LIC & LIT Listed Investment Companies (LICs) Q2 2018

A good synopsis. For me it's a case of NTA v Price v Yield plus longevity (of the LIC not me) in most cases.

Sure there are faults with that and faults with the way NTA or performance is reported. However, as is usually the situation, it's up to the investor as to what approach suits them.

In the past, I've been called a fool to my face and in front of others when I've opened my mouth and mentioned my approach to investing. No worries. I'll keep plugging away with an approach that suits me irrespective of what others may think.

Fully agree!

 

From WHF's response to Nodrog

Brokerage and Share Issue Costs

Whitefield accounts for brokerage and share issue costs in accordance with its requirements under Accounting Standards – the same way as every other similar LIC or investment entity.

Under the formal Accounting Standards share issue costs are required to be accounted for as a cost of raising capital (in an accounting sense the cost is attached to the capital).

Brokerage must be recorded as an added cost of establishing or disposing of an investment (the cost is attached to the cost of the investment) and is expensed (through other comprehensive income) as and when investments are sold or through revaluation.

Accounting Standards do this so that investors can clearly and separately identify and understand (a) gains/losses on investments (b) costs of capital raising and (c) operating expenses.

My problem is not with the accounting standards. Because I understand them I can go to the audited accounts and dig out of the notes the true picture on costs if I want to.

It is universally accepted that OERs/MERs throughout the investment community mirror this same protocol.

It is this “universally accepted” practice that costs charged to equity are not disclosed in an upfront manner to investors that I find disconcerting.

Next report, because of the size of their recent raising, BKI will likely have expenses charged to equity that are a magnitude of 2-3 times larger than their operating costs charged to the Profit and Loss. Is it right that they should be trumpeting a low MER in marketing material at the same time as being silent on the large costs absorbed to equity and only disclosing it in the notes.

In the WHF example would it be so difficult for "universally accepted standard" to be disclose of operating expense ratio of 0.40 (0.44 on NTA) plus 0.10 for brokerage and share issue costs? Who are they writing the reports for? If it’s for shareholders benefit than I want to clearly know all the costs they incur on my behalf, so I can make an informed decisions and comparisons between funds without having to go ferreting through the accounts to get the forced disclosures.

 

I understand anything I write that contravenes the gospel of the thread will be an exercise in futility.

Being a glutton for punishment though I will finish in due course addressing the WHF response to my earlier posts before swearing off future exercises in futility on this thread. (promise to self not to start on BKI and what a wonderful business Contact Asset Management is, increase in FUM in BKI is not just sticky, its captive. Cost (actual and dilution) to acquire new FUM is paid by BKI shareholders and when the time comes to renew the management contract at a higher rate, related parties will likely control the BKI vote (as they probably did for the vote to make management external) and the same related party also control Pengana who will probably end up buying Contact in the name of scale and simplification at a multiple based on the new contract fees. No agency risk there.

I’m happy for people to ignore, disregard, treat my posts as wrong, deluded, pedantic or paranoid. Its no skin off my nose – I dunno anything anyway.

People invested in WHF probably won’t see any further than their desire to justify their investment. That’s a shame – WHF is just the example used to demonstrate the issues I want to make of shareholders interest being put second which is endemic in fund management industry communications. I could have chosen a far worse example then WHF but that example would not have been relatable to those only interested in old school LIC’s.

 

Hi Dunno I’m a very novice investor just sharing my thoughts. Both WHF and BKI are 2 of my limited holdings. I don’t have any issue with them excluding those costs from the MER as they are meant to be “non-recurring” and only arise with capital raisings. It’s the same for every other listed company on the ASX. Those costs are not included when analyzing margins, ebitda multiples etc etc. there is a reason AASB, who are meant to set standards to assist the ordinary shareholder in interpreting stat accounts, allow those costs be netted against equity.

That said your point is still very valid. As a potential investor I’m interested in how often they are raising equity. I will therefore understand the dilutive nature of operations, both by virtue of a raising being dilutive by nature, but also the costs involved in the raising. This, I haven’t got a handle on as yet because I don’t have time to investigate their historic reports.

Perhaps a happy medium would be that they are excluded from MER but alongside need to disclose non-recurring costs involved in capital raising etc during the year were X.

Enjoying your and everyone’s contribution.

 

WHF's response to Nodrog in Blue(my bolds) My response in Black.

C. Performance

In a similar vein, Whitefield’s performance is drawn directly from our externally audited data, and determined in accordance with accepted investment industry protocols.


