LIC & LIT Listed Investment Companies (LICs) Q2 2018

Discussion in 'Shares & Funds' started by Intrigued_again, 2nd Apr, 2018.

Join Australia's most dynamic and respected property investment community
Thread Status:
Not open for further replies.
  1. Intrigued_again

    Intrigued_again Well-Known Member

    Joined:
    4th Mar, 2016
    Posts:
    217
    Location:
    Perth
    {Note - thread continued from here: Listed Investment Companies (LICs) Q1 2018}


    Not ready to join the dark side quite yet, but you guys put up one hell of an argument LOL.

    Truth is it’s been a shocking 12months health wise so had major time on the Gold Coast and recently Bali relaxing.

    Still with CBA (CBA LIC) and a few others I’m lazier than you.

    Love you guys selling the simplicity of all this, your all doing a great job.
     
    Last edited by a moderator: 1st May, 2018
  2. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    11,376
    Location:
    Buderim
    Hi mate,

    Sorry to hear about the health issues. Hope you’re on the mend.

    Selling simplicity? After hundreds of pages of posts I’m not so sure:D.
     
    KayTea and Redwing like this.
  3. Parkzilla

    Parkzilla Well-Known Member

    Joined:
    2nd Nov, 2015
    Posts:
    138
    Location:
    Brisbane
    Topped up on BKI today @ $1.565.

    Starting buying last month when it looked good @ $1.63, have been DCA'ing as it continues to drop.

    Must keep some powder dry but looks attractive to accumulator when prices are back what they were 12+ months ago!
     
    sharon, Snowball, mdk and 2 others like this.
  4. Tony

    Tony Well-Known Member

    Joined:
    28th Jun, 2016
    Posts:
    169
    Location:
    Sydney
    MLT is down too
     
  5. Zenith Chaos

    Zenith Chaos Well-Known Member

    Joined:
    10th Jul, 2015
    Posts:
    1,673
    Location:
    Sydney
    Almost everything is down. I'm not going to ask if this is it.......... Because if I do then it won't be.
     
    sharon and monk like this.
  6. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    11,376
    Location:
    Buderim
    Don’t worry, that’s just me selling everything in preparation for the crash:).
     
    Ynot, Martin73, sharon and 5 others like this.
  7. SenK

    SenK Member

    Joined:
    14th Dec, 2016
    Posts:
    18
    Location:
    Adelaide
    Toped up QVE, now it is 52 weeks low and down about 4% since yesterday, anyone aware the reason behind? Thanks.
     
  8. twobobsworth

    twobobsworth Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    772
    Location:
    Sydney, New South Wales
    Dividend is almost looking attractive.
     
  9. Snowball

    Snowball Well-Known Member

    Joined:
    28th Dec, 2016
    Posts:
    843
    Location:
    Perth
    The thing with the QVE dividend is, it’ll likely grow faster than the older LICs.

    Given the older LICs are bank heavy this is what pushes the yield higher to be around 6% gross.

    QVE is currently 5% gross which is good in my view. They hold many stocks with lower yield but typically much higher dividend growth than the banks.

    Portfolio is more diversified and stocks with offshore earnings.
     
    Last edited: 4th Apr, 2018
    orangestreet likes this.
  10. Snowball

    Snowball Well-Known Member

    Joined:
    28th Dec, 2016
    Posts:
    843
    Location:
    Perth
    Just some old fashioned volatility, changes in popularity, the voting machine doing its thing...also known as luck for the keen LIC buyer.

    What’s an accumulator to do?

    Accumulate :D


    What would Uncle Warren say...wealth transferring from the impatient (sellers) to the patient (buyers).
     
    KayTea, kierank and scoobie27 like this.
  11. dunno

    dunno Well-Known Member

    Joined:
    31st Aug, 2017
    Posts:
    1,675
    Location:
    Mt Stupid
    sharon, Anne11 and Nodrog like this.
  12. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    11,376
    Location:
    Buderim
    The older style LICs are eligible for the “LIC Capital Gains” Discount status under legislation specific only to “investment” companies. This requires they restrict turnover to less than 10% pa and this is generally from realising assets held longer than 12 months. A few of the older LICs do a small amount of trading and writing options (< 10% of portfolio) which would be impacted as per the article you referenced but it’s not really much of an issue. If franking refunds were scrapped they could simply remove the small trading portfolio from their operations.

