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Discussion in 'Shares' started by Simon, 24th Nov, 2005.

  1. Simon

    Simon Well-Known Member

    17th Sep, 2005
    Can anyone give me their feelings on LIC's such as the Argo fund? I understand they are similar to MFs with some significant differences such as fee structure and franking credits.

    Is their a place in my portfolio for them?

    Thanks team,
  2. Nigel Ward

    Nigel Ward Team InvestEd

    10th Jun, 2005

    I looked into AFIC and Argo, Brickworks and other LICs as a cheap way of getting access to a basket of largely blue chips. For example AFIC's expense ratio in 2005 was only 0.12% and Argo's 0.17%. From a fees perspective you can't get much lower than that! (Note of course that some of the rash of new LICs have ridiculously high MERs eg Pengana at almost 9% :eek: )

    The problem with the best of the LICs is that they trade at a premium to their Net Tangible Asset backing or NTA. AFIC and Argo usually trade in the teens % wise above their NTA. Perhaps that's the price of good management.

    On the all important performance front the story is also good for Argo and AFIC.

    Argo 20 year average annual performance is 15.1% - very commendable
    AFIC 10 year average annual performance is 13.51% - again good.

    So it's a good story. BUT

    1) both have had recent periods of underperforming the market by signficant margins. (But that may be due to their conservative investment approach which means less spectacular but more consistent returns)

    2) If you have access to share charting software, lay a chart for any of:
    CBA, BHP, WES, WBC or NAB (those being AFIC's 5 largest holdings) against a chart of the AFIC share price over all available history. That picture tells a thousand words.

    CBA share price since 1991 has increased almost 550%, AFIC's only 125%.

    Certainly that's an unfair comparison because the RISK is much higher buying a single share vs AFIC's well diversified portfolio...but that's a pretty big safety premium.

    But maybe the 550% is a fluke? Nah:

    BHP almost 700% (altho the BHP data I have goes back to 1987 whereas AFIC although it's been around since the late 1920s has data just to 1991).

    Westpac - over 900% (and yes most of that since 1991) remember WBC had serious trouble from lending to tycoons in the 80s.

    Wesfarmers - over 1000%.

    This analysis, crude though it is, shocked me into steering clear from buying into argo and afic. Don't get me wrong, I think they're a great alternative to the usual run of the mill managed fund which charges you substantial fees.

    BUT I'm prepared to take the stock risk and buy the underlying shares rather than buy the LIC because history suggests the rewards should be many times greater.

    At this stage I'll only invest in an LIC or managed fund which:
    a) has an active value adding contrarian approach; and
    b) is prepared to put it's money on the line by taking ONLY a performance fee far I know of only one :)

    Hope that helps explain why I ultimately didn't go with LICs.

    The only caveat to that would be where you can buy into an LIC with low fees, good management and which is trading at a substantial discount to its would expect it to be hard to go wrong buying $1 for 90c... ;)

    What do other people think?
    Last edited: 24th Nov, 2005
  3. Rick

    Rick Well-Known Member

    16th Aug, 2005
    I went with LIC's when I first started share investing.

    Thought a good way to learn and gain an undestanding of the market would be to monitor the way the pro's moved in and out of individual companies and their reasoning for doing so.

    I don't invest in LIC's anymore.

    I like my investing style better :p because:

    I believe you should back yourself. If you are prepared to put a bit of effort into your investing you should be able to at least match the average LIC.

    I don't like paying any type of fee for something I can do as good myself.

    It's more fun to do it yourself and you learn quicker.

    What really tipped the balance was that I couldn't understand the reasoning for some of the decisions that were being made, with my money.

    But of course there is room in your portfolio for them, it just depends on what type of investor you are. :)
  4. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    Well said Rick!.
    IMHO hands on experience it's the best way to go !.

  5. Simon

    Simon Well-Known Member

    17th Sep, 2005
    Some very interesting replies and I am grateful for them.

    Is it true that with a LIC you don't get the 50% CGT exemption after 12 months ownership?


  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

    9th Jun, 2005
    Sydney, Australia
    I read that in Personal Investor magazine recently Simon ... but I wasn't sure if I misunderstood the issue. If that is the case, then LICs start to become far less attractive than direct share ownership or through a managed fund.

    Would be interested to get some confirmation of that.