I put up my data drawn from a thrid party supplier. It seems to accord with the data subtotalled annually in the WHF report. WHF did not dispute the data – so I assume I am using what WHF regards as their correct externally audited data. If not, I put the data I am using up so it could be corrected.

Accordingly, we can only say that WHF’s graphs and performance tables accurately show the data as it is.

WHF claim is the charts / tables accurately show the data as it is, ie determined in accordance with accepted investment industry protocols.

What are these industry protocols? Why do these protocols seem to not produce the return I would have actually got as an investor – That is what I want to figure out.

Nevertheless, we appreciate that there can be complexities for investors in understanding or interpreting performance.

There are a number of problems or complexities in the information presented by the writer of the online commentary. Summarised most simply these are:

I will explore WHF's points in future posts.

 

Hi @Greedo That's exactly where I am at too. No issue withthe accounting treatment. Just want all costs disclosed in a consistent, precise, easily found, upfront manner.

Thanks for your response.

 

In my view, anything less than full and frank disclosure just isn't good enough.

1. Here is what we are doing.
2. This is why we are doing it.
3. This is what the effect will be for shareholders.

Play it with a straight bat and it all goes away. Rather than lionise these blokes that get a drink from others capital (and fair enough, that is part of the bargain), lets encourage them to be open about it.

 

Some do read, enjoy and think about your posts Dunno.
Taking an easy target would have been no fun.
There are few complaints when we only talk about beer and skittles which encourages too much discussion of these things at times.

 

There are a number of problems or complexities in the information presented by the writer of the online commentary. Summarised most simply these are:

(a) Dividends: No valid assessment of investment performance can be done without dividends (ie without dividends you only have half the data).

I did put a price chart comparison with STW and stated WHF underperforms on a price basis. My very next paragraph however was: (Emphasis added)

I’m not sure why WHF flagged this as a problem or complexity with what I had posted.

I don’t think we have any disagreement on this point. Price is only part of the equation. Income plus change in share price is what determines a shareholder’s total outcome.

 

@dunno - I am loving your posts at the moment. It's very thought provoking.

 

I don’t care one iota for agreement or disagreement – but value highly a response of thought provoking.

Thankyou @sharon

 

There are a number of problems or complexities in the information presented by the writer of the online commentary. Summarised most simply these are:

(b) Company Tax: LIC Share prices and NTA performance (with dividends) cannot be directly compared to before tax indexes or ETFs, without appreciating the tax differential. LIC Share prices and “pre-tax NTA” are after payment of company tax on capital gains and unfranked income, while indexes and ETFs are fully before tax. The impact of this can be more than 2% per annum, and may vary materially year to year.

I don’t understand the point WHF are making here in relation to the comparison I made.

Yes they pay company tax on capital gains and unfranked income but they pass that on as a higher franking credit and I did the comparison on grossed up dividends – to the extent that some franking credits have not yet been distributed that would influence the current market price which was used as the sell price in the cash flow analysis.

(c) Franking Gross Up: Grossing dividends up for franking goes some way to addressing the tax differential referred to above, as it recognises the credit shareholders receive for the company tax paid.

O.K this part of point c) now clarifies that point b) above is not applicable to the comparison I conducted as I posted a grossed up comparison I did that specifically to keep things on an even footing, because what I wanted to know is what grossed up income flow did each investment option return to the shareholder.

However it is not an accurate measure. The gross-up will tend to understate LIC returns by the amount of tax they have paid to the tax office, have in their franking account, but not yet distributed to shareholders. Whitefield has a strong franking credit reserve which will benefit our shareholders over future years. I shall just repeat the last sentence of my answer to point b) - To the extent that some franking credits have not yet been distributed that would influence the current market price which was used as the sell price in the cash flow analysis. How is using the current market price as the sell cash flow not an accurate way to recognise the value of retained earnings or franking credits etc.

 

Anyone who has had the misfortune to read one of my posts will probably have worked out I’m a bit spelling challenged, so I have no problem with e) following c) that will allow me to leave my favourite d) Technical Errors/Estimates: for a later time.

There are a number of problems or complexities in the information presented by the writer of the online commentary. Summarised most simply these are:


(e) Particular selection of start and end dates: Whether by design or chance, the writer of the online commentary excludes a period of very strong performance by Whitefield relative to the ASX200 through the selection of start date. (WHF’s significant outperformance in the year 2000 at both a portfolio and share price level is excluded from his data.)

