Whilst ETFs are a reasonably new phenomenon, Listed Investment Companies (LICs) have a much longer history, with 30 LICs available on the ASX when the first ETF was launched in 2001. However, they go back much further than that. The oldest and largest LIC on the ASX (AFIC) began life way back in 1936. There’s 6 LICs listed on the ASX which began life over 40 years ago, making them older than many readers of ETF Watch. Today we take a look at the grandfathers of LICs and see how they compare.
The 6 grandfather funds represent a whopping 53% of the LIC market by market capitalisation, in a market of over 90 funds. All are Australian equities focused with similar ‘buy and hold’ type approaches. The fund details are Provided in the table below:
|Ticker||Fund Name||Market Cap||Inception Year||Average Volume||Mgmt Costs||DRP Offered?|
|AFI||Australian Foundation Investment Company (AFIC)||$6,891m||1936||288,000 units||0.18% pa||Yes|
|ARG||Argo Investments||$5,228m||1947||164,000 units||0.18% pa||Yes|
|AUI||Australian United Investment||$996m||1974||26,000 units||0.13% pa||Yes|
|CIN||Carlton Investments||$844m||1970||4,000 units||0.10% pa||Yes|
|MLT||Milton Corporation||$2,831m||1962||191,000 units||0.14% pa||Yes|
|WHF||Whitefield||$377m||1971||22,000 units||0.35% pa||Yes|
One of the key callouts to make about the above fund list is how low their management fees are. With fees as low as 0.10%, this is lower cost than any of the Australian focused ETFs available on the ASX. Newer LICs tend to have higher management costs (of around 1% + performance fees), however the grandfather LICs, with their buy and hold approaches are offered to investors at a much lower cost.
We don’t have the data available to track performance way back to 1936, but we can go back 10 years which includes the infamous GFC period of 2008/09. The chart below shows the performance of all the above funds with dividends hypothetically reinvested from 1/1/2007 to 31/12/2016. Note that hypothetical reinvestment of dividends does not include any discounts the provider may offer with Dividend Reinvestment Plans (DRPs), and assumes dividends are reinvested at the company share price, rather than the underlying Net Asset Value (NAV). We haven’t included participation in share purchase plans, which all funds have offered periodically. We’ve also included broad based Australian ETF STW in the chart to allow comparison against a benchmark (STW tracks the S&P ASX 200 Index).
The performance of all the funds is reasonably consistent across the period with most having periods of outperformance and underperformance against their peers. The outlier is Carlton Investments (CIN) which has outperformed over the last few years. This is because of their high weighting to a single underlying investment (more on this later). Excluding CIN, the ‘benchmark’ STW portfolio’s 10 year performance fell bang in the middle of the basket of shares. It’s important to remember that the performance chart is based on a 10 year period with a defined start date. As each of the funds has periods of out or underperformance, changing the time period even slightly will likely show result, with the funds showing the highest performance in this time period possibly underperforming with a slightly different time period.
All of the funds pay 100% franked dividends, which of course is one of the benefits of investing in LICs, so investors on low tax brackets will receive increased total return when performance is grossed up by the franking credits that get applied.
The annualised 10 year performance including reinvestment of dividends is shown in the table below:
|Ticker||Performance (% pa)|
|* We are often asked why our performance reported does not match the performance reported by the funds. There are a few reasons, some funds report performance before the impact of management costs, some report performance based on the underlying NAV, not the share price, some report performance inclusive of discounts applied to DRPs, some report performance assuming investors participated in share purchase plans and some funds report performance inclusive of the impact of the grossed up franking credits. In short, there’s no consistency across the industry, however we report performance the same way for all funds, so you can make an apples for apples comparison from ETF Watch.|
Whilst the performance charts above include the impact of dividends, to some investors dividends are extremely important, therefore its worth having a look at the dividend yields across all the funds. Below we take a look at the dividend yields of all the funds over the last 10 years.
Over time there’s been some large variations in yield (eg 2010), however over the last few years all funds have reverted to a fairly similar yield of around 4% pa. Note all funds currently offer 100% franking on their dividends, whereas the STW benchmark fund is generally franked at around 70-80%.
One of the unique attributes of LICs, as opposed to ETFs and managed funds is the ability of the share price to trade at either a premium or discount to its underlying Net Asset Value (NAV) or Net Tangible Assets (NTA). More info on this can be found here. Below we compare the Before Tax NAV premium/discount over a 10 year period. We’ve used the before tax NAV rather than after tax NAV (both of which are disclosed by the funds), because these funds tend to have ‘buy and hold’ type strategies, meaning they can have huge unrealised capital gains. This means that their after tax NAV is much lower than the pre-tax NAV. Given these funds do not turn over their portfolios and the risk of liquidation of their entire portfolio is likely very low, we’ve used before tax NAV.
Century Australia (CIN) has a consistently bigger discount than the rest of their funds. This is likely due to their high concentration to a single underlying holding, meaning the market places a discount on their lack of diversification compared to the other funds. The other funds appear to trade at fairly similar discounts or premiums, with the relatively smaller AUI and WHF tending to trade at a larger discount than AFI, ARG and MLT. We assume the market is placing a slight discount on them due to their lower liquidity.
Unlike many of the newer LICs, all of the grandfathers are quite transparent with their portfolios, with all disclosing their top 20 or 25 holdings, which can account for up to 70% of the total portfolios. We’ll save the detailed analysis on how correlated they are for another post, but they all have plenty of familiar names like CBA, Westpac, NAB, BHP, Telstra and Rio Tinto in their top holdings. The top holdings for each fund can be found on their websites.
Excluding Carlton Investments (CIN), the largest holding amongst the grandfathers tends to be around 11% of the total portfolio. As we alluded to earlier, CIN is the exception, with a 43% holding in Event Hospitality & Entertainment (you might be familiar with their underlying brands like Event Cinemas, Rydges Hotel, and Thredbo Ski Resort). Strong performance of Event Hospitality has seen CIN outperform its peers in recent times, however it has also meant the market has placed a bigger discount on the company, as with less diversification, the fortunes of CIN are more tied to the performance of a single underlying company.
There we have it. Plenty of similarities and some differences between the grandfathers of the LIC world. For investors looking for no frills low cost LICs, one or more of the grandfathers may suit. This analysis presents factual information only and should not be considered investment advice. We recommend investors seek professional advice before investing in any of the funds mentioned.