LIC & LIT Listed Investment Companies (LICs) Q1 2018

@TAJ

As per above @Nodrog suggested for FGG , MSCI should be used because of it's International exposure.

So in my 2nd paragraph - I am kinda disappointed that all I was asking if calculating the NTA Formula is correct or not regardless of the shareprice/index proce etc.

 

On the fly NTA calc only works with low turnover LICs that have similar holdings to the relevant index eg the older style LICS such as AFI / AUI / ARG / BKI / MLT etc.

Even if you use MSCI International index adjustment it won’t work for FGG or most of the International LICs as they hold concentrated or very index unaware portfolios and are often very active.

In terms of the NTA formula and application see attached LIC Guide I wrote, pages 2 - 4:

 

Thanks @Nodrog

 

Easiest way is to get the weekly adjusted NTA from the following. They maintain a database of the LIC major portfolio holdings where’s possible to follow NTA. Where it’s unworkable the monthly figure published by the LIC is used.

https://cuffelinks.com.au/wp-content/uploads/Indicative-NTA-20180122.pdf

 

Far be it for me to temper enthusiasm for LIC's, or any other form of investment for that matter. It's each to their own as they view it.

The question I pose is how are you going to deal with the inevitable downturn? You wont know when it will happen or the degree of magnitude. However, I'm pretty sure it will happen.

I don't mean Oh I'll stick to my LIC/Investment plan. What are you going to do to adhere to your plan? Play numerous games of solitaire; continue to place funds with your preferred investment vehicle; ignore events and just sit? Not too sure many have thought about the attitude and when markets are thriving it isn't necessarily a matter at the forefront of your mind, well, mine at least.

The prices, and possibly dividends, can drop. LIC's and others don't actually produce anything. All they mostly do is to decide how many shares in what company they will hold at any particular time. If a particular company reduces it's dividend or payout ratio there is stuff all teh LIC can do apart from supporting the dividend it pays from it's reserves. WHF is a case in point.

My plan is simple. Keep on feeding the beast. May not be a great amount any any particular time and I've no set agenda on placing $xx's at determined intervals. I'm subject to nerves and worries same as most. How big I GULP I take when the SMSF drops, say, 40%, which impacts on the account-based pension, will be an interesting time I think.

 

Don’t tell em it’s simple. We’ll have nothing to talk about then.

 

Depends on where one is at in their investment journey. Ie. accumulation or dividend spending.

Perhaps step 1 would be diversification. By that I mean across asset classes & with multiple investment vehicles.

Then, depending on where one is at on their life journey, either hold on & ride it out, or ..... bail.
I’d like to think that most people are in for the long haul, so when the ship starts rocking, get ready to ride it out, rather than jump overboard. If a diverse portfolio gets completely smashed on the rocks (ie. >40% capital loss) then we’ve probably got some real big global crisis happening that only a fortune teller could avoid.....

 

I'm in accumulation mode and have some cash sitting on the sidelines (about 15% of portfolio value) in case of a downturn. My rough plan is to deploy around 10% of it for each 5% drop in the market, keeping a close eye on my favoured LICs to see whether any unique discounts (compared to historical averages) have suddenly opened up for any particular one compared to the others when deciding which one to buy.

That's the plan - whether or not I'll have the kahunas to actually stick with the plan as the market starts tumbling is a completely different matter!

 

And this is what I was getting at. Until you go through it you just don't know I think. It's a mental thing. As I said in the LIC 2017 thread, I was packing death at one stage but fortunately it worked out. In my case, big deep breaths was the order of the day - and the day after and the one after that.

 

I find it fascinating reading over the posts in SS at the time. Some hairy situations indeed.

 

It’s quite an experience. Excitement at first given all the bargains on offer. Then one eventually runs out of dry powder and becomes a bit annoyed. As the portfolio value continues to tank way beyond your worst expectation worry begins to set in. Alas it still continues to get worse. Worry turns to despondency ... .

How I dealt with it:

1. Keep bringing the focus back to the income. Fortunately if a mix of the older style LICs in particular are a major part of the portfolio their ability to smooth income will be a great relief.

2. Maintain a decent cash buffer. If income needs topping up due to a reduction in dividends / capital then that’s where the liquidity of cash is so important.

3. Even if you’ve been through major market falls before it’s hard not to feel miserable. I found “distraction” worked well for me. Stop looking at the portfolio. I mean STOP LOOKING, not even a peek. Ignore the media, don’t read or listen to anything about the market. Find other unrelated things to occupy your mind. And for the LIC income focused investor you’ll likely be cheered up by the fact that the dividend income has held up pretty damn well. It’s not so bad after all - I’m so glad during times like these I decided many years ago to take the income approach to investing in Shares.

 

I think also that one needs to understand that how we react to a crisis will depend on what else is going on in our lives. If we are shooting the lights out personally and professionally with a solid income stream we are far more likely to shrug it off, than if we are retired or out of work and have just been diagnosed with a serious, life limiting illness and your dog ran away due to a large townhouse development being built next door arrgghhh!!!

