My ASX share pick for the week is listed investment company (LIC) MFF Capital Investments Ltd (ASX: MFF).
Overview of MFF Capital
The job of a LIC is to invest in other shares on behalf of shareholders. Some LICs target large cap ASX shares. Some LICs target smaller businesses on the ASX. There are LICs that invest in global shares. LICs can have the flexibility to invest in anything in the world.
MFF Capital invests in quality global shares at prices that make sense.
It’s run by portfolio manager Chris Mackay who was the co-founder of funds management business Magellan Financial Group Ltd (ASX: MFG).
The ASX share has been operating for over a decade and it has been one of the best-performing LICs since the GFC.
Over the past 10 years it has made average shareholder returns per annum of 17.4% according to CMC. That includes the recent sell off due to COVID-19. I think that’s very strong returns considering MFF Capital hasn’t been strongly leveraged to the share market recovery over the past few months.
The reason why MFF Capital hasn’t strongly bounced back over the past few months like other shares is that it’s holding a large cash position at the moment. MFF Capital sold some of its shares and now it has a net cash position of 44% at the end of June 2020.
The ASX share’s cash is largely in US dollars, at 30 June 2020 it had 39.5% of net assets as cash in US dollars.
Obviously holding cash has been a drag on performance in recent months because various international shares have shot higher. Also, the Australian dollar has strengthened against the US dollar, hurting ‘returns’ of US cash in Australian dollar terms.
The global economy is (slowly) opening and all of the economic stimulus has really helped shares recover.
But I think having a high amount of cash will serve MFF Capital well this year. COVID-19 infection numbers are growing at an alarming rate in the US and New South Wales seems to have a growing number of cases from a pub. The upcoming US election could also cause a lot of uncertainty for the share market. There is a lot of uncertainty that could bite later this year.
It doesn’t make sense to hold cash for the long-term. Quality businesses will generate better returns than cash over the long-term. In the June 2020 update, MFF Capital acknowledged that it wants to put cash to work, it just needs to be at the right valuation.
I think the cash gives the ASX share great optionality for whatever comes next. The next couple of months will be very important as stimulus and support tapers off.
Whilst it does have a large cash position it still owns quality shares. It has two very large positions – Visa and MasterCard, the two global giants of the payment world. At the end of June, 18.5% of the portfolio was invested in Visa shares and 16% was invested in MasterCard shares. That means more than a third is invested in these two quality picks.
At the moment the only other large position is Home Depot at 9.2% of the portfolio.
These three picks are quality businesses which should be able to make good long-term returns.
It does actually own some ASX shares at the moment. It’s invested in some listed investment trusts (LITs) and companies (LITs). Two of those investments are Magellan High Conviction Trust (ASX: MHH) and Magellan Global Trust (ASX: MGG). These ASX shares invest in global shares and they’re trading at discounts to their net asset values (NAV).
I think all of the share positions I’ve mentioned have the potential to beat the market over the long-term.
At the current MFF Capital share price it’s trading at a 5% discount to the pre-tax net tangible assets (NTA) per share of $2.804 at 3 July 2020. I think it’s worth a long-term buy at the current share price, particularly under Mr Mackay’s stewardship.
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Motley Fool contributor Tristan Harrison owns shares of Magellan Flagship Fund Ltd and MAGLOBTRST UNITS. 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.