Listed Investment Companies (LICs)

Transcription

1 Listed Investment Companies (LICs) SECTOR REPORT STOCKS COVERED IN THIS REPORT Company Page Acorn Capital Investment Fund (ACQ) 4 Australian Foundation Inv. Co. (AFI) 12 AMP Capital China Growth Fund (AGF) 13 Australian Leaders Fund (ALF) 14 Aberdeen Leaders Fund (ALR) 15 AMCIL (AMH) 16 Argo Investments (ARG) 17 Australian United Inv. Co. (AUI) 18 BKI Investment Company (BKI) 19 Clime Capital Limited (CAM) 2 Cadence Capital (CDM) 21 Carlton Investments (CIN) 22 Century Australia Investments (CYA) 23 Contango Microcap (CTN) 24 Diversified United Investments (DUI) 25 Djerriwarrh Investments (DJW) 26 Hunter Hall Global Value (HHV) 27 Ironbark Capital (IBC) 28 ING Private Equity Access (IPE) 29 Lion Selection (LSX) 3 Magellan Flagship Fund (MFF) 31 Milton Corporation (MLT) 32 Mirrabooka Investments (MIR) 33 OZ Growth (OZG) 34 Platinum Capital (PMC) 35 Templeton Global Growth (TGG) 36 WAM Capital (WAM) 37 WAM Research (WAX) 38 Whitefield (WHF) 39 Westoz (WIC) 4 Watermark Market Neutral Fund (WMK) 41 Appendix Premium/(Discount) to pre-tax NTA 42 Premium/(Discount) to post-tax NTA 42 Total shareholder return 6 months 43 Total shareholder return 12 months 43 TSR compound annual growth 3 yrs 44 TSR compound annual growth 5 yrs 44 NTA growth 1 yr 45 5NTA compound annual growth 3 yrs 45 NTA compound annual growth 5 yrs 46 NTA compound annual growth yrs 46 RESEARCH ANALYST Josh Kannourakis jkannourakis@baillieuholst.com.au March 214 Performance Review The All Ordinaries Accumulation Index (XAOAI) returned 13.2% in the 12 months to 31 March 214 whilst the MSCI World Index*, a benchmark for LICs with an international focus, returned 33.9% as global equity markets regained confidence and the Australian dollar depreciated 11%. Our domestic LICs continued to outperform the market in the 12 months to 31 March 214 with an average active return (relative performance) of 3.2%. However, once again the globally focused LICs were the strongest performers. The top three performers in the sector outperformed benchmarks by 16.6% and the group outperformed its benchmark by an average of 6.2%. Large capitalisation domestic Australian United Investment Co. (AUI) was the strongest performer over the past 12 months with a total shareholder return (TSR) of 18.8% and an active return of 5.7%. Milton Corporation (MLT) and Djerriwarrh (DJW) were also strong with TSRs of 16.6% and 16.5%, and active returns of 3.4% and 3.3% respectively. Australian United Investment Co. (AUI) was at the largest discount to net tangible assets (NTA pre-tax**) at 6.2%. Milton Corporation (MLT) was also notable at a 2.1% discount. Djerriwarrh (DJW) continues to trade at a significant 21.4% premium to NTA (pre-tax**). DJW also has the highest dividend yield at 5.8% fully franked. Small capitalisation domestic WAM Capital (WAM) and Australian Leaders Fund (ALF) were the strongest performers over the past 12 months with TSRs of 26.7% and 26.6% and active returns of 13.5% and 13.4% respectively. Carlton Investments (CIN) also performed strongly with a TSR of 24.6% and active return of 11.4%. OZ Growth (OZG) had the largest discount to NTA (pre-tax**) at 16.3%. Contango Microcap (CTN) was notable with a discount of approximately 16.1%. MIR continues to trade at a notable premium to its peers at 17.2%. Aberdeen Leaders Fund (ALR) and OZ Growth (OZG) had the highest fully franked dividend yields at.% and 8.8% respectively. AMCIL (AMH) and Westoz (WIC) were also notable, trading on dividend yields of 8.6% and 8.5% fully franked. CTN was trading on a yield of 7.8% on a partially franked basis. Global Templeton Global Growth (TGG) was the standout performer over the past 12 months with a TSR of 54.7% and an active return of 2.8%. Platinum Capital (PMC) also performed strongly with a TSR of 51.3 and an active return of 17.5%. AMP Capital China Growth Fund (AGF) was at the largest discount to NTA (pre-tax**) at.7%. Hunter Hall Global Value (HHV) was also notable at a.1% discount. PMC had the highest dividend yield over the past 12 months at 4.4% fully franked. *A$ adjusted, **Pre-tax NTA refers to net tangible assets after tax paid but before tax on unrealised gains Disclaimer: LIC performance measurements reflect performance after all operating expenses and taxation. Using index benchmarks often understates performance as the indices used are before all operating expenses and tax. Total Shareholder Returns are often negatively impacted by capital events such as options, DRPs, Share Purchase Plans and placements. Dividend yields contained within are historical and are not an indication of future dividend payments. Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 1

