Investment Superheros at Morgans Noosa
Understanding the power of LICs is as simple as transporting yourself to a time and space when comic books and confectionery preoccupied your thoughts. John Caruso explains…
Imagine buying a basket of Australia’s best performing companies, at a discount! That’s the magic of Listed Investment Companies or LICs as we’ll refer to them in this article.
Think of them as investment superheroes, pooling your money with others, then using that pool to buy a bunch of shares – however unlike some superheroes, LICs are transparent, so you’ll always know exactly what’s in their portfolio.
There’s a whole crew of LICs out there, each with its own specialty. Some focus on established giants like BHP and CBA (think veteran superheroes like Captain America), while others target up-and-coming companies (think Iron Man in his early days).
Here’s the best part: sometimes these LIC superheroes go on sale! Their share price can be lower than the actual value of the companies they own. For example, in April, the legendary AFIC was trading at a 6.6% discount, which is like getting a discount on a whole box of your favourite chocolates!
“AFIC is the oldest and the biggest LIC, founded in Melbourne in 1926 and the next biggest is the South Australian company Argo Investment Ltd, founded in 1946 and chaired in the early 1980s by Sir Donald Bradman.” explains Matthew Auger, a partner and stockbroker at Morgans Noosa.
“Of greater local interest is the Wilson Asset Management group of LICs, founded by a bloke who now lives locally, Geoff Wilson. His flagship LIC, WAM Capital listed in 1999, and famed Melbourne stockbroker and philanthropist Sir Ian Potter founded Australian United Investment Company in 1953 and his charitable foundation remains its largest shareholder.”
LICs are also shareholder friendly. Many, like AFIC, kept their dividend payouts steady even during COVID, while some even donated their management fees to charities – like a superhero who gives back to the community.
Matthew said an example of an LIC with a philanthropic purpose was the Future Generation Australia Ltd (FGX) which Geoff Wilson set up a decade ago.
“With FGX, the underlying managers donate their management fee to charity,” he said. “In the case of FGX, the stock is selected by well-known fund managers like Regal Funds Management, and the charities they support include Father Chris Riley’s Youth Off The Streets, amongst others.
“Over the year to April, FGX generated a 12.7% return compared with its benchmark, the All-Ords Accumulation Index, which was up 9.9%.
“Doing good doesn’t mean having to sacrifice returns.”
So, how do you choose the right LIC?
Once you’ve picked an LIC that invests in the types of companies you like, maybe big, established ones or smaller up-and-comers, there are a couple of things to keep an eye on.
First, how well has the LIC been doing? Think team sport.
You want the team – the LIC’s management, for example – to be growing the value of the companies they own, their portfolio, faster than a similar group, let’s call them their benchmark, and this growth is called the Net Tangible Asset (NTA).
So, when you read or hear something like the following reported, you’ll be able to break it down into smaller chunks.
Geoff Wilson’s WAM Capital aims to beat the ASX All Ords Accumulation Index, and it did do well, growing its NTA by 22.2% compared to the Index’s 9.9% growth in a year.
You still with me? Great, let’s continue.
Everybody’s interested in getting a good deal these days, and sometimes you can buy an LIC for less than the actual value of the companies it owns!
This is called a “discount to NTA”, so back to the chocolates analogy, imagine buying a box of chocolates where each piece is individually priced, but you can get the whole box for a bit less.
Before you jump in, always check with your broker if an LIC is on sale (discount) or overpriced (premium) compared to its NTA. This can help you decide if it’s a good time to buy.
“LICs are attractive to investors as they take away single stock risk such as a profit downgrade, which happened to Telstra a few weeks ago, however they offer the benefit of diversification and a more reliable dividend stream which is important to retirees,” Matthew said.
So, if you’re looking for a way to diversify your portfolio, get some reliable dividends, and potentially score a discount on a basket of great companies, then LICs might just be your investment kryptonite! Just remember to consult your financial advisor before making any decisions.
The information in this article is generic in nature and you should always seek your own financial advice before making any investment decisions.
