24 thoughts on “The other side to the older, low fee LICs.”

  1. Steve,
    A thoughtful article. A couple of contrarian points I would like to add.
    + When business decisions are primarily influenced by taxation, one does not sell when they should sell and then they are inclined stick to the poor decision because of confirmation bias.
    + When you look at the accounts of these LICs they have already set aside the funds for the tax payable, so the difference is the investment return on the cash payable to the ATO. In a typical investment year, this would affect returns by a once off 0.5% which should be more than offset by investment losses avoided. On the plus side the cost base of the investment portfolio has risen and the capacity to pay franked credits enhanced.
    + My personal preference is to focus on LICs that focus on best decision of the day/week/month/year because they are consistently out-performing these old (style/money) LICs

    1. Hi James,

      Yes I wonder if there are a few cases where they held off selling a stock for tax reasons, and then watched it underperform. Hard to say to for us outsiders.

      I also wonder if they have identified some trades to add value, but implementing them due to their size has constrained them. I don’t have a good feel for this.

      Then have they built up a fear of underperforming the ETFs and become a bit gun shy to trade as much?

      Cheers
      Steve

  2. Hi Steve,

    I think that your final comment about these grandfathers of LIC being an approach to a regular investing plan is on the money, These LICs were mainly developed when there was not much a way to get easy access to a broad number of stocks on the ASX (‘diversity!’ 😉 ).You might think of them as the original ETFs (with some ‘active’ management) before there were ETFs. Given their size, yes you are right – they couldn’t meaningfully trade actively too much without moving the market so in some ways you can only tweak around the edges.

    Ex-50 or ex-20 based simple LICs would certainly give you more diversity than the somewhat top heavy LICs that you mentioned but having an assurety of a fatter dividend has always been the allure of the grandfathers regardless of the capital growth (or decline) of the fund. I guess that it is hard to be all things to all people.

    Keep up the good work!

    1. I agree Eddster probably what is putting off more LICs to start up ones that are more of an ex top 20 style fund is it will sacrifice some of the higher underlying yield.

      However in the medium term if it ultimately generates better growth then that can also play a role in supporting a good dividend.

  3. Hi Steve. We tend to agree. The reluctance of these funds to realize gains on their investments risks them becoming too heavily exposed to ‘yesterday’s winners’… the big banks being the clear example of this. We took a look at all of the old LICs last year and their 10 year performance give or take a bit is pretty much in line with the benchmarks.

    http://www.etfwatch.com.au/blog/how-do-the-grandfathers-of-australian-lics-compare

    Regarding their NTA, I suspect publications like the barefoot investor help keep Argo and AFIC’s share price high. He promotes them and his members blindly follow his recommendations. At a premium to NTA I’d Rather stick to ETFs that track the index, but at a discount these LICs may be a nice index alternative.

    Like you, we’d love to see some 50bp funds pop up that offer low turnover but more diversification away from the index.

    1. Agree with your thoughts there Etfwatch.

      I do think some of the financial media need to more accurately describe them. The barefoot investor does some great work and I think it is generally a good thing many people follow this thoughts and read his book. I did observe though that the articles I saw on his site for AFI and ARG mention about getting exposure to 100 or so of Australia’s top businesses. I just wonder whether a small punter without much share market experience knows that could mean 30% in financials from those words? About a quarter in four banks that are quite correlated.

      The LICs themselves are still not shy in using terms like diversified and active.

      Inexperienced investors may think they are getting professionals that have skills in picking the best companies from the worst. The evidence is starting to look a little mixed. Granted the MER is dirt cheap. But management create a fair bit of wealth for themselves even though the performance record is looking relatively average.

  4. I use the old LIC’s like others use cash and bonds in their portfolio. I like them as a great source of fully franked divvies, pretty reliable div payments despite what the stock market is doing. It all depends on what you are expecting out of them. My expectations are quite low.

    1. If you understand how they are run and what’s inside of them I can still understand the attraction of using them.

      It is a lot about expectations and I am sure many like yourself Phil have a good understanding of them and their capabilities.

      I was just a bit surprised at when I saw their websites speak of active and diversified. For those starting out this could create the wrong impression.

  5. Don’t follow AFI and ARG as they have never traded at the large discount to NTA that I require for existing LICs, so no comments there. Did, however, became a BKI shareholder when they took over Ian Huntley’s HIC, which we acquired at a very large discount to NTA, Equivalent BKI entry price is less than half the current market price. I would have sold these long ago, but they are held in my still working wife’s name, so there is a CGT issue.

    About the best I can say about BKI is that they have low management fees. As they should be. Despite the rhetoric in their monthly reports (which never change – read one you’ve read them all), they are an extremely passive manager. For instance, despite the rise and fall of the mining boom, the number of BHP shares held stayed basically the same. And the last time I looked nine of their top ten holdings were in the top ten by market cap stocks. That the one they didn’t hold was CSL should not come as any surprise. To sum up:- Nothing happening here!

