LIC & LIT Listed Investment Companies (LICs) Q1 2018

it was even better at $4.8 a while back greedy i know

 

Finally done read up on a few books (motivated money, million for life, super smart money), and the beginner LIC thread, shares vs property threads, and things finally make sense to me.

One question I have is whether to diversify between LIC's or not.

I am talking only about the 'big 3' (ARG, MLT, AFI) and possibly the 'other 2' (WHF, BKI). Please ignore all other LIC's for the purposes of this question.

What I have read so far is that they are actually fairly similar in their major holdings, and that the reason to have multiple LIC's is to participate in SPP's.

Would you say that there is really no more risk going with all of your money in 1 of the big 3 than say splitting between 3 or 4 or 5?

And if by random luck every time you went to purchase, it just happened that the greatest NTA discount was with always the same one of the above LIC's, would you just continue to keep buying that one? If not, what would be your algorithm/formula for how much to diversify and to where?

 

First up here’s a table showing average NTA premium / discount over a period of 10 years. This will give you an indication of which of the LICs you mentioned are likely to regularly trade at a premium or discount:



Of course you could just invest in one of them. But AFI and ARG due to size and popularity might be more inclined to often trade at a premium. WHF is often at a discount but I personally would feel uncomfortable having all my money in it given it’s size, external management and heavy influence of a single individual. Similar view with BKI except for size. MLT is currently at a premium but history suggests it’s more likely to trade around NTA.

If one is prepared to own just TWO holdings for Australian Shares then a combination of an Index ETF such as VAS (ASX 300) and a single LIC such as MLT could be advantageous. VAS is guaranteed to always trade at NTA. Just apply a simple rule of when the LIC is at a discount buy it otherwise buy VAS. Best of both worlds!

If Labor are successful in removing franking credit refunds then trading at a discount might become the norm for even the large LICs. I can’t help salivating at the thought of this. I would be more concerned about the actively managed LICs which generate most of their income (capital gains) from trading.

Not advice.

 

The Management Company not the funds

Was this easy to set up/do?

 

I would spread across a few different LICs even though they overlap one another sector wise mainly for the reasons outlined by @Nodrog. It spreads managerial risk and also grants you access to SPP opportunities when they arise. Just my two cents, not advice.

 

So easy I have forgotten what we had to do.

At a guess, probably wrote to the share register and ask them to remove the trustee but honestly I can’t remember. Sorry.

 

Thanks @Nodrog @@FruitCake@


If over a very long period (10 years) the average NTA is 2% premium for AFI and MLT is 2%, wouldn't that mean that if you bought both of them for a 0% premium/discount that you are actually paying 2% discount for AFI compared to it's long running average and 2% premium for MLT for the same reason?

I am still a bit unsure of the NTA stuff since it has been mentioned that you can be buying at a discount to NTA but could be at a discount to NTA due to the market moving up and being overpriced and so you could be paying a premium even though it is a discount to NTA.

When you say you personally would not put all your money into WHF/BKI due to it being externally managed and influenced largely by a single individual, it makes me think that it is probably best to just stay away from it because I want risk to be as low as possible.

For the VAS, I have read too many things pointing out that LIC's are superior because they choose the top performers of the asx200 and leave out the crappier ones, also LIC's being close ended, and lots of other reasons for choosing LIC's, which is why I am thinking that maybe splitting 1/3 between each of the big 3 major LICs and just not bothering with the ETF's

 

It can be a positive and a negative. LICs might miss out on a rising star whereas the ETF will automatically capture it. I was on the phone conf for the MIR presentation on Wednesday and they were saying how they missed out on A2M which detracted quite significantly from performance against the mid cap index. Same works the other way around where a LIC might hold on to a company that is going down down. As nodrog has mentioned many times the ETF is in this regard self cleansing, which is something to consider with the increasing pace of change. Of course the LICs have the fully franked divs going for them, but I would not write off the ETF as inferior.

 

Sounds like you've been reading the sales pitches!

Look at MLT for example, it trails XAOAI at 15 year total return by 50bps. MLT had a great run many years ago so they still get the benefit of that in their very long term figures. AFI looks good at 10 years, looks poor at 3 and 5 years vs ASX200TR..... BKI on the other hand is using a very smoky looking performance criteria - * Based on a tax rate of 30% and shareholders being able to utilise all franking credits. S&P/ASX 300 Accumulation Index franked at 80%. Grossing up! so if you are on a higher tax rate, you dont get that performance! Borderline dishonest imho. ARG looks unimpressive at 3-5-10 years against ASX200TR but at least they are honest.

