Why I think this mid-cap LIC is undervalued

You probably know someone who has a large amount of their share portfolio comprised of our big banks, like Commonwealth Bank of Australia (ASX:CBA) and Westpac Banking Corp (ASX:WBC).

But with the banks struggling lately, many investors are now looking to diversify their portfolio to benefit from smaller and mid-sized companies which have better growth prospects.

There’s a few ways to get exposure to a group of businesses outside the top 20. Here’s one of my favourites…

QV Equities Ltd (ASX:QVE)

This is a listed investment company which holds a group of close to 50 stocks, outside the top 20.

It’s managed by Investors Mutual (IML), who have successfully run several market-beating managed funds for the last 20 years, with lower volatility than the index. The manager focuses on good quality industrial companies from a group of sectors, meaning it avoids unpredictable resource shares.

So why is it undervalued?

Well, you’ve probably noticed the mining sector has been running red hot over the last couple of years. This has resulted in QVE underperforming the benchmark, as most resource companies (many of them speculative) have been bid up by the market.

Given the manager also has a value focus, they ignore the market-darling high PE stocks, and instead focus on finding more reliable growth at a reasonable price.

Since listing 4 years ago, QVE has returned 9.8% per annum after fees, before franking. While the ex-20 benchmark has returned 11.9% per annum, before fees and franking. The management expense ratio for this LIC is 0.99% which scales down as it grows, which is pretty reasonable compared to many other managers in the mid/small-cap space.

As with IML’s managed funds, they tend to underperform when resources are booming, but hold up much better in a downturn and have outperformed over more meaningful time periods. I think it’s likely this also happens with QVE, though if it doesn’t beat the market, I’m still happier with this exposure and dividend growth focus.

Recent results

QVE announced its results last week and it was a pleasing report. The company declared a 5% increase in the dividend, along with a fully franked special dividend to be paid in addition.

The dividend has increased every year since listing and is a key focus for the manager.

Currently QVE trades at a discount to NTA of around 5%, likely due to the recent underperformance.

Foolish takeaway

I’m happy to continue scooping up shares at this price to take advantage of other investor’s lack of conviction or short-sightedness.

The company’s investing philosophy fits exactly with my own –  a strong focus on companies with growing dividends and the QVE portfolio also holds many stocks with global operations.

I believe the focus on quality names purchased at reasonable multiples will translate into solid long term returns, while providing an increasing stream of fully franked dividends.

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Motley Fool contributor Dave Gow owns shares of QV Equities Limited. 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 Scott Phillips.

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