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The importance of dividends when measuring performance. A close look at LICs

ETF Watch - May 15, 2016

It’s official, the Australian Share Market has gone nowhere in the last 10 years. Referred to by some as Australia’s Lost Decade, the ASX 200 index closed at 5,310 on May 1 2006, and almost the same level of 5,252 on April 29 2016. What’s been missed in this comparison however is the impact of dividends on returns.

Performance of shares including Exchange Traded Funds (ETFs) and Listed Investment Companies (LICs) is generally reported on their share price movements over time. Dividends are reported on a “percent per annum” basis, and rarely are the two combined. What generally matters to investors is the cumulative performance of each, as a result the only way to properly report performance is based on share price growth and dividends. Today we look at the older ASX listed LICs (those with over 10 years history), and compare their performance when dividends are reinvested to see which LICs really have outperformed over the long term.

This exercise is particularly important for LICs and here’s why: Due to LICs company structures, they tend to build up a lot of Franking Credits. Because of Australia’s generous dividend imputation system (where those on low tax rates can receive tax rebates on the franking credits) the LIC managers are encouraged to provide a high dividend to pass these franking credits to investors, many of which are Self Managed Super Funds (SMSFs) who pay little (or no) tax. A quick look at the ETF Watch Fund Database shows 35 LICs with dividend yield over 4%, with most of these fully franked. As a result, measuring the performance of LICs purely on their share price growth is likely to understate their actual returns. This is where including reinvestment of dividends should provide a better guide to how the LICs actually performed.

How we ‘reinvested’ the dividends?

Many LICs offer dividend reinvestment plans, however they are inconsistently applied, sometimes at a discount to the share price or Net Asset Value (NAV), other times not. As a result to provide consistency we’ve assumed that dividends have been reinvested at the closing share price on the date the dividend was paid. Whilst this would be difficult to replicate in reality (and ignores the cost of brokerage), we believe it should provide a reasonable enough result. We have ignored the impact of franking credits in the analysis.

What funds did we include?

We included all LICs who focus on Australia and have more than 10 years’ worth of history. This accounted for 21 LICs, the full list can be found on this filtered view on the ETF Watch Fund Database. Whilst all focus on Australia, they are not all alike, for example ALF and DUI include in their mandate the ability to invest in international shares (albeit small amounts), CTN focuses on Microcaps and ALF, IBC and WAM all have the ability to short sell. Full details of the differences can be researched in the ETF Watch Fund Database.

The performance of these funds needs to be compared to a benchmark. In May 2006 there were 5 ETFs listed on the ASX (today there are over 130!). One of these funds is SPDR S&P/ASX 200 Fund (STW), a fund which tracks the S&P/ASX 200 index and has a market capitalisation of almost $3b. As a result we’ve used STW as the ‘benchmark’ allocation. As mentioned above, not all of the LICs benchmark themselves to the S&P/ASX 200 index therefore this is a rather crude benchmark and this should be taken into consideration for anyone comparing the results.

The diagram below outlines the 10 year performance of the 21 funds, with a starting price of $1, between 1/5/2006 and 29/4/2016 (hint: you can select and drag a smaller section to see a zoomed view).




Some observations that can be had from the above chart:

  • The cumulative performance of the Benchmark fund, STW was 59.29%, representing a return of 5.93% pa over the 10 year period.
  • The best performing fund over the period was Mirrabooka Investments (MIR), returning 142.72% over the period or 14.27% pa.
  • All but one of the LICs outperformed the benchmark STW fund over the period, with the only fund that underperformed being Australian United Investment (AUI), which to be fair performance was almost identical to STW.

If the above chart with 21 lines of data is too hard to digest, below is a table outlining the cumulative 10, 5, 3 and 1 year performance of each of the funds.

Ticker 10y pa 5y pa 3y pa 1y
STW (benchmark) 5.93% 5.88% 3.90% -0.37%
AFI 7.54% 5.94% 2.43% -1.96%
ALF 13.84% 6.70% 3.10% 6.64%
ALR 6.00% 5.46% 3.47% -0.27%
AMH 13.95% 7.67% 3.87% 2.74%
ARG 6.34% 7.17% 4.60% -1.20%
AUI 5.91% 5.65% 2.90% -3.95%
BKI 9.14% 7.50% 3.89% -0.04%
CAM 9.90% 2.92% -0.57% -3.71%
CIN 11.72% 11.24% 6.48% 2.22%
CTN 9.52% 2.53% 2.36% -3.26%
CYA 7.74% 6.85% 4.01% -0.41%
DJW 7.99% 5.86% 3.30% -1.19%
DUI 7.56% 7.81% 4.34% -1.03%
FSI 7.17% 7.87% 5.32% 2.66%
IBC 6.92% 4.92% 2.10% -1.91%
KAT 7.04% 4.14% 5.56% -0.12%
MIR 14.27% 8.48% 5.66% 4.07%
MLT 6.40% 9.27% 4.52% 0.09%
WAM 13.29% 7.09% 5.87% 4.83%
WAX 12.79% 12.42% 5.97% 5.56%
WHF 7.41% 10.58% 14.23% -0.78%

*Multi year performance is calculated by the simple method where the total performance is divided by the number of years. It does not factor in compounding to the performance figure.

Does this mean LICs are better than ETFs?

The headline numbers show that the majority of the Australian LICs have outperformed the S&P/ASX 200 benchmark over the long term. This may lead investors to assume LICs are always a better option than ETFs. What the above analysis does not show is the numerous LICs which have been closed down over that period. Presumably at least some of these LICs were closed down due to poor performance. A number of these LICs also rely on one or two key investment managers, whilst they may have performed well over the last 10 years, it does not mean their performance will be repeated over the next 10. As a result investors must draw their own conclusions and always remember past performance does not necessarily predict future results.

Why is the performance of the LICs reported differently by the managers?

This is a question we get asked often at ETF Watch, where the fund performance reported by the managers is different to what is reported by ETF Watch. There can be a number of reasons for this:

  • LICs often report their performance before fees are accounted for which tends to inflate the returns.
  • LICs often report their performance based on the NAV/NTA of the fund rather than the underlying share price.
  • LICs may report their performance inclusive of discounts that apply to dividend reinvestment plans.

What does this all mean?

We started this blog by stating that the performance of the S&P/ASX 200 has gone nowhere in the last 10 years. The analysis has shown that the effect of dividends on total performance must not be forgotten, with even the benchmark fund reporting 5.9%. Australia’s traditional high dividend yield combined with the compounding affect can turn lacklustre headline performance into reasonable total performance. There’s no doubt that some LIC managers have been able to prove their history of outperformance, the question is will the next 10 years see them continue to outperform?

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