2 LIC Sector Update The narrowing of share price discounts to NTA over the past three years has provided LIC shareholders with supplementary returns above the underlying performance of the portfolio. Over the past quarter we have observed, on average, modest reductions in premiums and expansions in discounts to NTAs in line with softer, broader market sentiment. It is our view that the excess returns achieved over the past three years from such narrowing of discounts and expanding of premiums to NTA is unlikely to continue over the next 12 months. However, we do continue to favour the LIC structure as a core component in establishing diversification of equity asset allocation. A number of LICs and unlisted fund managers have capitalised on this unprecedented level of investor interest in the sector by successfully raising capital or establishing new LICs over the past 12 months. A key theme over this period has been geographic diversification and many of our international LICs have exhibited outstanding performance. We continue to recommend our international LICs to provide investors with the necessary geographic diversification for their portfolios. FIG.1 provides a comparison snap shot of the variance in discounts and premiums to NTAs in March 214 versus the averages over three and ten years. When choosing our preferred LIC exposures we compare the current discount and premium with the long term averages to assess whether the current market valuations provide an attractive entry point. In addition, we focus on quality of management, medium and long term performance and propensity to pay out fully franked dividends. FIG.1: MARCH 214 PREMIUMS/ (DISCOUNTS) TO NTA VERSUS HISTORICAL AVERAGES Large Capitalisation Small Capitalisation Domestic International Specialist 35% 25% 15% 5% -5% -15% -25% -35% AFI ARG AUI BKI DJW MLT ALF ALR AMH CAM CDM CIN CTN CYA DUI IBC MIR OZG WAM WAX WIC WHF WMK AGF HHV MFF PMC TGG IPE LSX March 3yr Average yr Average Source: Baillieu, Bloomberg, company reports. Australian Foundation Investment Co. (AFI), Australian United Investments Co. (AUI), Argo Investments (ARG), Djerriwarrh Investments (DJW), Milton Corp. (MLT), Australian Leaders Fund (ALF), Aberdeen Leaders(ALR), AMCIL (AMH), BKI Investment Co. (BKI), Clime Capital Ltd (CAM), Cadence Capital (CDM), Carlton Investments (CIN), Contango Microcap (CTN), Century Australia Investments (CYA), Diversified United Investments (DUI), Ironbark Capital (IBC), Mirrabooka Investments (MIR), Oz Growth (OZG), WAM Capital (WAM), WAM Research (WAX), Westoz Investment Company (WIC), Whitefield (WHF), AMP China Growth (AGF), Hunter Hall Global Value (HHV), Magellan Flagship Fund (MFF), Platinum Capital (PMC), Templeton Global Growth (TGG), ING Private Equity Access (IPE), Lion Selection (LSX) Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 2

3 FIG.2: OVERVIEW OF LISTED INVESTMENT COMPANIES COVERAGE BY SECTOR Source: IRESS, Baillieu Holst, Company reports Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 3