As I said in my original post I picked STW as a comparison because I wanted an investable comparison, not a theoretical Index. STW is the longest running market cap ETF on the ASX as far as I know.

Starting points are the best trick in the book for getting statistics to confess what you want. WHF are right to question whether my start date is by design or chance. As I said in the original post, trying to be fair I simply used all the data available since STW launched.

Using the suggested start date by WHF of 2000 the only data I have for comparison is the XAO price index.
Here is the chart for XAO price vs WHF price starting Jan 1 2000 (WHF is the red line)


On the price chart WHF does indeed have some good performance in the early 2000’s

I don’t have what the theoretical income returns for the index so I can’t present the income part of the return picture. This is the main reason I picked STW as the comparison – It’s the longest dated full return comparison that I have data for. I could use the XAO accumulation against WHF’s total return but that would introduce comparison errors with franking of the type they refered to in b) above – so I will simply leave the 1 Jan 2000 full return comparison undone.

Now I must ask as they did. Is 2000 as a start date chosen by design or chance? Does it paint a fair picture or an optimised picture? What drives this early 2000’s outperformance? I direct you to this post as a probable cause.

Listed Investment Companies (LICs) Q1 2018

Here is an updated chart from the post of the three largest LIC’s to include WHF for the three years following introduction of dividend imputation refunding.(WHF is the purple line)

This is a relative strength price charts compared to the XAO price charts. Again I don’t have income data for the index back to 2000so I cant present total return comparisons. But I think its reasonable to say the price outperformance against the index was not just experienced by WHF, in fact they underperformed other LIC’s, so the outperformance over the market is more likely attributable to the macro tax changes that boosted all lic’s then from alpha attributable to WHF. A macro tailwind that is now at real risk of becoming a head wind.

Relative strength for the period following dividend imputation refunding washing throught the market. (WHF is the red line)

 

If not for contrarian viewpoints humans would probably still be huddled around fires in caves listening to witch doctors explaining why the earth was flat. Your views add great value.

I don't think people are ignoring your point of view, rather they are being more pragmatic about financial reporting. Based on what you're saying, none of it is accurate. But it's all in the ballpark, so most of us accept it at face value. I wish I had the time or inclination to analyse the details but I don't.

What Australia needs is better legislation and penalties for companies that "cook the books".

Otherwise, what's to stop a LIC adding 0.3% to their MER and saying, "that's just the way we do our calculations".

Keep up the good work. I'm pretty sure I speak for everyone when I say we are listening.

 

i have been looking at the Financial section on CommSec for LICs AFI, ARG, BKI, MLT and WHF. My thinking was that if one LIC retained more of its earnings then it would present a future windfall with increased funds available for investment from which to derive more dividends. I listed on a spreadsheet the payout ratios (I hope that is the correct one) for the last 10 years looking for the lowest payout and therefore presumably the highest retention of funds for future investment. CommSec holds figures for the last 10 years from 2008/06 to 2017/06. Averaging the 10 years ratios, I had the following results AFI (average payout ratio 93.10%), BKI (92.8%), ARG (92.5%), MLT (88.4%) and WHF (217.7%)? There must be an error with the figures collected for WHF. For the others I was quite surprised at the high percentage payouts. I was expecting more payout figures down around say 75%. Did I do something wrong?

 

Payouts would be closer to 60-75% for a typical Aussie company but these are just holding vehicles to pass thru dividends to shareholders.

So as long as they retain a little to smooth dividends, I’d expect them to and hope they pay out most of the earnings. Around 95% seems to be the more likely normal average.

There was some crazily high earnings per share figures around the GFC which may be skewing that 10 year average? Might have been trading gains or special dividends, but my guess is it wasn’t natural dividend flows.

 

LICs Retaining dividends is only efficient for those in high tax environments. Those holding in super want the franked dividends, which are more valuable paid out to the super shareholder and then reinvested rather than retained at company tax rates.

 

Thanks @Snowball , I was just thinking that as well as retaning some funds for dividend smoothing, if they also retained funds for re-investment that might have also been provided a growing income stream for the future.

 

Thanks @Hodor

 

Interesting article i read the other day on ETF's.
Thoughts come to mind; The different stages of the investment cycle. Open and closed ended funds.

Investors, not banks, could spark the next crisis with these time bombs:
Investors, not banks, could spark the next crisis with these timebombs