    The worst affected are the active “trading” LICs. Most of their franked dividend comprises realised trading profits as opposed to simply passing through the dividends from companies in the underlying portfolio like the older LICs. But because the trading LICs typically have minimal “long term” embedded capital gains in their portfolios they could transition to a “LIT” relatively easily.

    Then of course one of Labor’s key policies is to halve the current Capital Gain Tax Discount so Investors would only be able to claim a 25% Discount as opposed to 50% now. That would change the figures detailed in the article reducing the difference between different structures.

    Those who hold LICs outside a SMSF, who are higher income earners, have large portfolios or earn income from other assets would be minimally impacted. SMSFs really cop it.

    As mentioned earlier given we’re invested heavily in LICs I’m taking some precautionary action by increasing our exposure to cap weighted index ETFs. Also we’d solely hold LICs and ETFs invested in ASX whose dividends / distributions include franking credits mostly in personal names then dominate the SMSF with cash, fixed interest, International equities and god forbid local and international Property Trusts:eek::D.

    Due to the size of our SMSF portfolio the fees would be greatly increased even if investing through an Industry Fund plus we’d lose flexibility and other technical benefits typically only available to SMSFs. The excess over pension limit held in Accuumulation also still gets to take advantage of franking credits. It’s only assets that give off franking credits that impact SMSFs under the proposed change. Hence my earlier reasoning for holding more of the Australian equities in own names and a lesser allocation to franked product plus all other asset classes in the SMSF.

    The terrifying thing is that the SMSF portfolio would start looking more Bogleheadish:eek::eek::eek:. Given the size of our portfolios which are dominated by Australian equities some extra diversication is hardly a bad thing:).
     
    Last edited: 5th Apr, 2018
    Ynot, Redwing, Snowball and 7 others like this.
  13. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    11,376
    Location:
    Buderim
  14. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    11,376
    Location:
    Buderim
  15. dunno

    dunno Well-Known Member

    Joined:
    31st Aug, 2017
    Posts:
    1,675
    Location:
    Mt Stupid
    Hi Nodrog - can you point me to the where the requirement for less than 10% turnover is detailed?

    I can't see anything in the legislation about it. There are rules about whether a LIC is an eligible LIC to pass through gains, but this has nothing to do with turnover. There is also the requirement that the gain passed through be on capital account and held for greater than 12 months - which is the same rules for personal holdings. But nothing about turnover restrictions that I can see.

    So curious to where the 10% turnover restriction you refer to comes from.
     
  16. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    11,376
    Location:
    Buderim
    You’re correct in that this is not a “precise” legislative requirement but those in the industry often quote that figure as a useful rule of thumb. You will generally find that only the lower turnover LICs meet the “LIC Capital Gains” requirements. And for “trading” LICs passing gains through the capital account may not be suitable for their operation.
     
  17. dunno

    dunno Well-Known Member

    Joined:
    31st Aug, 2017
    Posts:
    1,675
    Location:
    Mt Stupid
    The difference between Pre & Post tax figures will matter to those on tax rates lower than the company tax rate if Labor franking policy comes to pass.

    By paying Before tax NTA you are effectively buying somebody else’s tax debt. On the face of it a very illogical thing to do – but so long as you can in turn sell your tax debt at a later date, it sort of makes no difference I guess.

    {if your happy to pay $1 for each $1 of tax liability you take on when buying a LIC – do I have a deal for you!!
    I have millions worth of tax liabilities that you can buy for just 50c in the dollar – what a bargain.}


    However, the tax liability in most LIC’s is not static – the LIC’s do churn the makeup of the liability as they sell and change the make-up of their portfolio’s over time. The tax liability of an old school LIC may grow as they realise less capital growth than total capital growth, but at least some capital growth is continually being realised as they manage their portfolio’s

    This realising of capital growth is the problem.