4 The Acorn Capital Investment Fund (ACIF) About: The Acorn Capital Investment Fund (ACIF) is a new and unique addition to our Listed Investment Company (LIC) coverage universe. It listed on the ASX on May 1 st 214 under the code ACQ. ACIF will invest in Australian Stock Exchange (ASX) listed companies outside the top 25 by market capitalisation and unlisted opportunities if they are evaluated to be more attractive than listed opportunities. Acorn Capital: Acorn Capital was established in 1998 and is Australia s first and largest specialist microcap investment manager with $1.1 billion in funds under management (FUM). The investment team comprises 2 professional staff with an average of 2 years experience. Management is supported by a highly experienced Board, chaired by Professor Bob Officer. Acorn s current funds under management are principally institutional investment mandates and have been closed to net new investment since 23. The ACIF opportunity will allow non-institutional investors access to Acorn s unique investment approach, with regard to listed and unlisted microcap opportunities, for the first time. FIG.3: SNAPSHOT Share price code ACQ Option code ACQO Share Price ($).925 Price ($).3 Market Capitalisation ($m) $5.8 Exercise Price 1. NAV per share on listing.978 Expiry date 24-Oct-15 Estimated discount to NAV -5% Management Expense Ratio.95% Baillieu Holst Ltd acted as Underwriter for The Acorn Capital Investment Fund and earned fees in relation to that activity in the past 12 months. In line with the company s internal compliance guidelines, our investment recommendation is restricted. Source: Iress, ACIF Prospectus, Baillieu Holst The Microcap Market Definition: The listed microcap market consists of ASX listed companies ranked outside of the top 25 by market capitalisation (<$4m), often classified as small cap or microcap stocks. The unlisted microcap market is vast and consists of unlisted public and private companies. FIG.4: LARGE CAP VERSUS SMALL CAP PERFORMANCE: YEAR TOTAL RETURN Mind the gap Apr 4 3 Apr 5 3 Apr 6 3 Apr 7 3 Apr 8 3 Apr 9 3 Apr 3 Apr 11 3 Apr 12 3 Apr 13 3 Apr 14 Small Ordinaries Accumulation Index ASX 2 Accumulation Index Source: Iress, Baillieu Holst Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 4

5 Performance attribution: The graph below illustrates the recent underperformance of the listed microcap market versus its large capitalisation peers. The divergence in performance is the most significant since the inception of the ASX 2 (XJO) and Small Ordinaries (XSO) in This is largely attributed to the performance of large capitalisation financials versus the small capitalisation resource sectors. Large capitalisation financials account for 45% of the ASX 2 and increased 56.1% in the two years to 31 March 214 with investors seeking yield as deposit rates diminished. Conversely, the Small Ordinaries index suffered as the Small Resources Index (XSR) fell 56.3% over the same period. The materials sector still accounts for 18% of the index. The opportunity: The microcap segment exhibits inefficient market characteristics relative to the large capitalisation universe. Namely, the market has less information flow, is underresearched and consists of a greater number of stocks. These characteristics often result in pricing inefficiencies that offer experienced microcap investors, such as Acorn, opportunities to generate investment outperformance or alpha. Within the LIC universe, Contango Microcap (CTN) is the only other pure microcap exposure. It is our view that the relative underperformance of the microcap segment over the past two years provides a unique opportunity to capitalise on attractive market valuations within the microcap space. ACIF Investment Overview Objectives: ACIF seeks to utilise Acorn s resources and experience as a microcap investment specialist with an aim to: - Create a diversified microcap portfolio representing the best opportunities on a risk adjusted basis across both listed and unlisted markets. - Deliver outperformance above returns from the Small Ordinaries Index. Value proposition to investors: The ACIF provides investors with two core value propositions, in our view. - Diversification to a large and less efficient universe of listed and unlisted microcap companies. - Access to Acorn s extensive team of expert sector-specialist stock pickers and increased breadth of investment opportunities from Acorn s strong positioning within the listed and unlisted microcap investment universe. FIG.5: INVESTMENT DECISION STRUCTURE Source: Company Reports Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 5