So for for that reason, reduction in volatility I believe is a worthwhile goal as we simply do not know what circumstances we will find ourselves in in future and how we will react. Past performance is not a guide etc.

 

Nice little announcement from MLT this morning - 8.8cps fully franked payable on 1 March. Are their reports always so awfully formatted? That blue text is making my eyes bleed.

Very similar commentary to that from AFI, BKI etc that the market appears to be fully valued and that it is difficult to find stocks fairly priced to add value to the portfolio.

 

Stop complaining. With a MER of 0.12% I don’t care if they use purple text.

 

This is a key factor why (IMHO) passive investing (index) is ultimately the correct choice for all. Fact is, the market is going to go through periods of ups and downs, but the key is successful investing in the markets is not only hold on when "crashing" but actually beg, borrow & steal to add to your portfolio at the cheaper valuations.

However, the market is a mental/emotional game as much as it is anything else. Heck, sometimes I think it is only a mental game.

If you are active, even simply investing in LIC's your intestinal fortitude is tested like never before when there is blood on the street.

Sure, your practical brain says buy, buy, buy... these things are cheap, the market will rebound etc. That is great - but then you think hold on, what if Im holding the next Lehman brothers (or any of the others) which is not going to rebound, in fact you may lose 100%. The doubt creeps in, and thus your resolve is not only tested, it is defeated and you back away.

The ONLY way (IMHO again) you can sleep at night and continue to dollar cost average down to extreme levels is via the index.

I can only guarantee (as much as I can) than the S&P500 index will be there, and extremely confident will be significantly higher in 20 years than today. I can not say that for any company, any lic or anything else.

 

Some excellent points but I can assure you in the case of older style LICs I don’t agree. As one who owned both index ETFs, equities and AReits (LPTs back then), and older style LICs the Index didn’t provide any added comfort. In fact the LPT index fell by nearly 90%.

Not only did the older larger LICs not fall as hard as the index (premium increased) hence less volatile but due to their company structure the overall dividend / distribution reduction was noticeably less than the index funds. That is also less volatile.

@SatayKing another investor like myself who also has been investing a very long time also owned an index ETF during the GFC. He might like to add further.

Here’s a visual for you. Index ETFs vs LICS. Who experienced the most pain in terms of volatility during the GFC? I can assure you I felt much happier with our LICs smoother ride both capital and income wise compared to the Index ETFs we owned:



As for what will still be around in the future well the older LICs have been arount longer than any Index Fund.

Don’t get me wrong I like index product and still own accordingly as well as LICs. But Index funds can’t perform miracles.

 

I understand that, but I am not sure you understood what I was saying.

In relation to the mentality around continually investing during a major 'crash' - there is no comfort in any LIC, or the specific Australian indexes etc. Australia cant easily become a Japan etc. Or could it?

I am specifically talking about the S&P500 - The US large cap index. Not indexes is a whole, not the XJO or anything else. I am talking about the largest caps, in the largest first world economy etc.

 

Yes I did understand that. But go back prior to the GFC where the US experienced it’s lost decade and ASX was firing on all cylinders. I own an international ETF with 60% exposure to the US. But US has it’s bad times also.

I also understand what you’re getting at with the psychology of investing. But whether it’s a lower turnover active product (even Vanguard US have a couple of excellent funds) or index product the important thing is to have a plan, buy regularly, diversify against country risk and not only hold your nerve in the worst of market times but take advantage of the opportunity.

 

Heck @Nodrog this can be argued until the cows come home and I doubt everyone would agree. Nor should they as it's an individual matter.

The thing about ETF's I think is they hold companies whether or not they are any good. It's irrelevant. If it's in the index, it's in. Probably some ETF's held Babcock & Brown or Alinta but I don't recall any of the LIC's I hold did so. It may hold some which due to specific issues go Boom; Lehman Brothers being one, so it drops out and another comes in. Gee, there are more companies delisted and now non-existent than there are listed. But then that is one nicer aspect of ETFs of get it while it's good, dump it when it's bad.

As for the older LIC's usually being staid and dull, I suppose the approach expected by shareholders is the managers will not be gung-ho and get a rush of blood to the head by following the next fad.

And the portfolios are a little more concentrated in the number of companies than expected compared with some ETFs which surprised me as well as the spread. An example is STW which I hold and have for many years. From what I have seen recently it's weightings to Financials (is about 35% I believe) but MLT is now down to 32% or so for banks, AFI is 23%. So it goes. However, I haven't looked at the comparison in any great detail across all sectors.

LIC's do have an ability to change weightings which is not necessarily available to ETFs. That can be an advantage.

I don't have anything against ETF's. I hold one but at the moment that will be all as a consequence of me being me. My only disappointment, if you can call it that, with the one I hold is the fluctuation in the amount of distributions. It isn't necessarily a great amount by any means but it's still there and an aspect I have not encountered with most LICs which is why my preference is towards them - PMC notwithstanding but that's the nature of that beast!