    For example AFIC Before tax NTA is $6.03 and its After tax NTA is $5.15

    If you can’t utilise franking credits your effective tax rate on capital gains earned through a LIC will be 30% that means if you are a SMSF pensioner AFIC is worth $6.03-$5.15 x 30% = 26.4c less to you than under current legislation. And your ongoing yield from capital gains (historically around 6%) drops by 30% - something that will not occur if you own shares directly or through a LIT or ETF.

    The only way the LIC can shelter you from the detrimental tax consequences of them paying tax on your behalf for capital gains and you being unable to claim franking credit refunds if you are a below company tax rate tax payer is if they don’t sell anything at all - which sort of defeats their ability to actively manage.
     
    Last edited: 5th Apr, 2018
    Nodrog and Ianvestor like this.
  18. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    11,376
    Location:
    Buderim
    Yep all valid points.

    If the change gets in as is then I imagine some LICs will restructure to LITs and those that don’t will likely be discounted to a level that compensates for the structural disadvantage. Likely more so especially immediately after the change. That is, expect an overreaction. Those with plenty of Accumulation years ahead and cashed up investors willing to continue to invest in the Sector might jump at the heavily discounted opportunities. Others might choose to invest in pass through fund Mgr structures.

    These are legitimate concerns but the older LICs have survived for decades even prior to Dividend Imputation. But as the charts you posted some time ago showed there will likely be an adjustment to reflect the impact of the change.

    Like all changes there will be winners and losers. However those experienced in the LIC environment will know how to position themselves for a profitable outcome as a result of the change if it happens:). Others will ignore it all and simply enjoy the high yields on offer from heavily discounted quality LICs. And some may exit the sector completely if it worries them. Each will need to make their own decision.

    Not advice.
     
    Last edited: 5th Apr, 2018
    Ynot, mcarthur, Snowball and 5 others like this.
  19. Ianvestor

    Ianvestor Well-Known Member

    Joined:
    3rd Oct, 2016
    Posts:
    98
    Location:
    Melbourne
    Good points here. I think the last paragraph is the key. Some of the older LICs have managed to hang on to the reputation that the investments are being "actively" or "professionally" managed and well diversified. If they were given fresh money to start a new LIC now, would the portfolio look the same? I.e. How many positions do they only hold because there is plenty of tax payable on them? Or simply not to venture too far away from the index? Arguably they have become less about picking the best stocks than was the case in years gone by.


    It wouldn't surprise me if more investors question this. Is much of the portfolio stamped as never to sell unless for special circumstances? Some of the long term performance numbers don't look that special. I expect something like AFI to trade at a discount to pre tax NTA again over time. The ETF option looking more relatively attractive perhaps for investors starting out now compared with the likes of AFI & ARG.


    Not advice.
     
    Ynot, sharon, dunno and 3 others like this.
  20. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    11,376
    Location:
    Buderim
    Phew, big day yesterday.

    @dunno just to clarify I meant to add that the example you gave above for the older LICs is incorrect. The realised capital gain is mostly from selling shares held longer than 12 months and passed on to the investor as a “LIC Capital Gains” Dividend NOT a “Franked” Dividend. In effect the end result is no different to a LIT / ETF or if you owned the shares directly. As mentioned previously it’s the “Trading” LICs that would be most impacted by Labor’s proposed change as they can only pay out “Franked” dividends. This however doesn’t negate concerns raised about large embedded capital gains typically in the older LICs portfolios.

    To explain better than me here are some extracts from the below linked article:

    OLDER STYLE LICs:
    TRADING LICs:
    LICs: Traders versus investors for tax purposes - Cuffelinks

    I’m guessing this LIC thread will fizzle out shortly given all the scary posts of late:). It’s been fun but such is life.
     
    Last edited: 6th Apr, 2018
Thread Status:
Not open for further replies.