6 Investment philosophy and strategy: A key point of differentiation between Acorn Capital and many other investment managers is its approach to portfolio strategy, namely: - Sector neutrality: This means the manager does not take economic sector bets and thus sector weightings, which includes both listed and unlisted investments, will closely reflect the relevant benchmark (+/-5%). This approach is based on the investment philosophy that over long-term investment horizons managers cannot consistently, accurately predict which sectors will outperform or underperform. - Research-driven selection: Specific members the investment team carry out portfolio management and analysis of assigned sectors. - Diversification: The portfolio will target 6-8 stocks to reduce the inherent volatility in the microcap segment. The manager can invest a maximum of 7.5% of the portfolio in any one company. - Full investment: The manager will not take material asset allocation bets and seeks to be fully invested at all times. - Style neutrality: The manager seeks to avoid style bias by not focusing on either a growth or value investment emphasis. Investment process: The investment process for ACIF seeks to implement Acorn s aforementioned investment philosophy and strategy whilst combining its listed and unlisted (private markets) resources to source the most attractive relative sector opportunities. Unlisted opportunities are assessed based on their relative attractiveness compared to the listed equities portfolio. Unlisted opportunities are selected only if they are perceived to be more attractive than listed opportunities. This aims to broaden the scope of investable opportunities, thus providing a greater source of alpha and portfolio diversification. It is worth noting that Acorn is a low turnover investment manager with 2-25% annual turnover compared to many of its microcap manager peers that exhibit annual turnover ~ 8%. Private markets (unlisted): The unlisted investment strategy is an extension of Acorn s long-only strategy. It leverages off Acorn s robust research experience in the listed microcap market and its specialist unlisted team which complements the research function through its strengths in deal sourcing, structuring and exit strategies. Key takeaways: - Not private equity: Acorn s unlisted investments should not be confused for a private equity investment. Unlisted investments will be minority stakes and thus the manager allows greater diversification, albeit whilst sacrificing control. Unlisted opportunities are selected only if they are perceived to be more attractive than listed opportunities. This aims to broaden the scope of investable opportunities, thus providing a greater source of alpha and portfolio diversification. - Higher expected returns: Shareholder returns are expected to be higher than those achieved by Acorn s listed-only strategy due to the greater relative inefficiencies within unlisted investments, such as liquidity premiums and increased informational asymmetries. This is evidenced by the performance of Acorn s listed only composite against the portfolio to date (FIG.5). Yield and investment horizon: Given the nature of unlisted investments, we would not expect a dividend to be paid within the first three years of investment. The unlisted portfolio will likely take up to three years until full investment and desired returns would require an investment horizon of around five years. Performance: The Existing Strategy portfolio has outperformed its relevant small cap benchmarks over all periods to date and the broader market since its inception. Despite the lack of track record for the Existing Strategy portfolio (i.e. less than five years), Acorn Capital s listed long-only microcap funds has an enviable track record. The Acorn Capital Wholesale Microcap fund, which reflects the listed equity component of the ACIF portfolio, has returned 11.2% p.a. after fees and expenses, thus outperforming its benchmark by 5% p.a. since its inception 12.5 years ago. Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 6

