I think listed investment companies (LIC) can be a really good way to make good long-termtotal returns if you find good investment managers.
The job of a LIC is to invest in other shares on behalf of shareholders. If they make good investment returns then it should lead to good growth of the share price and usually attractive dividends.
Fees are part of the picture. The higher the fees that the LIC charges, the more that detracts from the LIC’s net returns.
There is a complication to consider with LICs. They sometimes trade at a premium to their net tangible asset (NTA) value and sometimes they trade at a discount. That means you can buy $1 of assets for $0.90 if the NTA discount was 10%. Sometimes LICs trade at a premium, so the $1 of assets could cost $1.10. But the best LICs could be worth paying a premium for.
With that in mind, here are two LICs that could be good for strong total returns:
MFF Capital Investments Ltd (ASX: MFF)
MFF Capital is a LIC that focuses on international shares. It’s run by Chris Mackay, the co-founder of Magellan Financial Group Ltd (ASX: MFG). He owns around $200 million of MFF Capital shares, so he’s very aligned with the regular shareholders.
According to CMC, over the past decade it has delivered total shareholder returns (TSR) of an average of 17.5% per annum, making it one of the best-performing LICs out there.
I think that long-term performance could continue with some of its current holdings. Looking at its positions worth more than 1%, it owns businesses like Visa, MasterCard, Home Depot, CVS Health, Facebook, Berkshire Hathaway, Microsoft, CK Hutchison, Flutter Entertainment, L’Oreal and JP Morgan Chase.
Aside from investing in great businesses, another reason to like MFF Capital is that it has low costs. Its fees are fixed, which means as it gets bigger it will cost even less as a percentage of assets.
The board has provided guidance that MFF Capital is going to increase its half-yearly dividend to 5 cents per share. An annual dividend of 10 cents per share would equate to a grossed-up dividend yield of 5.5% at today’s MFF Capital share price.
WAM Microcap Limited (ASX: WMI)
WAM Microcap is a LIC that targets ASX shares with market capitalisations under $300 million at the time of acquisition. This is the area of the market where investors can unearth some hidden gems if they look hard enough.
The Wilson Asset Management team have done very well at finding undervalued growth companies. Since inception in June 2017, WAM Microcap’s portfolio has delivered average annual returns per annum of 21.2%, before fees, expenses and taxes. This has been a great performance, which includes the COVID-19 period.
The LIC has been rewarding shareholders with special dividends in each financial year since FY18. FY20 saw total dividends of 9 cents per share declared for investors. That represents a big dividend return in one year.
Some of the small caps that it owned at the end of September 2020 included Redbubble Ltd (ASX: RBL), Baby Bunting Group Ltd (ASX: BBN), Temple & Webster Group Ltd (ASX: TPW), Macquarie Telecom Group Ltd. (ASX: MAQ) and City Chic Collective Ltd (ASX: CCX).
At the current WAM Microcap share price it offers a grossed-up ordinary dividend yield of 5.4%. That’s a solid starting yield and it could be boosted by regular special dividends if the strong performance keeps coming.
I believe that both of these LICs are capable of continuing to produce strong returns over the coming years. At the current prices I’d probably go for MFF Capital for the international exposure and NTA discount.
ASX small caps have had a really strong run over the last six months and the WAM Microcap share price now appears to be trading at a premium to its NTA. Though I must admit that WAM Microcap is one of the biggest positions in my portfolio, so it’s not as though I’m pessimistic about it at this price.
But I’m also looking at other share opportunities at the moment.
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Returns As of 6th October 2020
Tristan Harrison owns shares of Magellan Flagship Fund Ltd and WAM MICRO FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Temple & Webster Group Ltd. The Motley Fool Australia has recommended Temple & Webster Group Ltd. 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.