LAZY 2019 LIC BASED PORTFOLIO. – thanks to Sharesight discount offer.

It is approaching that time of year where I am looking forward to some lazy time having a beer or two whilst watching the Boxing Day Test Match on TV. I thought it was also worth discussing how a lazier way of investing can work.

I personally get enjoyment out of making a big effort in trying to discover the odd cheap small cap stock. Yet I can still appreciate the benefits of a lazy portfolio. Clearly if you can find stocks you don’t need to sell then there is a significant tax advantage from all the compounding. I write this at a time when we may well see CGT changes in the future. In the past I have written about the importance of having a strategy that is not too wedded to certain tax structures –  diversify your portfolio from political / taxation risk.

I often read about some investors being all out actively trading, then others wanting to find a portfolio where there is no need to sell for decades! Both extremes I find difficult. From a political / taxation risk point of view I don’t mind sitting a bit on the fence in this respect. Having plenty of my investments in companies I can hold for longer periods also has the benefit of making me patient in searching for other stocks to purchase. I feel I can take my time being more selective and be more thorough in “turning over a lot of rocks” to uncover new opportunities. Having a higher turnover of your portfolio increases the regularity you need to find a new stock to buy. That can potentially rush you into decisions you later regret.

I felt this blog tended to create an impression that I turnover my portfolio more than I actually do so that was another reason for this article. My turnover was higher than normal in the first year or two of blogging for a few reasons. My tax rate was suddenly lower meaning that CGT on many previous positions would be less of a burden than if I sold in the years prior. Then when quitting working in the investment management industry full time it freed up plenty of time. That enabled me to read more about individual stocks so that I could develop the conviction to be slightly more concentrated, and hold for longer periods.

Although I enjoy spending a lot of time investigating some more complex potential investments, there may well be a time where that may change. I also may not enjoy spending so much time on my investments if I discover that a lazy investment approach does far better than my more active efforts! Hence the tracking of a lazy portfolio.

When starting this blog in early 2016 I never thought I would keep it up to this point. Therefore I was a bit lazy in the first year about the format of the blog. I did try to track how the stocks I had mentioned I was holding were going. I shall include a link towards the bottom of this post which discusses how I got to this point in time in terms of tracking some stocks.

At this stage I now want to bring up a fictional portfolio I set up in Sharesight early this year. When I say fictional I refer to the dollar amounts and allocations etc. I did still own every one of the stocks at the time. In fact the point was that these were holdings I discussed on the blog before but had never sold. I glanced at them thinking that they were a diverse enough bunch that could be held longer term. An all-weather style portfolio perhaps that spun off some decent dividends, and didn’t require much attention. If this does heaps better than my own actual portfolio over the next 5 years maybe that is my catalyst to spend all my time lying around at a beach somewhere. That would require better years than experienced in 2018 though!

lazy

I also wanted to be lazy in terms of how much blogging I wished to do going forward (yes the number of blog posts did slow down a bit this year), so tracking this in Sharesight sounded perfect. The idea was to only potentially fiddle with this fictional portfolio once a year. This portfolio right now is about ten months old. Since every man and his dog likes to put forward outlooks and various picks for 2019 though, I figure I will join the bandwagon to some extent and address it again right now.

Here is how the portfolio looks now and how it fared thus far as at December 14th.

sharesight dec14.jpg

Note that I chose the ETF reflecting the Australian market as a benchmark. The portfolio at least did better than this during the period above, returning 6.11% compared with the benchmark return of 0.92%. (Note this commenced 12 Feb, not Jan 1). I feel like this flatters the relative returns, in that some of my stocks benefit from a declining AUD. Also the Australian market was an easier benchmark to beat for most of this year. If I chose something like VGS though then that is completely unhedged for currency, so that may be slightly unfair given the weakness in the AUD since February. For what it is worth though VGS produced about 5% gross.

These figures whether it be the above portfolio or the benchmarks are applying the income received on a grossed up basis, so a like for like comparison.

I won’t debate too much whether I judge this portfolio has done particularly well or not, it simply is what it is!