7 FIG.6: PERFORMANCE TO 31 JANUARY 214 (PRE-FEES AND TAXES) Item 1 year return 2 year return p.a. 3 year return p.a. Since inception p.a. Total return since inception Existing strategy (listed and unlisted portfolio) 3.9%.6% -3.1% 24.9% 2.9% SIRCA Microcap Accumulation Index -5.7% -2.5% -7.3% 14.1% 91.8% S&P/ASX Small Ordinaries Accumulation Index -7.4% -2.3% -6.2% 9.2% 54.4% All Ordinaries Accumulation Index.7% 14.6% 7.% 13.7% 88.7% Existing Strategy Versus Benchmark (Small Ords.) 11.3% 2.9% 3.% 15.8% 146.5% Source: Iress, Company Prospectus Note: Existing Strategy inception was February 29 (~4.5 years) Fee structure: The base management fee or Management Expense Ratio (MER) will be.95% p.a. plus a performance fee of 2% of benchmark outperformance above the Small Ordinaries Accumulation Index (XSO). The performance fee is only payable when outperformance is above the high watermark. This is in line with other active managers within the listed investment company universe. - Unique fee claw back arrangement: Importantly, the fee structure contains a claw back arrangement which is unique to the sector. This means 5% of performance fees are at risk from 214 to 216 and will be returned to shareholders if outperformance is not achieved. Risks: Investing in the listed and unlisted microcap market contains some heightened risks relative to investing in large capitalisation LICs, which generally hold ASX 2 companies. Core risks to microcap investment are as follows: - Liquidity: Microcap stocks and unlisted investments have lower liquidity than larger capitalisation investments. Therefore realising and exiting investments is a risk within both the listed and unlisted microcap space. - Governance: Governance risks are more pronounced within the unlisted space due to, on average, greater informational asymmetry between management and stakeholders. Acorn has a highly experienced board and importantly three out of the five directors are independent. FIG.7: BOARD OF DIRECTORS Name Position Biography John Steven Judith Smith David Trude Chairman and Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director John is the non-executive Chairman of ACIF. He is the head of the National Corporate Division and a member of the National Board of Minter Ellison. He practises in the corporate and capital markets area and also has an extensive general corporate practice. B.Ec, LLB (Hons), DipComLaw Judith was formerly the Head of Private Equity at IFM Investors and Chair of the IFM Risk Committee. Judith was also a member of the IFM Investments Committee. She also held various investment management roles including more than a decade at National Mutual Funds Management. B.Ec (Hons), M.AppFin David is a senior corporate banking executive with 4 years experience in a variety of financial services roles in the banking and securities industries. He is the Chairman of Baillieu Holst. David was formerly Managing Director, Australian CEO of Credit Suisse, where he is currently a Consultant. He currently holds several other board positions. Robert Brown Director Robert is an independent director of Acorn Capital and is Chairman of its subsidiary Australian Microcap Investments Pty Ltd. He is a professor of finance in the Department of Finance, University of Melbourne, where his research has focused on security market behaviour. B.Ec (Hons), M.Ec, GradDipAcc, FCPA, SF Fin Barry Fairley Director Barry is Acorn Capital s Managing Director. He founded Acorn Capital in 1998 and has more than 4 years of investment experience. Dip of Mining Engineering, SA Fin Source: Company Reports Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 7

8 LIC Basics What is a LIC? A LIC has characteristics of both managed funds and stock exchange-listed companies. Essentially a LIC is a company that invests in other companies, with the purpose of giving its shareholders exposure to a variety of shares via its investment portfolio. LICs may also invest in cash or fixed income instruments, although in many cases this will form only a relatively small proportion of their investment portfolio. Income from LICs takes the form of semi-annual dividend payments that are linked to the profitability of the portfolio. Capital gains can arise where the investor sells the shares in the LIC for more than they originally bought them for. Benefits of investing in LICs Diversification Investment in just one LIC can potentially give an investor exposure to more than different companies in a range of industries. This therefore reduces the risk to capital losses as losses connected to one company may be offset by gains by others in the portfolio. A LIC is a cost-effective method of achieving such a degree of diversification. LICs are managed by investment professionals Each LIC is managed by full-time investment professionals whose goal it is to optimise returns on the investment portfolio for shareholders within strictly enforced risk parameters. In this respect, LICs are passive investments. Once the shares in the LIC have been purchased, the investor leaves investment decisions to the managers of the LIC. Some LICs have operated for more than 5 years while others, although only recently listed, are operated and managed by investment firms that have built strong reputations over many years. Transparent investment philosophy All LICs are transparent as to how they invest their funds. Investors can choose the relevant LIC based on their own investment goals and risk preferences. Some LICs focus on specific geographic areas (such as Australia or overseas), may invest in a range of industries or focus on just one (such as resources), or are geared towards providing investors with annual income streams or longer-term capital gains (or a combination of both). In this document, we briefly describe each of the 2 selected LICs as well as list the main investments of each and their recent performance. Ease of investment Investing in a LIC is done in exactly the same manner as any other company on the ASX, by placing an order with your stockbroker to buy shares in it. Exiting the investment is just as straightforward: the investor sells the shares on-market during trading hours through their stockbroker. The majority of LICs are highly liquid, meaning that there are a relatively large number of willing buyers and sellers on the ASX ready to allow the investor to enter or exit the investment at any time they want and without having to buy in at a premium or sell at a discount to market price. Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 8

