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Listed Investment Companies (LICs)

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

  1. unwillingwillis

    unwillingwillis Well-Known Member

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    No Advice there austing just opinions and views. I'm not really serious about moving to ETFs. Just a little frustrated when older style LIC try to get 'too clever'. First ARG now BKI. ETFs certainly remove the human element (that is the part that usually stuffs everything up). I have never been a fan of DRPs. I use a similar strategy building cash from dividends to invest.
     
  2. austing

    austing Well-Known Member

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    ARG :confused:???

    BKI, don't worry. Nothing's really going to change for it's investors. Unlike most other externally managed LICs they've capped the fee at a very low level. As long as they don't neglect BKI due to the new LIC being added it's not a big deal. On the positive side having external management means they can afford to add new employees and use resources more effectively.

    Humans can also avoid what ETFs don't. Always pros and cons with both.

    Don't mind me when I jump up and down at times about external management. It's not always bad. Just grumpy old man syndrome and perhaps some senility at play:confused:. I'm depressed today having turned 57:(.
     
    Last edited: 7th Jan, 2017
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  3. Jack Chen

    Jack Chen Well-Known Member Premium Member

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    Happy Birthday @austing thanks for all your valuable insights over the years :)
     
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  4. austing

    austing Well-Known Member

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    Raining outside again. Just adds to the misery:(:(. Woe is me, violins please. So little to do but bore others here with my ramblings. BBQ and home brew this afternoon should cheer me up:):cool:. If that doesn't work I'll look at my total dividends from last financial year:):). That always brings a smile to my face!
     
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  5. ErYan

    ErYan Well-Known Member

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    Happy birthday @austing

    I'm traveling at the moment so about the only piece of useful information I can give you is Beer Lao is a gem of a drink.

    Hope your brew made up for the rain. In some cultures rain is a sign of good luck. Maybe your next batch of brew will reach a new pinnacle in taste......and alcohol content.

    Key-man risk been mentioned recently. Which LICs are most affected by this risk? Which LICs have had the foresight to mitigate said risk through the grooming of capable successors or putting in place proceses that anyone can maintain. Wouldn't this be add to the argument for index ETFs?
     
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  6. Mac Fields

    Mac Fields Well-Known Member

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    Happy birthday :D. As a quiet reader of these forums, appreciate your time and ongoing commentary from your experience. Hope it was great.

    57?, you've got time to do it all again!
     
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  7. austing

    austing Well-Known Member

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    Hi @ErYan,

    I'm guilty of having raised key person in the past. But in reality this risk is probably not as high as some suggest in many cases. Many LICs with key person risk have established processes and / or talented others in place so if the high profile person in the LIC left there's unlikely to be a major impact. Initially there could be some panic and a hit to NTA as the man and particularly the "story" is etched in many investor's minds. But provided performance continues and a talented existing or new person is appointed to the lead role things should settle down when normality return.

    It's quite common for the smaller botique fund Mgrs to have greater key person risk.

    There's no list that I know of that tells you the LICs with the highest key person risk and who has the best processes in place. You will need to read stuff like the prospectus for newer LICs and research reports to determine this. These can often be found on the LICs website and at Research specific sites like this one:

    Index (IIR)

    Just register for free to read the reports.

    Here's an example of a newer LIC that I would consider to have higher key person risk:

    http://www.aepfund.com.au/downloads/absolute-equity-performance-lonsec-report.pdf

    When a key person leaves there are a number of scenarios that could happen. The following are some of these:

    1. As mentioned earlier things come good again.
    2. The key person(s) may try to close down the LIC.
    3. Performance deterioration or investor concerns may result in a deterioration of NTA.
    4. An activist may build a large stake in the LIC particiularly if there is a persistent and significant discount to NTA then look to change the mgr or wind up the LIC to realise market NTA.

    I don't invest much in the so called "new breed" LICs. But I have a simple rule with those that have very high fees, are small, have key person risk etc or a combination of these. Understand what you're investing in and only ever buy at a substantial discount. That way if for whatever reason the sh*t hits the fan and the LIC is wound up the capital at actual (not existing discount) NTA is returned to investors. In many cases (but not all) those that followed the above rule may even make a nice capital gain.

    The tax outcome will vary depending on one's circumstances and the structure holding the LIC. Because most of our LICs are in a SMSF in tax free pension mode the result will be optimal around pre-tax NTA. For others it may be closer to post-tax NTA. But regardless it's a good outcome from a failed LIC.

    The fact that money can be made in these situations is used to advantage by traders both private and professional. Geoff Wilson (especially WAM and WAA) is very active and successful in this area. Others piggyback off him by monitoring which LICs he is building a larger holding in and analysing the obvious factors such as persistent NTA discounts and unstable dividends etc.

    So when investing in any LIC especially the new breed variety do make a little effort to understand what you're investing in. The greater the issues mentioned earlier ( eg key person risk) the greater the NTA discount you should demand before buying.

