Buying Soul Patts shares? Here's what you're really buying

An investment in Soul Patts shares is really a bet on a sprawling asset portfolio.

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Thinking about buying Washington H. Soul Pattinson and Co Ltd (ASX: SOL)? I wouldn't blame you. I've made no bones in the past about my love of Soul Patts shares.

This ASX 200 investing house remains one of my favourite ASX investments of all time, and one of the largest positions in my Australian shares portfolio to this day.

However, this isn't your typical ASX stock. As such, if you're buying Soul Patts shares, it's very important that you understand exactly what kind of assets you're really buying.

Washington Soul Pattinson is a company that's really closer in structure to a managed fund rather than something like Woolworths Group Ltd (ASX: WOW) or JB Hi-Fi Ltd (ASX: JBH).

That's because instead of producing or manufacturing goods or services to sell to customers as a traditional business does. Soul Patts runs a huge portfolio of other assets on behalf of its investors. Thus, buying a Soul Patts share is really just buying a stake in this underlying portfolio.

But what assets are we talking about here?

Soul Patts divides its investment portfolio into six underlying components, which sit outside the company's 'Net Working Capital' fund for acquisitions and the like. Let's break them all down using the data contained in Soul Patts' annual report from 2023.

What you're really buying when you purchase Soul Patts shares

The first (and largest) is its 'strategic' portfolio. Making up 48% of Soul Patts' overall house, this is where the company keeps track of its significant positions in a handful of other ASX shares.

Some notable examples are a 12.8% stake in TPG Telecom Ltd (ASX: TPG), a 39.2% share of New Hope Corporation Ltd (ASX: NHC), a 43.1% share of Brickworks Ltd (ASX: BKW) and a 36.6% position in Pengana Capital Group Ltd (ASX: PCG).

Next up is Soul Patts' 'Large Cap' portfolio. This is primarily made up of the basket of blue chip shares that Soul Patts acquired when it bought up the listed investment company (LIC) Milton Corporation a few years ago. Today, it accounts for 21% of Soul Patts' investing house.

Then we have the company's 'Private Equity' division. At 11% of Soul Patts' overall portfolio, this is where the company keeps its unlisted company investments, which are typically small, high-growth opportunities.

These are predominantly selected from areas like agriculture, energy transition materials and technologies, and education. Some examples are Soul Patts' investment in Aquatic Achievers swim schools and electrical supply company AMPControl.

Yield and property

The next part of the Soul Patts picture is the company's 'Structured Yield' portfolio. Here, the company invests in "actively managed structured credit investments", which basically involves lending other businesses money. It contributes around 6% to the company's overall investments.

Following that, we move on to the 'Emerging' division. This part of the business is similar to Soul Patts' 'Private Equity' portfolio, except it focuses on companies that are already listed or are in the late stages of preparing for an initial public offering (IPO). It accounts for another 6% of Soul Patts' investing house.

Finally, Soul Patts' last portfolio is 'Property', making up just 1% of its overall investments. Here' Soul Patts owns actively managed direct property investments, as well as joint ventures. It's a small part of the overall picture, but one example is a retirement development that the company is building in Cronulla, Sydney.

So if you're buying Soul Patts shares today, these investments are what you're really purchasing a stake in.

Of course, this inherent diversification and active management is what many investors find so appealing with Soul Patts. After all, this company has proven that it has what it takes to deliver outsized returns over long periods of time.

According to the company's December AGM update, Soul Patts' underlying portfolio delivered an average return of 12.4% per annum (including dividends) over the ten years to 31 July 2023. That rises to 12.5% per annum over 20 years. Over the 12 months to 31 July, the company hit a return of 32.4%.

Motley Fool contributor Sebastian Bowen has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Brickworks and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Jb Hi-Fi and Tpg Telecom. 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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