    1. Very interesting feedback there given the long history in keeping an eye on them.

      They are not sounding like a very active manager!

      These three LICs seem to rely on a brand that they are trust worthy based on long histories. I think they need to be careful therefore when describing their own investment approach that they are true to what they say.

      Another strength of their brand is low fees. They also need to be careful. Firstly ETF fees are getting more competitive. Secondly in the case of BKI and ARG they have played around with some other ventures. I.e. New associated LICs in URB & ALI, which may confuse their low fee branding.

      1. As an example of working “outside of one’s expertise”, URB shows that you need to have a good narrative that people can understand. 1/2 Urban Development and 1/2 equities to support the urban development until it gets legs? A strange mutant and the market did not understand it and the under subscription level showed it. I have never been a fan of BKI for exactly what Graeme says – very little change in the portfolio and very average performance. The spin off of the BKI investment advice into a separate company (ostensibly to manage URB apparently) is another piece of confusion when having the investment advice kept in-house is another point of brand dilution.

        Regarding this and the afore mentioned grandfathers, low fees are one thing but you are getting what you pay for here. The only advantage over an equivalent ETF might be dividend reserves.

  6. Eddster, I did not invest in URB for the simple reason the market would become bored with it because they have very little to announce for months on end. Dividends will be meagre, property valuations annually if you are lucky. Yawwwwn! It will make BKI look exciting.

    1. I would add that when I read the fine print of the fees of URB, the property side didn’t look that simple. Seemed like the manager had lots of room to charge a variety of different fees on transactions.

    2. Good call. I am not sure how much they could have done with the urban development without a pretty large amount of capital (more than they raised). It tends to be a pretty expensive undertaking. I am not sure what they could redevelop with the money that they received (I am not following them admittedly). Somewhat like what Blue Sky faced… hmm

  7. this is a very perceptive article , i see banks are a very big lagger today (april 26th) and AMP came a shocker recently too…

    1. I saw for example that AFIC held plenty of AMP.

      Whether AMP and the banks perform well from this point of time is one question. The issue I have is whether a holding like AMP matches well with the snippet from the AFIC investment philosophy I noted in the post. Even prior to the RC, was AMP a company with a strong brand and high quality assets that can sustain superior returns over the long term?

      1. I heard Jason Beddow (arg.ax) speak recently where he advised they are required to keep their portfolio churn under 5% if they wish to retain their LIC discount on capital gains. Whilst welcome, the benefit is not significant. Just another constraint on their investment performance?

  8. Seems like BKI are keen to avoid selling existing holdings to take advantage of new opportunities. Big capital raising today to get some cash to use for their active and high conviction investment strategies. Seems like an unorthodox way of capital management.

    1. “Active and high conviction investment strategies” ? I’d think more the SPP ‘proceeds used for’ motherhood statement of increased liquidity, lower MER and investing in profitable, income producing, well managed companies. I actually don’t think liquidity is a problem for BKI, wonder how long it takes for the lower MER to cover the costs of the issue and am yet to see a LIC aiming to invest in unprofitable poorly managed companies.

      BKI have these SPPs every couple of years. Taxing the memory, but I seem to recall that the purchase price, post tax NTA and market price usually end up about the same. At least it isn’t diluting. I guess if one really want more shares in an increasingly under performing LIC, then going via the SPP may save one a few dollars in brokerage.

  9. Hi Steve,

    Just checking out your article again seeing I referred to it on PC forum. In regard to the following:

    “Like you, we’d love to see some 50bp funds pop up that offer low turnover but more diversification away from the index.”

    Of course Mirrabooka although Ex50 only is an alternative albeit with MER a little higher than 50bp. And often overlooked is Amcil (large and small cap) with similar MER to MIR.

    For a number of reasons I’ve been simplifying our portfolios. Probably summed up as simply: Buy an older LIC when cheap, Index ETF if not. At this stage of life and being a dividend focused investor that’s all that’s really needed for us. Add to that a generous cash buffer for any potential dividend shortfall in times of gloom I’m confident we won’t find ourselves sleeping under a bridge and eating cat food🙂.

    Cheers

    1. No worries Nodrog. Thanks for bringing up examples of Mirrabooka & Amcil. I probably know less about them than most because I haven’t had them much on my radar. I might try and look a bit more at these and others in this slightly more expensive than the older brigade category. Any others worth a mention?

      My article probably appears quite gloomy on the old LICs and no doubt has a negative tone. But can can still see the attraction. Especially with those that are financially quite secure. Meb Faber on his podcasts refers to this as you have already won the investing game. So no need to try anything fancy if a modest stable dividend yield covers your living costs. I thought my article may perhaps give some younger less experienced investors some food for thought. I have seen the very inexperienced viewing these LICs as diversified enough to put all your eggs in this basket. There are risks though the growth may not meet those investor’s higher return goals like for example the last decade.

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