    Finally some might consider this to be an argument for traditional (not actively managed) ETFs. But as mentioned in earlier posts the automated rigid rules often result in rubbish being included in the index that humans are better able to eliminate. If you look at the SPIVA reports they show that unlike most other asset classes Large Cap active Mgrs still have a reasonable chance of outperforming the index. In the case of small caps this is much greater again. See below:

    [​IMG]

    https://au.spindices.com/documents/spiva/spiva-australia-mid-year-2016.pdf?force_download=true

    Personal ramblings, not advice.
     
    Last edited: 8th Jan, 2017
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  8. austing

    austing Well-Known Member

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    Had a tremendous night at the neighbour's party last night and they still don't know it was my birthday:). Just coincidence. Plenty of great food, beverages and conversation had me forget about being one more year closer to geriatricism:eek:. But now you reminded me of my birthday yesterday I'm depressed again:( (only joking:D).

    My friend @Anne11 sent me my Chinese horoscope yesterday including health problems specific to my birth date. It follows with my comments in bold as to how I'm working hard to prevent these health issues:

    January 7 1960 health astrology
    Below there are listed some examples of such potential issues:

    1. Constipation also known as dyschezia is characterized by infrequent bowel movements. (if I have problems I'll ask my wife to add fibre to the home brew)

    2. Locomotor ataxia which is the inability to control bodily movements with precision. (Common after a home brew session but only temporary)

    3. Anorexia which is one of the most known eating disorders characterized by refusal of alimentation. (Home brew is well known for keeping weight on)

    4. Dental abscess and other periodontal problems. (alcohol kills oral bacteria)

    :)
     
  9. pippen

    pippen Well-Known Member

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    What are peoples thoughts on AMH as a substitute for either QVE and or MIR?

    I did notice they have focused more on small mid cap sector after selling off and reducing holdings in the big stocks during the middle of 2016.

    MER ratio is fair at .77%
     
  10. austing

    austing Well-Known Member

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    Haven't been following AMH closely but a good LIC aimed more at growth than stable dividends. And it hasn't come with the hefty premium like MIR in recent times. That said it has a flexible mandate in that it can invest in large and small caps depending on where the investment committee think presents the best opportunity. Essentially a blend of best ideas from AFIC / MIR. So unlike QVE / MIR it's NOT mid / small caps only.

    This might be of interest:

    http://www.amcil.com.au/_uploads/news/121845AMH_AGM_Presentation_161012.pdf
    http://www.independentresearch.com.au/Report/GetReportFile?ReportId=1222

    I personally don't see it as a pure substitute for MIR / QVE. But if you don't hold AFI and MIR then it could perhaps be seen as a substitute for both. But do remember AFI is focused on dividend reliability.

    My thought, and others may disagree, is that if you already hold AFI (or similar such as ARG, MLT, AUI) then perhaps it's better just to be patient and buy MIR when the heat has gone out of it. Patience is often rewarded in this game. And besides dedicated small cap LICs are considered optional by many. First rule of thumb, keep it simple. Then if you're stupid enough like me to think that the likes of QVE / MIR can perhaps improve performance then you might consider them.

    But importantly remember the likes of ARG and MLT aren't only the top 20 or even the top 50 there's still wide diversification there. In the case of MLT the top 50 only comprise around 60% of the portfolio. The following report may be of interest:

    https://dpsi7pmz5b6vt.cloudfront.net/uploads/media/3513/MLT_REPORT_AUG_2016_FINAL_v2.pdf

    Cheers
     
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  11. pippen

    pippen Well-Known Member

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    Great reply!

    Yes you must have read my mind, in that im waiting waiting and waiting for MIR to cool down abit and i dont hold AFI however i hold ARG, BKI and MLT so i understand your reasoning!

    Will definately look into those links and bide my time maybe instead of trying to get cute with lots of little holdings!

    Got to remember stay the course stay the course!
     
  12. pippen

    pippen Well-Known Member

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    @austing may i ask when you first started your lic journey how did you decide on the asset allocation you desired or wanted to implement?

    I read you consulted with Daryl Dixon i believe and got on board with lic's.

    Was it just broad old school lic's such as AUI, DUI and WHF back then and slowly got positions in ARG MLT BKI as well as international exposure or was it a gradual process with many mistakes along the way like selling and buying at highs etc etc?!
     
  13. austing

    austing Well-Known Member

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    Gradual process with many mistakes along the way best describes me. Although buying high and selling low wasn't too much of an issue.

    Ignoring all my major mistakes I never did asset allocation. It's all about dividends with us happy to be invested in Aussie shares / LICs. A bit of International came later with PMC again because it focused on franked dividends. A deliberate attempt to include more International exposure is a relatively more recent thing and I often wonder why I'm doing this:confused:? Stupidity / senility / too much home brew / herd mentality / perceived need of insurance, I blame the lot:eek:. That said other than a bit of VGS purchased when cheap the others are also about franked dividends coming from PMC and in the future increasingly from FGG (hopefully).

    The first LIC I owned was AUI. I stupidly sold that and others to start trading. When I eventually got serious about LICs I focused more on AFI, ARG, MLT, WHF. The rest were / are mostly smaller positions. The portfolio evolved from there to where it is now including around 10% International exposure.

