Join Australia's most dynamic and respected property investment community

Listed Investment Companies (LICs)

Discussion in 'Other Asset Classes' started by The Falcon, 21st Jun, 2015.

  1. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    957
    Location:
    Sydney
    Following on from Darren A’s request for a brief explanation of LIC’s I thought I would create a LIC specific thread. Just quickly I will cover off what a LIC is, then I hope the thread can evolve to LIC specific discussion.
    Please note; I am not a professional, just an interested amateur.

    OK, to the question at hand……….what is a LIC? A bit of googling will give you a bunch of answers some more helpful to the uninitiated than others. So, I have come up with the below which I hope is helpful.

    A LIC is a pooled investment vehicle, in the form of a company, the stock of which can be bought and sold on the ASX. The Company holds a basket of stocks, and will also have a varying amount of cash on hand. This is the company’s tangible assets. Its investment managers make assessments about which stock to add to the basket, and which to sell, when, how much cash to hold for future buying opportunities etc. In exchange for this service, the Company charges a management fee. Management fees of the largest, longest established LICs are extremely low, typically 0.20% per annum or lower.

    LIC’s must report their Net Tangible Assets, and their top holdings each month. This allows a potential stock holder, to know exactly what the value per share is of the basket of stocks the company is holding, and which stocks the LIC is holding.
    http://www.afi.com.au/Last-12-months-ASX-Announcements.aspx
    At any time, the basket of stocks, on a per share basis may be worth more, or less than the stock price of the LIC. This is referred to as a discount or premium to net tangible assets (NTA). A LIC trading at a 10% discount to NTA for example, is holding $100 worth of stocks which you can have by buying the LIC’s stock at $90. A 5% premium to NTA however, will cost you $105 for a basket worth only $100. Clearly, you want to avoid the latter.

    LIC’s will pass on dividend income received from its basket of stocks to stockholders in the form of a franked dividend. Depending on their view of economic outlook, the managers will decide to hold back some of the dividend income as cash for future use. They use this to take advantage of opportunities to buy stock cheap, and also to smooth their dividend payments to stockholders. It should be remembered that during the GFC the largest LIC’s did not decrease dividend payments to stockholders, while many of their stock holdings suspended dividend payments. The LIC’s funded these dividends from their cash positions.

    There are a wide range of LIC’s operating on the ASX, with varying focusses and strategies, fee levels and historical performance. Speaking very generally, the largest LIC’s by market capitalisation are the longest established, and have the lowest fees. They are focussed on income and value, typically holding a diversified portfolio of mostly large cap stocks, and they do not trade their portfolio much. They have proven good stewards of capital over the long term.

    Many of the newer LIC’s have much different approach, employing all kinds of active management and specific sector focus. In addition to a management fee, often 1% or more per annum, many often charge performance fees that levy an additional cost to the stock holder should the LIC hit a particular rate of return in any given year.

    Like any investment, past performance, cannot be relied on as a guide to future performance. It will however give you some kind of an idea of how they handled past circumstances. You have a wide range of choices on the ASX, so due diligence is important.

    Note I don’t really want this to become an active vs. passive (ie. LIC vs Index ETF) thread, we will have an ETF thread as well. I’ll add more over time and welcome other contributions, I am just a punter after all.
     
    KJB, pippen, Newfast and 14 others like this.
  2. jafeica

    jafeica Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    99
    Location:
    Sydney
    Thanks for the summary. Out of interest what are the biggest / most popular LIC's available?
     
  3. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    957
    Location:
    Sydney
    The largest LIC's by market capitalisation are ;

    AFI (Australian Foundation Investment Company) est. 1928
    ARG (Argo Investments) est. 1946
    MLT (Milton Corporation) est. 1958
     
  4. jafeica

    jafeica Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    99
    Location:
    Sydney
    Having recently read and been converted by A Random Walk Down Wall Street, personally I'd favour the older/larger LIC's who trade less and have lower management fees than the newer LIC's who are more active with a higher management charge.
     
    Observer, Diesel111, CatCafe and 2 others like this.
  5. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    957
    Location:
    Sydney
    Personally, I prefer the big three plus BKI and WHF. So on the same page there.

    For International I like MFF, but most of my international exposure is direct stocks.
     
    Newfast likes this.
  6. Ouga

    Ouga Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    372
    Location:
    "Trying is the first step towards failure" Homer
    Thanks The Falcon for this good post.
    I like the big ones too, AFI and ARG especially. I like ARG's holdings better, but have just found out AFI has the option of DSSP (bonus shares instead of dividend) which is a plus for my circumstances.

    The Falcon - would you like to give us more details about the reason behind you also getting behind BKI and WHF?
     
  7. Redwing

    Redwing Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    837
    Location:
    WA
    Colin Rice, Ouga and The Falcon like this.
  8. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    957
    Location:
    Sydney
    Ok, so on BKI and WHF ;

    BKI is dirt cheap, 0.16%, no performance fee. This is run by Tom Millner (of the Soul Patts/Brickworks/New Hope Millners) with a sole analyst. Ian Huntley and Rob Millner are on the board and part of the investment committee. Board members feature heavily in the largest shareholder list and their incentive options are very modest - so you have good alignment between management and shareholder interests. Tom is fairly young ( around 40) so will be at it for a long time. They are conservative managers with an income / value focus.

    WHF isn't so cheap at 0.35%, no performance fee. This is an "all industrials" incl banks LIC so if you had a long term negative view of the resources sector then this would suit you. It's not a huge LIC by market cap but is growing via rights issues. Very good alignment as the Investment Managers family's wealth is in this company. (Gluskie Family is largest shareholder at approx 30%). WHF has a bonus share plan.

