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The Best LICs On The Market

The Best LICs On The Market

By Tony Featherstone 02.04.2013


Finding value in Listed Investment Companies is becoming harder. After strong gains in the past 12 months, the LIC sector is trading at almost parity to its net tangible assets (NTA). The big discounts that plagued the sector in recent years have rapidly narrowed.

The sector traded at an average 2.87 per cent discount to its pre-tax NTA (weighted for market capitalisation) at the end of February, Australian Securities Exchange data shows. In January, the sector traded at a slight premium as the sharemarket rally boosted demand for LICs.

That is a remarkable turnaround for a sector that traded at a whopping 21 per cent average discount to its pre-tax NTA in February 2009 as the GFC flared. Persistent large discounts to NTA are a turn-off, because they suggest the market values the LIC at less than its assets are worth.

But big discounts, in the right LICs, can provide an attractive entry point for shareholders who are able to buy an LIC for, say, 80 cents a share, when its assets are worth $1 a share. LICs often trade at discount if the market is concerned about their investment performance, management, or ability to pay consistent dividends – of if weak market conditions reduce demand for their shares.

Investors who bought LICs last year have generally enjoyed solid gains. The sector traded at a 7.4 per cent discount to its pre-tax NTA in January 2012. The sharemarket rally in the second half of last year and the narrowing of discounts have given LIC investors a double boost.

The combined market capitalisation of LICs rose 28 per cent to $20 billion in the year to February 2013, and the average monthly value of those traded gained 20 per cent, according to ASX.

Greater interest in dividends and the sharemarket rally have helped LICs return to favour. Upcoming financial planning reforms will even the playing field between LICs and unit trusts by removing trailing commissions, and several LICs have raised more money this year than they original sought.

Placements by WAM Capital, Cadence Capital and Australian Leaders Fund have been heavily oversubscribed in the past 12 months.

That is a good story, but what matters most is how much of the improving outlook for LICs is already captured in the price. Two reports released in March have important insights of valuations within the LIC sector and the best opportunities for prospective investors.

Patersons’ excellent quantitative research on 30 LICs found most were trading at premiums to their historical price to NTA levels, except for Argo Investments, Milton Corporation, Diversified United Investments, Australian United Investments, and AMP Capital China.

WAM Capital, Clime Capital, Carlton Investments and Westoz are the most attractive LICs, based on analysis of price to NTA and long-term NTA growth rates, Patersons found. The report said: “Carlton Investments, and Westoz offer the best value … WAM and Westoz have the highest dividend yield at around 7.1 per cent and 7.6 per cent, fully franked, respectively.”

Aberdeen Leaders, Djerriwarrh, Mirrabook, Australian Leaders Fund and Magellan Flagship appeared most expensive, Patersons said.

Its research found the average dividend yield for LICs had fallen from 7.8 per cent (on a grossed-up basis) to 6.5 per cent over the past three months. The highest-yielding LICs, based on distribution trends, were Australian Leaders Fund, Westoz, Aberdeen Leaders, and WAM Capital. The largest LICs, in particular, are sought for their record of steady, reliable fully franked dividends.

Yield compression is not unique to the LIC sector. Popular income stocks, such as Telstra and the big four banks, now offer lower dividend yields after their sharp share price gains over 12 months. The LIC sector’s average 7.8 yield stacks up well against big-income stocks and comes with better diversification.

Independent Investment Research’s December quarterly LICs review, released last month, also found a sharp narrowing of value in the LIC sector. It said: “The sector garnered support in recent months, with a number of companies being re-rated by the market. The value on offer by some (LICs) has been recognised, which has resulted in a reduction of discounts … 85 per cent of the LICs covered in this review experienced a narrowing in the discount or expansion in the premium to pre-tax NTA over the December quarter.”

It found the top five performers for the December 2012 quarter, as calculated by pre-tax NTA plus dividends, were Australian Leaders funds, Whitefield, Argo, Diversified United and Milton Corporation.

Independent Investment Research has only one Highly Recommended rating (its top rating) on an LIC – Australian Leaders Funds. WAM Capital, Clime Capital and Whitefield were among several that received Recommended Plus ratings (the second highest).

