We’ve often suggested listed investment companies (LICs) as a suitable vehicle to gain instant diversification for an Australian investor’s portfolio, including here. They also have plenty of advantages over managed funds.
What many investors don’t realise is that there are more LICs on the ASX than just Argo Investments Limited (ASX: ARG) and Australian Foundation Investment Co.Ltd (ASX: AFI) – the two largest LICs. According to the ASX, there are currently 65 LICs and Listed investment trusts (LITs).
The great thing for investors is that many of the LICs offer variety in the types of stocks they focus on, their investing strategies vary and in some cases, LICs can take both short and long positions, allowing them to benefit from downward moves as well as normal capital gains.
One example I own shares in is Contango Microcap Ltd (ASX: CTN). Currently sporting a fully-franked dividend yield of more than 8% and investing in smaller stocks with market caps of between $10 million and $350 million on the ASX gives me instant diversification with one security. Since inception in 2004, Contango has produced annualised returns of 16.4% before fees and taxes – well above the All Ordinaries Accumulation Index return of 9.4% (both include dividends).
Here’s a closer look at 5 other LICs which are included in the S&P/ASX 200 (Indexasx: XJO) (ASX: XJO).
Milton Corporation Limited (ASX: MLT)
With a market cap of $2.9 billion, Milton is the third-largest listed LIC on the ASX behind AFIC ($6.7bn) and Argo ($5.3bn). All three sport ultra-low management fees of between 0.12% and 0.18% according to the ASX website. Milton is one of my favoured LICs, thanks to its low cost (0.12% in the year to June 2015), excellent management, a dividend every year since 1958, and returns of more than 10% annually over the past 10 years, beating the 7.8% from the index (both including dividends).
One thing to watch, as with all LICs, is the price compared to the last reported net tangible assets (NTA) per share. Milton had $4.39 in NTA per share at the end of June, below the current share price of $4.56, so investors might want to wait for a better entry price.
Djerriwarrh Investments Limited (ASX: DJW)
Djerriwarrh is one of those special LICs that ‘soup’s up its performance by selling options over part of its investment and trading portfolio, allowing the company to continue paying high dividend yields. Currently paying a 5.5% fully franked dividend yield, which grosses up to 7.9%, Djerriwarrh has paid a dividend yield of more than 5% over the past decade, but performance has suffered, with the LIC portfolio underperforming the S&P/ASX 200 Accumulation index. Another issue is that Djerriwarrh’s shares consistently trade at a premium to its assets. Add in a management fee of more than double the top three (0.39%), and it’s one LIC I’d be avoiding for now.
Diversified United Investment Limited (ASX: DUI) (‘DUIL’)
Diversified United Investment was founded in 1991 and has paid a dividend every year since listing in 1992/1993. The company currently pays a 4% fully franked dividend yield (grosses up to 5.7%) and its latest NTA per share at the end of June 2015 was $3.68. The current share price is $3.50 so is trading at a discount, although falls in July may have removed some of the discount. DUIL has very low operating costs – 0.07% in the latest half year. Interestingly, DUIL also invests in international exchange traded funds (ETFs), giving investors some exposure offshore – important when the Australian dollar has just dropped to its lowest level in six years. DUIL has outperformed the S&P/ASX 300 Accumulation index over the past 10 years, and its one LIC I’d be adding to the watchlist.
Mirrabooka Investments (ASX: MIR)
Like Djerriwarrh, Mirrabooka shares are trading at a massive premium to their underlying net tangible asset (NTA) backing per share. The current price is $2.65 compared to reported NTA of $2.29 at June 30, 2015, so this is no bargain. The good news is that the company has outperformed the S&P/ASX Mid cap 50 and Small Ordinaries Accumulation Indices over the medium to long-term (both including dividends reinvested).
One thing to also research when considering an LIC is to see which companies they invest in. Mirrabooka doesn’t follow the usual path of following a major index and instead invests in a wide variety of medium-sized stocks. Its largest holding at the end of June 2015 was Qube Holdings Ltd (ASX: QUB).
Platinum Capital Limited (ASX: PMC)
Like many other LICs, Platinum trades at a substantial premium to its underlying assets. The main reason for that is its popularity – given the LIC has thrashed its index since inception in 1994. Platinum’s fund has returned 13.3% per annum against the MSCI World Net Index of 6.8%. Platinum Capital invests around the world, with 39% of assets allocated to Asia, 23% to North America and the same to European companies. The LIC can also take short positions to juice up returns in falling markets.
It also helps that renowned fund manager Kerr Neilson is the driving force behind Platinum’s performance, but the price for investors is a 1.5% management fee. All those factors need to be considered before building a stake in Platinum Capital.
This review covers just 5 of the 65 listed investment companies on the ASX. For those looking for a quick and easy way to get into the market and instant diversification, LICs, including the ones mentioned above could be your best bet.
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Motley Fool contributor Mike King owns shares in Contango Microcap. You can follow Mike on Twitter @TMFKinga
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.