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'Why L-I-Cs can be D-U-Ds!'

Discussion in 'Listed Investment Companies (LIC) and Trusts (LIT)' started by JIT, 22nd Dec, 2007.

  1. JIT

    JIT Well-Known Member

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    Hi chaps,

    Here's a very interesting article that 'blows the lid' on LICs!

    Why L-I-Cs can be D-U-Ds - Eureka Report Article

    Written by Scott Francis, a fee for service financial planner in Brisbane, who likes the index approach.

    I know a few here like LICs, so what do you think of Scott's findings here??
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Very interesting - I must admit that I've not done extensive research into LICs - I've always been a bit nervous about the added variables which come from the difference between trading price and NTA value ... which is why I'd tend to prefer ETFs I think (again, not that I've done extensive research).

    I did do a bit of searching on LICs a while back when looking for some new managed funds to invest in, but was rather unimpressed with the performance figures I found. I didn't think all that much of it at the time, since I wasn't seriously looking ... but if the figures accurately represent the long term performance versus the index, then it is another vote in favour of index funds or ETFs I'd think.

    It would be interesting to look at some of the more specialised LICs and compare them to specialist sector managed funds and ETFs to see if there are actually some star LICs out there.
     
  3. JIT

    JIT Well-Known Member

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    If you look at Scott's website, he his much, much harsher on actively managed funds than LIC's. Some of the figures on the performance of the vast majority of fund managers are quite overwhelming. I'm completely converted to the index fund way. Probably going to ditch my industry super fund too, and switch to a diversifed index fund portfolio using a super wrap.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Are you going for 100% index tracking, or will you include some alpha seeking investments as well ?
     
  5. JIT

    JIT Well-Known Member

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    I'm only using index funds: outside of super I'm using a fairly conservative asset allocation with a balance of growth and income orientated index funds and a medium-term time-frame (+/- very conservative use of leverage), but the plan for super would be a much higher growth strategy over a longer time-frame with an asset allocation that suits this. I do see a case for having a small part of your portfolio in selected active fund managers, but for me the selection process here is still far too random and unreliable. I'd prefer to try and do a bit better than average by tilting the portfolio towards small cap, value, and emerging market indexes. I'm no expert on this sort of stuff, but that's what the index fund pros say. I'm leaving most of the asset allocation and portfolio construction decisions to someone who's really interested and knowledgeable in these areas, and taking a back seat myself. I like the passive aspect of investing with index funds, which is a bit like buy and hold residential property. You set it, then forget it! I don't see the point of working a full-time job, then coming home and being a full-time investor, there's more to life than that. Just a personal decision really, and one that suits me perfectly, and gives me peace of mind. It really does free up a lot of your time too!
     
  6. dkmc

    dkmc Well-Known Member

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    I think the analysis is a bit flawed
    5yrs is too short a time frame
    Just have a look at argos website - and look at the 20yr time frame
    Its also dangerous to lump all LIC's together
    they are so different between them

    There was also no analysis of the income component
    One of the great things about Argo and the likes
    is that they focus on tax effective income, and income growth

    A quick look at etrade shows argo's 1yr dividend growth is 14%
    10yr ave dividend growth at 9%

    which is quite healthy
    After many years - the income grows - and you will have an investment that gives you 10% income and 10% growth

    However at this current point in time the yields are lower than the index
    which makes them less favorable
    Any investment which has a lot of investment in resources, BHP or RIO will have lower yields than the index

    The other thing is that some allow you to buy parcels at 2.5% or there abouts discount to the market every year up to a certain amount - which reduces your cost price

    Over time LICs are very powerful

    I havent analysed the dividend growth of the asx
    that would be interesting to compare
    givent that the yield of the asx would be around 4+%

    Disclaimer - I own some argo shares,
     
  7. coopranos

    coopranos Well-Known Member

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    That article seems a touch misleading.
    Over 10 years Argo has at least matched something like a Vanguard Index fund, go back further and it has strongly outperformed it.
    It is interesting they take a short term view when it suits them though.
    Also having had a look at some stuff written by Bogle (the vanguard founder) he claims the major reason actively managed funds fail to outperform the index is fees. With LICs like Argo having very good fees (less than an index fund) one would assume that this is a reasonable case for their inclusion in a portfolio.
    The fact that Argo has beaten the index on average over the long term is even more of a case.
     
  8. AsxBroker

    AsxBroker Well-Known Member

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    Hi all,

    I think it is also slightly misleading, I think the first two points are not 100% correct. I'm sure that the LICs can easily change the fees they charge and also change their investing philosophy which could easily increase the amount of trading which in turn would mean higher brokerage costs.

    It really depends on what the LIC is trying to achieve and whether they do it by active or passive investing they same as other fund managers, that's what LICs are, they invest money. It's only that they are closed ended funds (ie, limited number of shares) and listed on the ASX which make them different to open ended funds which aren't listed.

    Cheers,

    Dan
     
  9. FrankGrimes

    FrankGrimes Well-Known Member

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    A few points that spring to mind -

    - I'm not suprised the big LICs have underperformed the ASX300 index over the past 5 years. They are VERY conservative and are overweight in financials.

    - Look back beyond the last 5 years, when the ASX300 has had negative returns. ARG and MLT still tick along nicely. ARG has never made a negative return (Their website). Here is ARG + MLT vs index for the last 10 years

    98 99 00 01 02 03 04 05 06 07
    ARG Total Return (%) 4.9 16.8 1.0 19.0 25.4 9.6 8.2 19.8 32.7 19.1
    MLT Total Return (%) 26.3 4.0 5.6 32.7 14.1 9.6 8.3 26.4 27.1 17.0
    Index (%) 1.0 14.1 16.8 8.8 -4.5 -1.1 22.4 24.8 24.2 30.3

    But LICs have their place. ARG, MLT or AFI (AFI less so) won't outperform the index during the good times but they will during the bad.. The last 5 years isn't enough for a comparison.

    I have STW (Street Tracks ASX200 ETF) and ARG, AFI and MLT and during the recent volatility I know I'm much happier with the LICs. Even if they underperform at times and are considered boring..
     
    Last edited by a moderator: 23rd Dec, 2007