 

In a nutshell “Positive Skew” can at times work in favour of cap weighted index funds.

 

Another (though not critically important) reason to own multiple LICs is to smooth dividend distribution dates, as the funds pay in different months:

 

Market is in a sea of red today. Might be a few juicy opportunities popping up?

Who’s taking advantage of what?

 

PIC up .5%

 

Thanks @Ouga and @The Falcon

I was going by reasons for choosing the older LIC's over ETF's such as
- fully franked dividends vs around 80% for index ETFs
- no or less rebalancing and therefore more tax effective
- closed end funds - again improves tax effectiveness
- sticking with the top companies and ditching the lower end speculative stuff which the index fund can not do
- focus on dividends which are important during downturns

Do you think it would be worthwhile splitting some index funds and some LIC's?
As I understood it, the older LIC's would have captured an overwhelmingly large portion of the index funds companies anyway, but with tax-effective and income-focused management making ETF's almost redundant.

By the way I am not trying to outperform the market. My goal is only two-fold:
1. To find a strategy that I can mostly just follow without thinking; and
2. If there was some way to improve this slightly such as knowing when to hold off and when to put more in, I would like to know how to do that. No idea if this is something I can realistically know how to do since I have not yet found how to know when something is considered high or low compared to long running average.

 

I just jumped in and bought the LICs I’ve been wanting to buy. Then I closed my browser.

 

By the way, I saw someone say that they use NTA, yield, historical averages to decide when to buy. I think it was @@FruitCake@.

The NTA part seems easy enough to calculate.
The yield, someone mentioned below 4% is not good and the further along to 5 is preferable (for old LICs)

Can someone tell me how to find historical averages and where the current price is vs its long running average?

 

Good post. You’ve put some thought into this. I’ll revert with a rebuttal of each advantage when I’m on laptop. Suffice to say, while I think LICs can be fine vehicles, their advantages are well marketed by their promoters (as you would expect) without the other side of the coin being shared. This is not “LICs are bad”, just a view as to why I think the market portfolio (index) should be starting point for many investors

 

I just use NTA and yield as a guide more than anything in terms of creating my short list of LICs. Mandate and fees also come into the equation as well. When I choose to buy out of my shortlist on the day once I’ve saved up a large enough chunk is based on gut feel a lot of the time. But this is just me.

 

Teenage pregnancy statistics say you shouldn't rely on parts of your anatomy for decisions

 

- Franking ; this is a red herring. Would you prefer a lower FF dividend, or a higher dividend with lower franking level which grosses to the same amount. The reason these LICs divs are FF is because they apply franking credits received and then pay tax on unfranked divs / distributions, creating franking credits to attach to dividends. Net result is its a wash.

- Rebalancing, take a look at STW which is to date the most efficient Index ETF in Oz. Basically no turnover at all. The straight ETF structure means no embedded tax position. This is not the case with LICs and the "post tax NTA" that nobody talks about, because the manager will "never sell" these positions. This is what you buy into with LICs....existing tax positions based on gains made in the past that you did not benefit from, but on which portfolio decisions will continue to be made, or rather not.

- Closed end ; On balance, yes an advantage over MIT structure. Straight ETF like STW, not so. And now with AMIT in place, I think no longer an advantage over VAS. Lets see. Closed end other side of the coin is if you have a liquidity event you must sell on market and share price will vary from NTA. Not so ETF, you will get NTA.

- Stock picking "good companies". Not really seeing the advantage here as the market grows more efficient over time, based on 10-15 year performance I posted earlier. Pull the portfolios apart and they are really very close to index, more so when you put 3-4 of them in a portfolio!
Although there is rubbish at the bottom, there are diamonds in the rough that the index will capture but LICs may not. Refer Positive Skew. We have seen this recently play out. Note, i would absolutely not overweight small cap in Oz without a filter, but market cap ok.

- The Big 4 portfolios look pretty much like the index. With market like dividend yield. A bit of a red herring here. Dividend stability yes, because they will typically hold cash to smooth payments. This is something you can do yourself of course if its important for you, but realise many people will see this as an advantage.

The large LICs are good vehicles because they are cheap, and because their turnover is low. Index ETF likewise. If you go with market portfolio (Index) you never have to worry about NTA, manager performance, changing horse mid stream etc which is a distraction (feeds on action bias) and you can get on with looking at asset allocation which is more important long run imho.

2c.