    Both BKI ( BKI Investments) and WHF (Whitefield Ltd) are starting to put up quarterly / half yearly presentations and videos ( in the case of WHF) which are well worth looking at to get a feel for the managers style and see if it's a fit for you.

    http://www.whitefield.com.au/images/assets/WHF Update Mar 2015_x264.mp4
     
    Last edited: 21st Jun, 2015
    Ouga and CatCafe like this.
  9. Darren A

    Darren A Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    105
    Location:
    Sydney
    Thanks very much for this great post Falcon. I have been primarily a property investor but would now like to learn more about all areas of stock market investment. I guess I have quite a bit to learn about if I want to do this properly.
     
    Colin Rice, Newfast and The Falcon like this.
  10. turk

    turk Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    199
    Location:
    Victoria
    Thanks Falcon, good summary.

    Over the last 2/3/years I have been moving money to equities/funds to improve cashflow, looking forward to this thread evolving.
     
  11. CatCafe

    CatCafe Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    154
    Location:
    NSW
    Seems like all the major LICs are trading at premiums to intra-month NTA's

    Is it perhaps a better time to load up on VAS ETF?
     
  12. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    957
    Location:
    Sydney
    Sure, if you had a view that you wanted to buy something now then I'd be buying an ETF rather than paying a significant premium to NTA for a LIC.
     
    radson likes this.
  13. Ouga

    Ouga Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    372
    Location:
    "Trying is the first step towards failure" Homer
    Falcon, thanks for the reply.
    Great stuff, I watched the WHF presentation, looks like they have been doing pretty well and the bonus share plan is attractive for long term hold. Nice yield too. Also like the industrial focus. Would love one that's free of materials and banks.

    Will be looking at perhaps adding new time round.
     
  14. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    957
    Location:
    Sydney
    There are some LICs that play exclusively in the small and mid cap space, so if you wanted to avoid banks and materials that's where you would look. I don't follow them, but maybe have a look at WAM funds, Contango and Cadence Capital. Just be aware of fees and outstanding options which can have a dilutive effect. Personally, small caps is somewhere Id also look at unlisted managed funds rather than just LICs and I wouldn't use an ETF for Oz small cap exposure...so much complete rubbish down that end of the ASX.
     
    Ouga likes this.
  15. BingoMaster

    BingoMaster Well-Known Member

    Joined:
    22nd Jun, 2015
    Posts:
    262
    Location:
    Melbourne
    Thanks for the great thread.

    When calculating the NTA one should look at the pre tax NTA, not post tax, right?

    And if so, am I correct in assuming Whitefield looks like its currently trading at a discount?
     
  16. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    957
    Location:
    Sydney
    Yep, pre-tax. post tax is only applicable if all holdings where liquidated and capital gains distributed...for the big 3, this is never going to happen.

    Re WHF, quick look as follows ;

    SP this morning 446cps.
    NTA (pre-tax) at 31 May 492cps , and closing price 29 May was 458cps. So, at that time, was a bit over 7% discount.

    But lets look at whats happened to the ASX200 (XJO) between 31 May and this morning, this will give us a pretty fair idea of the value change of the underlying holdings ;

    XJO 31 May (29 May close) 5782pts
    XJO this morning 5681 pts.

    So, about 2% off the 29 May close. WHF SP has moved from 458cps to 446cps, again, about 2% off. So, as of this morning WHF is maintaining a 7% discount to pre-tax NTA.

    The point I am making is that a month end NTA figure is applicable at that point in time only. We need to account for what has happened in the market since that NTA figure was published. ie. If the broad market crashes, and the share price of the LIC holds up, then a LIC can go from trading at a discount to trading at a premium pretty quickly.

    Here is a link to the 1 month chart AFI vs XJO. At the start of the chart, AFI was trading at a slight discount, this became a premium as SP held up while market fell. Its now closing back in on fair value ;

    http://www.google.com/finance?chdnp...&q=ASX:AFI&&fct=big&ei=OLCIVYCFKMGc0ATnvK2ABA

    Hope this might help.
     
    CatCafe, KDP and Ouga like this.
  17. jafeica

    jafeica Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    99
    Location:
    Sydney
    I had a few questions which I meant to ask the other day but forgot!

    Firstly, regarding diversification when investing in the larger LIC's. If I wanted to invest all my money in the larger LIC's, as they all basically hold a very similar basket of shares, is holding one, for example Argo, enough diversification or would you advise splitting the money over the three.

    Secondly, is there historical data showing NAV in relation to Share price? Are there times when share price is below NAV for these larger LIC's?

    Thanks
     
  18. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    957
    Location:
    Sydney
    First question, that's a matter of personal preference. Obviously they are very diversified vehicles, but no harm in spreading out a little, by doing so you spread manager risk. Might also be that at any point in time where an entry point is far more attractive for one of the big 3 than the others. They do have slightly different approaches though, and I will try to summarise later as best I can.

    Re NAV to SP, absolutely. Check this out for AFI ;

    http://www.afi.com.au/How-We-Invest/shareprice-NTA-chart.aspx

    When I get a chance i'll provide some other data/info source info too. That's it for today....too much real work to do!
     
    Ouga and jafeica like this.
  19. jafeica

    jafeica Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    99
    Location:
    Sydney
    Thanks for the info @The Falcon

    AFI Share Price vs NTA looks about level at the moment. Could be a good time to invest without paying a premium for the privilege.
     
  20. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    957
    Location:
    Sydney
    I make NTA to be around 606cps now against 615cps SP. not much in it, slight premium.
     
    Ouga likes this.