To make myself feel a bit better though, and my readers with how they may have gone this year, I shall copy a quick chart from Deutsche that I felt was interesting. It was from mid-November when markets were quite low and not too far away from current levels. It basically shows that in 2017 it was one the easiest years in over a century in terms of the likelihood of picking an investment type that would produce a positive gain. This year has proved the opposite, well in mid-November anyway it was looking like the most difficult year on record. (Tallest bar on the right of the chart). Let’s not judge ourselves too harshly! Here is the chart from Deutsche below.

deutsche chart.jpg

Or alternatively when I get a bit frustrated with my portfolio I like to check on the unofficial David Einhorn index.

https://www.reuters.com/article/us-hedgefunds-greenlight/losses-at-einhorns-hedge-fund-greenlight-grow-in-november-idUSKCN1O02X5

Not having a go here just think it is good not to lose sight that investing can be a long term game. As the bull market cycle is unusually long it is more difficult to pass judgement on investors. The media thinks of 10 year records as extremely long term for a fund manager. Yet in this cycle sometimes I wonder if even that long necessarily tells much about manager skill. Here I am discussing a 10 month period!

So now then the idea is to try and leave this fictional portfolio untouched. Perhaps spend less than an hour thinking time, maybe a couple of decisions at most as more of a rebalance only if necessary. What were some of the major themes then in 2018 that may require a rebalance?

Equity markets have had a bit of a reality check, but the correction in US markets of late is hardly a blip at all in the context of the last decade. With Asian markets on the other hand that is not the case. Clearly I got a bit carried away with how EAI & PAI performed well for me in 2017. I will take the lazy approach here and not do anything though because there is a risk they could fall further if US equities keep trending down. It may be an area to examine lifting exposure when I revisit this in a year’s time. Regarding PAI I did discuss on the blog in June this year about lightening up there. The premium looked excessive and I felt a SPP was quite possible. This fictional portfolio has some cash still so this could potentially be deployed in a SPP if it were to occur and was attractive through the year.

Whilst the AUD has been weak since this portfolio commenced I don’t feel it is yet of the magnitude the requires any rebalancing from that perspective.

Bond yields rose in 2018 (despite falls in recent weeks) and you could argue that holdings like ALI, APW & UOS are a little sensitive to this theme. There is of course a possibility that APW is slowly wound up though so once again I will take a lazy approach here and leave as is. If not wound up in 2019, hopefully in my lifetime! APW certainly hasn’t been a lazy sort of investment for Samuel Terry Asset Management & Sandon Capital so am appreciative of their efforts there. The fact that these 3 performed well in a rising yield environment means that these were sound enough picks I feel.

Should markets decline in 2019 I feel there may be an opportunity for some rebalancing a year from now if necessary. Aside from some possibility that APW sells its assets, the same theme exists for the now small position in REF. Apart from the cash we also have holdings like ALF, ALI & GOLD that you would think would behave somewhat defensively.

Who knows though 2019 may once again be another good year for the bulls. In that scenario I would concede this portfolio could well underperform. I would hope though in that environment there is some conversion in valuations between markets in Asia & the U.S. that would assist EAI & PAI. These were big drags on returns in 2018.

This portfolio received an unusually high level of dividends in 2018. This was mainly from a special payment from REF, and we also saw TGG declare a special dividend. PAI & JYC were high dividend payers and I suspect those two will remain so in 2019. It probably leaves now however a portfolio with a lower yield than I would like. This is partially from the high yielding SVWPA being converted to cash from a corporate action. I don’t think the lack of high yield requires much action though. In theory one could say that the high income generated in 2018 can sit on the side and allow me to address this at a later time.

From a stock specific level I am comfortable still with this bunch and have often commented on these stocks in the past, so won’t write too much more on this occasion. ALF has been one of the weaker performers and likely to leave readers scratching their heads why I would keep holding this dog! In short my theory is if performance doesn’t improve then I don’t see obstacles in the way of someone accumulating 5% and proposing a huge off market buyback. Many disgruntled shareholders would happily vote for this. In recent months they have delivered an outcome that is very difficult to do, being market neutral and losing capital whether the market goes up or down!