 

Click on the links below to read other articles from this week's newsletter

10 Big Stocks Bets From Award-Winning Fund       

18 Share Tips - 2 April 2013

Trader's Toolkit - Simple Moving Average (SMA)

How Resource Limits Lead to Financial Collapse

Using Feedback To Improve Your Trading

Newsroom cuts a boon for PR but a turnoff for readers

Top 10 shorted stocks

Stock on the slide: ASX rolling 52-week highs

Stock on the slide: ASX rolling 52-week lows

Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at Feb 14, 2013. The author implies no stock recommendations from the above commentary. Readers should do further research or talk to their financial adviser before acting on themes in this article.



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WHAT’S ON THIS WEEK

week 28 November 2014
    • 24
    • BHP BHP Billiton briefing on its coal and copper businesses | 8:49 AM
    • Deloitte/Financial Services Council lunch David Murray, chair of the Financial System Inquiry, speaking at a Deloitte/Financial Services Council lunch | 8:50 AM
    • 25
    • AllianceBernstein economist Guy Bruten Briefing on Australian economy in 2015 by AllianceBernstein economist Guy Bruten | 4:23 AM
    • AOFM Australian Office of Financial Management (AOFM) to issue $200 million of February 21, 2022 Treasury Indexed Bonds | 4:25 AM
    • Australian British Chamber of Commerce lunch Helen Conway, director of Workplace Gender Equality Agency, speaking at Australian British Chamber of Commerce lunch | 5:42 AM
    • CEDA CEDA workplace flexibility event featuring PwC managing partner Gavin Moss | 6:46 AM
    • RBA Speech by Reserve Bank of Australia deputy governor Philip Lowe to the annual Australian Business Economists conference dinner | 8:48 AM
    • HVN Harvey Norman annual general meeting | 8:48 AM
    • MPL Medibank Private shares to begin trading on ASX | 8:48 AM
    • ALL Aristocrat Leisure full year results | 8:49 AM
    • ANZ ANZ-Roy Morgan weekly consumer confidence survey | 8:49 AM
    • BKN Brickworks annual general meeting | 8:50 AM
    • MSB Mesoblast annual general meeting | 8:51 AM
    • RFG Retail Food Group annual general meeting | 8:51 AM
    • 26
    • AOFM AOFM to issue $700 million of April 21, 2024 Treasury Bonds | 2:19 AM
    • ABS Australian Bureau of Statistics construction work done for September quarter | 4:25 AM
    • HIA Housing Industry Association/Commonwealth Bank affordability report for the September quarter | 4:27 AM
    • CAB Cabcharge annual general meeting | 5:22 AM
    • WEB Webjet annual general meeting | 5:22 AM
    • SUN Suncorp chief executive Patrick Snowball speaking at Australian British Chamber of Commerce lunch | 5:22 AM
    • AVG Australian Vintage annual general meeting | 6:08 AM
    • REX Regional Express annual general meeting | 6:09 AM
    • 27
    • AOFM AOFM to issue $500 million of Treasury Notes maturing on Febrary 27,2015 | 4:05 AM
    • ABS ABS private new capital expenditure and expected expenditure for the September quarter | 4:24 AM
    • HIA HIA new home sales for October | 4:27 AM
    • WOW Woolworths annual general meeting | 4:28 AM
    • CBA Commonwealth Bank business sales indicator for October | 4:28 AM
    • BOQ Bank of Queensland annual general meeting | 5:20 AM
    • SEK SEEK annual general meeting | 5:21 AM
    • MYX Mayne Pharma Group annual general meeting | 5:23 AM
    • BPT Beach Energy annual general meeting | 5:23 AM
    • FeTech magnetite and iron ore conference FeTech magnetite and iron ore conference | 5:41 AM
    • 28
    • RBA RBA to release financial aggregates for October | 4:26 AM
    • LYC Lynas Corp annual general meeting | 4:27 AM
    • MEL Metgasco annual general meeting | 4:28 AM
    • PRY Primary Health Care annual general meeting | 4:28 AM
    • RRL Regis Resources annual general meeting | 4:29 AM
    • AHF Australian Dairy Farms annual general meeting | 6:07 AM
    • AOFM AOFM to issue $500 million of October 21, 2019 Treasury Bonds | 6:09 AM
    • FeTech magnetite and iron ore conference FeTech magnetite and iron ore conference | 6:09 AM

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