My ASX share of the week is MFF Capital Investments Ltd (ASX: MFF).
Quick overview of MFF Capital
MFF Capital is a listed investment company (LIC) which is listed on the ASX. The job of a LIC is to invest in other shares on your behalf. It aims to hold at least 20 shares in its portfolio.
It focuses on companies with attractive business characteristics. In other words, quality businesses.
The businesses it looks to buy must be trading at a discount to their intrinsic value. Meaning, the share has to be trading at good value for MFF Capital to decide to buy.
It mostly invests in overseas shares, but it does own some ASX shares too.
The person at the helm of MFF Capital is Chris Mackay, the co-founder of Magellan Financial Group Ltd (ASX: MFG). He owns more than $183 million of MFF Capital shares, so he’s very aligned with regular shareholders.
How MFF Capital has performed
MFF Capital has been one of the best-performing LICs over the past decade. The ASX share has delivered an average total shareholder return per annum of 17.9% per annum.
For the 2010s MFF Capital was largely invested in US shares. It did very well with shares like MasterCard, Visa, Home Depot, Bank of America, JPMorgan Chase, Alphabet, Lowe’s and HCA Healthcare. It didn’t hold much cash at all during the last decade.
The current assets of MFF Capital
One of the main advantages of LICs is that they can shift their holdings to the best opportunities.
Earlier this year MFF Capital decided to sell many of its positions and significantly increase its cash position as the COVID-19 situation was developing.
At 31 July 2020 MFF Capital’s net cash position was 41.7%. Despite the high cash position, it still has some high-conviction positions. At the end of last month, 17.9% was invested in Visa, 16.5% was invested in MasterCard, 9.6% was invested in Home Depot, 2.4% was invested in CVS Health, 3.7% was invested in Berkshire Hathaway and 2.1% was invested in Microsoft.
The ASX share’s cash position is largely in US dollars, so MFF Capital’s value in Australian dollar terms has been slowly falling since March as the Australian dollar strengthened against the US dollar.
Why I think MFF Capital is a great buy right now
I think there could be a lot more market volatility ahead, particularly as the US election gets closer. A LIC with a large cash position could be a good hedge for whatever happens next. If the market just keeps rising then its equity positions will benefit.
I think it’s a good time to buy things related to the US share market with how much stronger the Australian dollar is at $0.72 today.
There are only a certain number of investment managers that I think can outperform the market over the long-term. Chris Mackay is one of them. The fact that MFF Capital’s costs are fixed is a really useful thing – as the ASX share gets bigger its costs as a percentage of assets should fall.
I also like that MFF Capital is looking to increase the dividends to shareholders. It has a large franking credit balance that has more value in the hands of shareholders, so bigger dividends make sense. The LIC is aiming to increase the rate of six monthly dividends from the current rate of 3 cents per share to 5 cents per share within the next three years.
At the current MFF Capital share price, an annual dividend of $0.10 per share equates to a grossed-up dividend of 5.4%. That’s a solid future dividend yield for the ASX share.
In terms of valuation, the MFF Capital pre-tax net tangible assets (NTA) was $2.74 per share, which is a discount of 3.3% compared to the MFF Capital share price. I’d be happy to buy another parcel of MFF Capital shares today.
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Motley Fool contributor Tristan Harrison owns shares of Magellan Flagship Fund Ltd. 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.