Lastly the news regarding Labor’s plans to make changes to the treatment of franking credits probably deserves a comment. Stocks that are favourites amongst SMSF investors for their high fully franked yields will likely experience some resultant volatility next year. The portfolio listed above does have plenty of LICs, but not so many that I feel are that popular with those hungry for fully franked yields.

So there you have it, not much thinking time involved there. A year’s investing strategy done within the lunch break of the cricket perhaps.

As I noted earlier, here is a link to my previous disorganised way of trying to have some accountability for the stocks I wrote about. It shows how I got to this point. As you can see it wasn’t easy to read or track so Sharesight is much more valuable from that point of view.

UPDATE 21st DECEMBER

Because this blog post discussed a Sharesight portfolio I was tracking, I figured why not see if they can offer any discount for the readers of this blog. They have come to the party in terms of anyone wishing to join up to their paid services and pay the year upfront. With my limited views I don’t expect a large take-up, but for what it’s worth I want to make it clear though this site has an affiliate relationship with Sharesight. You can still get a very good deal though, read further down to see the discount offer details. 

HOW TO SUBSCRIBE TO SHARESIGHT’S PAID SERVICES AND GET THE 17% DISCOUNT?

Sharesight Discount

Sharesight have offered the readers here two months free for the first year of their subscription, which is effectively about a 17% discount. This offer is for those who are not currently subscribing to their paid services, but are now thinking about doing so. This is the discount you get if you are prepared to pay for the yearly subscription upfront. There are options for monthly payment although that will not qualify for this particular discount I refer to. The way the market has been trending down of late may make paying upfront even more worthwhile rather than leaving the funds invested!

The key though is you must use this particular link to join.

https://www.sharesight.com/au/valueinvesting/

I may not have done a great job explaining the features of Sharesight so before I finish this post I shall just leave a short video here from Sharesight themselves. If you are not aware, it is completely free to sign up with them and start tracking a portfolio up to a maximum of 10 securities. The paid services I refer to enable more than 10 stocks and other features.

https://www.youtube.com/watch?v=CyOhmQpTIS0

That, and in more videos on their YouTube page should give you a good start on their services if you haven’t already tried them.

Once again, make sure you use the specific link I mentioned above to qualify for the discount, here it is again just below.

https://www.sharesight.com/au/valueinvesting/

If you have any questions or comments specifically about taking up this discount offer, feel free to email me at valueinvestingforaliving@gmail.com. Questions regarding the technical aspects of the Sharesight product it will be better to reach out to Sharesight themselves.

https://help.sharesight.com/au/new-feedback/

I shall just add my 2 cents worth in that I have been a happy paid up customer with Sharesight for a number of years now. It may even help with a better understanding of performance reporting from LICs. I have written about the confusing performance reporting of LICs before! Speaking of the lazy way of investing, surely it will save you some headaches and time when it comes to tax reporting.

Since that is probably my last post for this year I wish the readers here all the best for 2019!

Disclaimer:

Please do not go out and copy the portfolio (sure I hear you it hardly shot the lights out anyway but just in case!). I may trade out of the stocks mentioned at any time and not make that clear on this blog. My circumstances and financial goals are likely very different to that of readers. Please seek the relevant personal financial advice from the appropriate qualified professionals before making decisions on your portfolio. Sharesight has nothing to do with the stocks I chose to put in this fictional portfolio! I am not licensed as a financial advisor.

banner_sharesight_300x50 small

https://www.sharesight.com/au/valueinvesting/

12 thoughts on “LAZY 2019 LIC BASED PORTFOLIO. – thanks to Sharesight discount offer.”

  1. Hi Steve,

    Great insight as usual.

    After reading this post I’m not sure I’d call that a lazy portfolio though. Or if it is our portfolio and management of same is verging on comatosed.

    The only active management of the portfolio if you can call it that is simply occasional tax loss harvesting by swapping like with like for continuity of dividend income but different enough from ATO perspective. Have been consolidating the portfolio so this is not only useful for offsetting some capital gain but raises the cost base “just in case” for the future.