    Change including occasional fiddling (when the idiot in me takes hold) has pretty much stopped. It's unlikely I'll be adding anymore LICs, just topping up when great opportunities arise. Of course we owned lots of direct shares as well but they've now been reduced to not much more than a handful in the desire for simplicity.

    Like Thornhill I'm not a believer in asset allocation. Australian shares is where most of our wealth is. Others have thrown truck loads of arguments at me as to why I'm stupid for avoiding asset allocation but I mostly just smile and ignore them. No sense arguing. Not because I think I'm right / smarter / superior etc but because I have faith in what we do.

    My focus continues to be on dividends and I try to do a reasonable amount of our buying when the market is cheap. Honestly if all Australian shares ever stopped paying dividends for a longer period of time my belief is that the last thing you will be focused on is your share portfolio. There will be much greater things to worry about!

    I'll leave it to readers to decide if I'm stupid or not in our approach. As stated many times I'm nothing more than an amateur investor. Dixon started our journey then Thornhill helped to increase my conviction. Experience has taught us the rest including the most recent crash test of our approach during the GFC. Whatever one does conviction is critical otherwise you will continually worry, lose sleep then end up doing something stupid at the worst possible time.

    Not advice as usual.
     
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  14. johnpendlebury

    johnpendlebury Well-Known Member

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    out of curiosity, why do people write "not advice" at the end of posts?
     
  15. austing

    austing Well-Known Member

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    Perhaps not required under law (???) but just being cautious. I'm not liscenced to give advice. Asset protection has been drummed into me over time. If someone is silly enough to do what we do and it all goes to sh*t be it on their own heads:). It's now gotten to the stage where "not advice" is like my signature:D.

    Always DYOR!
     
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  16. scoobie27

    scoobie27 Active Member

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    I think you have a long while to wait. I stupidly bought some MIR at 2.82 without looking at the NTA and even that was a HUGE premium. My only research was "yeh it's good to own a small cap LICs" I only recently checked it's NTA and it is HUGE !! So I'm behind the 8 ball already with MIR. I think MIR has the biggest premium out there. I better check NTAs properly before any future purchases.
     
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  17. Anne11

    Anne11 Well-Known Member

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    I follow Austing's approach with my minor tweak in that the shares portfolio outside of super has mostly LICs, VAS for now and 5 direct shares, although inside super we have the usual asset allocation: Balanced etc.. In the next few years if things go according to plan, i hope to build up three roughly equal income sources: rental, shares, super.
     
  18. Mac Fields

    Mac Fields Well-Known Member

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    I'm thinking this is a key when buying into LICs. Hopefully you haven't bought too much and can balance this with other investments? As others have said, these are long term buys. One step back, many steps forward :)
     
  19. scoobie27

    scoobie27 Active Member

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    I only have only a smallish amount. MIR is one of 12 LICs I own which also includes VAS and VHY plus a bit of the banks so pretty well spread out. Not regretting buying it in spite of the premium. I feel the premium will always be there so thought I might as well bite the bullet. Didn't worry about too much the premiums as austing had mentioned many times. I just bought them on a dip as I did the other LICs. MIR would have to drop a lot or the market rise while it's price stayed put for the gap to narrow. Will wait for the premium to disappear before buying more but I doubt that will happen anytime soon. Actually I'm itching to buy more LICs but haven't been able to the past few months as the markets has surged:mad:. I guess I just have to be patient and wait.
     
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  20. austing

    austing Well-Known Member

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    That's the problem with generalisations. I wrote that with the older style LICs in mind such as AFI, ARG, BKI, MLT, AUI, WHF. That is, widely diversified market index proxies. MIR is a niche LIC focused on stocks outside the Top 50. I, Thornhill and others make these generalised statements but it would be wise for investors to make an effort to understand NTA and apply a "reasonableness" test. It doesn't have to be working out an up to date NTA for a given day but simply even a quick glance at the monthly NTA reports freely available. Up to around 5% or so premium to NTA is fine but once the premium blows right out better to avoid.

    However some investors just don't want to make the effort to understand NTA and if they buy the old index proxy LICs regularly over a very long period of time including taking up discounted SPPs, Rights Issues and DRPs etc NTA tends to even itself out.

    Take the following NTA chart of AFI (the largest and most popular LIC) shown here:

    AFIC :: Australian Foundation Investment Company (NTA chart)

    Because of it's popularity and size it's one of the worst older style LICs for trading at a premium. However if you purchased it regularly and took advantage of DRPs and SPPs often offered at 2.5 - 5% discount much of the premium is reduced to an acceptable level.
    As mentioned above MIR is a niche LIC and hence they tend to behave differently. Best to make an effort to understand these. You don't need to own them but if you do knowledge and patience can be useful.

    Above all don't fret about a minor thing such as buying a parcel of MIR at a high NTA. If that was the worst thing I did over the years whilst investing in Shares I would be a very happy man.
     
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