding small mid caps LICs on ASX I find their fees to be quite high which cannot be good over the long term and think there is a high manager risk as well. Instead, I would rather diversify internationally.

I used to think that way as well. But doing some more research I have realised it's not that difficult to achieve income smoothing with index/ETFs as well. Sure, the dividends can drop during bear market for index/ETF but when you look at the rises in dividends before the bear market you will notice jump in income of 40%-50% in few short years before the drop. Surely, it can't be that hard to stay disciplined to not spend all your increase in dividends each year and instead just withdraw an amount you withdrew last year plus inflation. See below chart of dividends from VAS from 2009 (inception date) onwards. You can see they are pretty stable with gradual increase. I fully expect them to be volatile just before bull market ends and start of bear market.

US has some of the worlds best dividend growth companies that are the envy of every dividend growth investor. The problem is majority fund managers still can't beat the S&P500 index over the long term. When you have some time you can go through list of dividend champions (25 years of higher dividends). There are hundreds and hundreds of companies to choose from. Now compare that to ASX companies where you would struggle to find 10 companies with 25 years of higher dividends. The list is maintain my David Fish. You can read more about him on SeekingAlpha.

Cheers,
Oracle.

 

Great reasoning oracle, thanks. Perhaps I was lazy in my reply.

I meant in a hypothetical scenario of equal returns I prefer the LIC approach for more control over diversification within the ASX vs just having VAS only.
I don't like the makeup of it and wouldn't feel comfortable with that as my only investment, since I'm ASX only at this stage. (Leaving the international bit aside for now)

You're right that is higher risk I guess but personally I feel more comfortable with that approach, not having too much in one sector. If Oz has a much better spread in the future , VAS would become much more attractive to me.

I suppose I also think this approach will outperform based on the index's current weighting. It's also higher risk that I'm betting these small-mid cap managers can outperform. That may prove to be wrong and I'll wear that since I made the choice.

Mine is a decision to diversify within Oz vs international at this stage because I want more income.

If I did not care about generating a high level of dividends right now I could definitely go with Oz + Int. Index. Like in a super fund it's a great mix. Would feel more comfortable with the spread then.

Agree everyone has to decide what they prefer to hold and why. And to be prepared if choosing LICs or stocks we are making 'active' decisions and we may be wrong and need to own it.

The desire for income smoothing is probably irrational. But it's nice

You could prob easily achieve the same thing smoothing it yourself like you said.

Yeah sorry I didn't mean there was no dividend opportunities in US. I meant that everyone here agrees on US indexing because there are no good equivalent LICs over there for us to participate in the dividend growth like we can with the index, because the managers haven't proven themselves to do any better. Also the market is well diversified so no need. Agree the dividend growth over there will be far superior to here in Oz!

I'm at peace with that. I just currently want to achieve a relatively strong and somewhat more diversified dividend income in Oz for my limited dollars.

Sorry for my lazy answer before and thanks for pointing out my irrational investing biases

 

Hi @oracle,

Great well reasoned post.

What I think is good about cap weighted index ETFs is that they automatically reflect structural changes in the economy. In with the good / new, out with the bad / old. The older LICs due to size, turnover restrictions required to maintain CGT discount status and perhaps management not making good decisions may be a problem in the future with the increasing speed of change / disruption in the world nowadays. Being cautious can be a good thing but being too slow to act maybe not especially with huge FUM such as AFI. Turning a large ship around is a slow process.

Of course cap weighted index ETFs have no choice in avoiding fads. But the investor has the choice of standing aside when fads lead to bubbles. So not a major problem.

As a dividend focused investor I've not been interested so much in whether a LIC beat the index but rather because they focus on stocks that pay dividends both payers and growers. Reliability and consistency of dividends has been more important to us. That said the index ETFs to date have also been good in terms of total dividends. A total return investor would likely argue that a LIC Mgr should at least match the index ETF performance because both capital and dividends are available to draw on. And of course it's easy to smooth distributions from ETFs, that's part of the purpose of holding a cash buffer.

I think some of this comes back to behavioural issues. The older LICs because their main priority is to provide a relatively reliable and consistent income stream for shareholders seeking that end lets me sleep better at night. I don't know the future but these LICs have been very good to us over the years.

I'm a fan of indexing for International exposure and hold VGS as the main core with a couple of smaller LIC satellites.

I have no problem with the likes of VAS / STW and was one of the early investors in STW well before VAS existed. I held it for years then during a fit of stupidity sold it a couple of years ago. Bloody selling nearly always ends up a mistake. I try to do better nowadays. Come the next major period of gloom I will be reintroducing one of these ETFs back into the portfolio permanently. I like STW mostly because it's a stand alone ETF as opposed to VAS which is a class structure layered over the unlisted wholesale fund. That said Vanguards low fee focus and perhaps the feeling that Vanguard's popularity may improve survivorship of product still has me undecided. Head tells me STW but gut tells me VAS.

@oracle which of the ETFs do you favour? From memory you prefer VAS to STW but I can't recall your favoured International ETF(s).

I'm not generally a fan of smart beta ETFs but given the major problem of speculative resource companies in the index especially in the small cap sector I think the following dividend filtered ETF that I and @Il Falco have been discussing shows promise. The fee on the high side is not ideal. Trouble is with a lot of these niche ETFs is whether they survive long term.

https://www.vaneck.com.au/mastering-small-companies-with-smart-beta/

MVS - VanEck Vectors Small Companies Masters | Australian Small Companies ETF | Snapshot- VanEck Vectors Australia | VanEck Vectors Australia ETFs

Happy investing.

 

@oracle,

You might enjoy these articles on "positive skew" if you haven't already seen them and why many active Mgrs fail to beat the index even before fees and costs:

Lopsided Stocks and the Math Explaining Active Manager Futility

Why Indexing Works by J.B. Heaton, Nick Polson, Jan Hendrik Witte :: SSRN

 

Currently, only invested in VAS for ASX exposure. Reasoning is the low fees and reputation of Vanguard brand. Recently, have been doing some reading regarding survivability of the Vanguard funds. Everything I have read makes me feel confident that I do not have to worry about all my money being with one fund.

They are like property manager for your property. If the property manager company goes bust you still own your property. All you do is change to new property manager.

For international exposure I am inclined to buy VTS in discretionary trust. I am still going to do some more research on estate taxes but so far I am fairly happy that owning in trust should be safe. If for whatever reason I can't buy VTS than second best option is VGS.

Cheers,
Oracle.

 

Thanks.

Of course I remember now the recent discussion based on your question about VTS estate tax. My memory must be Going downhill.

I don't personally think the estate tax is an issue if investing through a Trust / Coy. Local fund Mgrs including Vanguard are investing through Trust structures albeit unit Trusts. Not sure how US IRS would know if a foreign investor of a Trust passed away anyhow in a lot of cases. The distributions / capital gains would simply go to remaining Trust beneficiaries.

 

This is like a full circle for me. I originally was going to go the Boglehead way and invest in VAS, VGS and fixed interest. Then I got side tracked in LIC's.
Now that I have learnt LIC's have their own downside as well as not truly being set and forget (you will get diluted this way) I can see the benefit of VAS/VGS. At the moment though I'm mostly fixed interest.