    I can’t describe how wonderful a feeling it is now to have sold all direct shares and reduced our portfolio to around a handful of LICs / ETFs. Decision making is so rediculously minimal / simple a kid could run the portfolio. Almost like a weight lifted off my shoulders and gives me peace of mind in knowing my heirs won’t be burdened with complexity if I kick the bucket. But our lifelong objective of an ever growing stream of dividends continues on unabated. The current dividend income has reached a point and continues to grow at a level we never dreamed possible.

    I’ve looked into so called “all weather” portfolios over the years. However with our dividend income well above living expenses, a simple but globally diversified portfolio with the addition of a generous cash buffer lets us sleep well at night regardless of what severe weather the portfolio might be exposed to in the future.

    Curious also given possible change to franking credit refunds why the lazy portfolio holds so many “trading” LICs in particular given capital gains are taxed at 30%? I suppose distributions from cash / listed property and periodic realised capital gains offsets franking credits. Depends on one’s personal circumstances and level of income of course. With a high enough income the full benefit of franking credits in uneffected.

    All boring stuff I know but just another view on a Lazy approach to investing.

    1. Hi Nodrog,

      Plenty of good questions you ask there.

      First thing I should clarify is that I didn’t quite sit down and come up with this mix of what my entire portfolio will look like. It was a fun experiment to get me thinking about my own portfolio turnover. These were leftover stocks I had discussed on the blog that I continued to point out I held. Yet still less than half of my actual portfolio at the time I set this up in February.

      As to what is lazy or not, well with the experiment in this case I made no active decision or “fiddling” thus far. I booked a SPP purchase for FGG, and was forced to decide on what to do with the restructuring of the SVWPAs. So a couple of forced corporate actions, but zero trading outside of that in almost a year.

      I suppose this style here is not as lazy as your approach with one main point. For example if this experiment of stocks fell 15% in 2019, I would rebalance towards equities in some way, hopefully in a tax effective manner and maybe just with one trade. But for me I think of it as lazy if I spend an hour a year pondering whether to make a couple of changes.

      I actually still love spending hours and hours on an active approach but I’m still curious to how this method goes. My preferences may change one day.

      The franking changes are still uncertain and likewise how different LICs will react. My early thoughts are that it is not a distinction of what are actively trading ones and are not whether they may be hit or not. I also set this experiment up in February before all this news really started. As a lazy experiment I certainly couldn’t go and make wholesale changes as a result!

      IF all of the franking changes came in (still a big IF), my gut feel is the LICs where low income SMSF investors targeting large franking rebates own may weaken. Possibly Wilson ones and the grandfather LICs, especially given they are at premiums? Some LICs may convert to a trust structure? If it is perceived an issue for some of the ones I suggested in this sharesight experiment portfolio maybe they even get wound up and the shares gain in 2019! I’m interested in your thoughts here as I haven’t read many people commenting much on this issue. Most are just writing wait and see but there might come a time soon where it all happens!

      My quick response here is because I have to stay at home today, so will spend it lazing around watching the cricket!

      Cheers
      Steve.

      1. Hi Steve,

        I read your original post too hastily earlier today and upon reading more carefully well yes the experimental portfolio is quite lazy. So sorry there.

        One thing some LIC investors appear to overlook is that whilst “discounted” SPPs seem like a nice idea, when in retirement finding $15K regularly across a number of LICs may not be easy. Hence if participation is not possible then there’s potential dilution. Fortunately from memory a number of the LICs you have in the portfolio are not as guilty of such practices? So I suppose this is just one issue to consider if having a number of LICs in a lazy retirement portfolio. You know all this but I’m just commenting in general for others who might read this.

        Of course you’re correct about the future of franking credit changes in that nobody knows what will happen. I was in the process of consolidating the portfolio before Labor announced their policy so it made sense to also diversify against tax changes as well. Eg ETFs as well as LICs given the difference in tax treatment.

        Should the franking credit changes ever get legislated a number of “trading” LICs have said they would strongly look at restructuring to a LIT. Even Geoff Wilson apparently said this very recently at a presentation in regard to his funds. Fortunately the trading LICs as you know generally tend to have minimal embedded capital gains so tax wise the process of transitioning to a LIT should be quite painless. Unfortunately the low turnover popular older style LICs with huge embedded capital gains are unlikely to be able to restructure to an LIT unless CGT relief was available as part of the change. I doubt they would consider it anyhow.

        But the problem is what is beneficial to one investor may not be the case with another. Then there’s the inability of LITs to smooth dividends. So how shareholders would vote on restructuring would be interesting. Dixon & Co appear to have been able to convert a couple of their LICs to LITs recently with relative ease.

        I’m personally treading very cautiously with placing further funds of any significance into LICs at the moment until things become clearer or market turmoil dishes up exceptional opportunity. I recall when the older LICs lost their CGT discount as part of Ralph Enquiry legislation. From memory the LICs impacted by the change got hammered accordingly. Fortunately lobbying by LICs resulted in Costello eventually exempting them from the change and price promptly recovered. The loss of franking credit refunds given how long it has been around now and the SMSF effect would appear to have much greater potential for LIC repricing compared to what occurred with the Ralph situation. I think LICs will always have a place just like they did before franking credits ever existed prior to 1987. The older LICs had been going strong long before then. Then again there were no other general low fee market proxies like now being ETFs. So hard to know. But will these LICs likely be repriced accordingly to compensate for any structural disadvantage should franking credit refunds get abolished? And of interest to me is the typical “overreaction” that often happens initially with such changes or even when announced as a budget measure regardless of whether it becomes law or not.

        Hence given these possibilities let alone what’s happening with market / political etc volatility globally in general I’m being very cautious and holding a large stockpile of cash. Being in the peak sequence of risk zone as retirees adds further emphasis for taking this position. I might be wrong but given the froth (appears to be peaking) in the LIC sector and what happened there also last time in addition to previous issues mentioned I can’t help but sense that there may be a lot of opportunity in the not too distant future. Of course anything could happen. My crystal ball is no better than anyone elses.

        Cheers

      2. I think keeping an open mind like you are makes sense. I wouldn’t make huge changes all of a sudden with so much uncertainty. By the same token I wouldn’t keep my head in the sand. I went with the cop out fund manager speak talking about volatility around this topic next year!

        Something like WAM I thought could see their typical buyer demand reduce a little bit if Labor got their way. Yet initially it could mean that WAM pays out all the franking credits ASAP before going down the LIT route. Maybe that is like a sugar hit to the price at first?

        I was also thinking buyer demand may drop off a tad for ARG & AFI and they could trade half way between their pre and post tax NTA. So far I’ve been totally wrong on that so who knows. Even though their performance has struggled a little and with these uncertainties they are still very popular right now. I guess that is often a pattern when the market corrects like it has of late.

        If I wanted to add broad ASX exposure I would have a preference over an ETF versus ARG & AFI right now. The better dividend smoothing is nice but I’m not sure it’s worth paying such a premium for with all these other issues in the background.

        I think I had 7 LICs in this example portfolio but I don’t think they are the ones that low income SMSF investors have flocked into for the franked dividends. They don’t have much embedded capital gains in them. They are fairly large so probably no great obstacles in becoming a LIT. Ones like ALF, EAI, ALI, TGG if they really got on the nose could get wound up and have a good time from the discount contracting. I really don’t think this is likely but it can’t hurt to think about what happens if there were initial setbacks.

  2. “If I wanted to add broad ASX exposure I would have a preference over an ETF versus ARG & AFI right now. The better dividend smoothing is nice but I’m not sure it’s worth paying such a premium for with all these other issues in the background.”

    Yep, that’s what I’ve been doing lately with the increase in volatility providing some opportunity. Nothing is really ever worth paying a premium for let alone with all the current uncertainties.

    1. No worries David. When I started drafting it a few weeks back it sounded like a bit of a plug for the sharesight services so I have ended up going down that path now. Since then I have been in the process of trying to get a slightly better deal on the product for the readers here. Whilst we potentially sort it out readers can email me at valueinvestingforaliving@gmail.com if you want to know a bit more.

    1. Hi Leonard, in terms of the portfolio I have written about here, APW & UOS are exposed to real estate mainly in Australia & Malaysia respectively. I have blogged about these since 2016 and do concede though they are not high yielding like some REITs.

      Nonetheless they have been solid performers since I have held and expect that to likely continue from current price levels.

      It just means that as a result I haven’t spent much time searching for more property exposure. For me adding REITs may result in more property exposure than I need.

      That doesn’t mean there are not good REIT opportunities out there though. Just I haven’t been looking for them, feel free to share if you think of some that offer good value.

  3. Hi Steve

    Interesting reading.

    I would like your thoughts on ALF, a serial under performer over the last few years. It is a long / short LIC and originally a directional fund but of late has been market neutral (longs and shorts balanced). Their appendix 4e shows 90 odd longs and after talking to the coy matched by 90 odd shorts and generally matched within sectors (ALF do not declare short positions).

    Hardly a conviction portfolio.

    And no conviction on the direction of the market.

    Also 4e shows they turnover both long and short portfolios 4 times throughout the year – again shows little conviction.

    Holding a short portfolio long term is extremely expensive (the coy does acknowledge this). The short portfolio is insurance in a falling market but it did not work in the market correction at the end of 2018.

    I cannot see that such an approach can work in the longer term. When dealing with averages of a highly diversified long portfolio and averages of a highly diverse short portfolio the differences between the two will be small, not enough to overcome the cost of the short portfolio. Hence the slow leakage in the NTA.

    I have been selling out of my position.

    Interested in your thinking behind owning ALF.

    Cheers
    Geoff

    1. Hi Geoff,

      Some very good points you make. I basically agree with what you have written although I’ve reached the conclusion I will still hold. My cost base is probably circa $1.05 and I’ve looked at this is a cash alternative style investment. It is nonetheless a big fail for me to be down so much on what I thought was a low downside investment.

      I’ve also been surprised at the huge amount of low conviction calls. Too many as I don’t think they can understand so many well enough. Ironically, I’d hate to think how bad they would have gone if they dialled up the risk on the positions they liked, probably much worse!

      I thought it was pretty bad how with the volatility in the market in q4, the net exposure levels hardly moved.

      I think the board is not doing enough given what has occurred. For instance it has made so many changes in recent years. First they like international, then they don’t, staff constantly coming in and out. It now seems like a market neutral product 100% of the time, this wasn’t the case for about a decade. In such situations shareholders deserve an exit near NTA like they did with the other 2 LICs given how ALF seems to have changed its strategy in recent years. Geoff Wilson once argued that when Peter Hall left HHV, shareholders there deserved the right to exit at NTA because it meant the LIC had changed too much. I think all the mixed messages from ALF in recent years make for a similar argument.

      Obviously the stock has annoyed me so why keep it? It’s just speculation but I think Braitling may not care so much in keeping this listed. He was buying a lot of stock recently around 90 cents in March. I’m guessing he is thinking maybe I can bounce back this year. But if not, he will probably win anyway by realising NTA on it in the next year or two. With the other two LICs getting removed from the ASX maybe that is a sign he doesn’t like the negative public attention from having to defend his shocking run of recent performance. So I think ALF is a target for some change soon.

      But as I regularly say on the blog, I’m often wrong. And I haven’t been buying ALF for quite some time and don’t intend on increasing my position unless I saw an activist announce a 5% stake. That’s probably stopped me whinging about this stock a lot more on this blog. Fortunately I haven’t made it one my my larger bets.

      They are at least aggressive with the buyback, their only high conviction idea!

      I believe this month is again a shocker for them, so at least in the short term your selling decision is looking better than my call!

      Cheers
      Steve.

  4. Hi Steve
    For me it was also an alternative asset class investment, along with WMK (sold out), MA1 (reduced position) and AEG (continue to hold). All have been disappointing.

    With the proceeds am holding increasing levels of cash, waiting for another correction so I can buy quality companies at what I think is a discount to a fair valuation.

    Cheers
    Geoff

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