9 Costs involved in investing in a LIC Entry costs Investing in the ASX via a LIC is highly cost-effective relative to other methods of investing in a portfolio of investments. The initial cost comes in the form of brokerage paid to acquire the shares. Investing in a LIC allows the investor to effectively buy shares in more than 5 companies (depending on the LIC), but only pay brokerage to invest in one (the LIC). A LIC is therefore an efficient method of diversification. The entry costs to LIC investments are generally lower than retail managed funds, which utilise a front-end load charge that can be up to 4% of the market value of the units in the fund at the date of purchase. Investing in the ASX via a LIC is highly cost-effective relative to other methods of investing in a portfolio of investments Ongoing costs There are two types of fees that the manager of the LIC charges during the investment period: management fees and performance fees. The LIC uses management fees to cover costs incurred in running the portfolio. These fees are taken out of the profits of the LIC, which are a function of the performance of the investment portfolio of the company (including dividends paid and capital gains/losses on shares that are sold). They are paid regardless of the profitability of the investment portfolio. These fees range from % of assets per year. This is much lower than average fees charged for retail managed funds, which are approximately %. The effect of this cost-saving on a longer-term investment, where returns compound over a number of years, can be quite substantial. One reason for this lower cost is that LICs do not incur back-office or distribution costs, reducing their cost of operation. The fees (calculated as a management expense ratio or MER) of our selected LICs are shown in the graph below. FIG.8: MANAGEMENT FEES OF SELECTED LICs FOR FY13 1.8% 1.6% 1.4% 1.2% 1.%.8%.6%.4%.2%.% AFI AGF ALF ALR AMH ARG AUI BKI CAM CDM CIN CTN CYA DJW DUI HHV IBC IPE LSX MFF MIR MLT OZG PMC TGG WHF WAM WAX WIC WMK Unlike management fees, performance fees are paid only if the LIC s investment portfolio outperforms a predetermined benchmark and is linked to the size of this outperformance. Not all LICs charge performance fees. These fees provide an incentive for the manager of the fund to optimise returns for shareholders of the LIC. They are generally paid not just if the fund is profitable, but when it is more profitable than the market as a whole. Unlike management fees, they will generally not deteriorate low returns or worsen investment losses. Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 9

10 Performance fees for our selected LICs are shown in the table below. The benchmark index is the S&P/ASX All Ordinaries Accumulation Index unless otherwise stated below. FIG.9: PERFORMANCE FEES Company Performance Fee AFI None AGF 2% above S&P/CITIC3 TRI ALF 2% above All Ordinaries Accumulation Index ALR None AMH None ARG None AUI None BKI None CAM 2% above All Ordinaries Accumulation Index CDM 2% of returns above index or of portfolio return CIN None CTN 15% of returns above index CYA % of returns above index +1% DJW None DUI None HHV 15% above MSCI World Index IBC 15% of returns above index +1% IPE % of outperformance of portfolio over benchmark LSX 15% of outperformance above benchmark MFF % if returns exceed MSCI World Index and -year bond rate MIR None MLT None OZG 2% where performance exceeds 7% over 12 month period PMC % of returns above MSCI World Index +5% TGG None WHF None WAM & WAX WIC WMK 2% of returns above All Ordinaries Accumulation Index if index increased, or where the 2% of the index decreased over the period, 2% of positive portfolio perf (% if negative) 2% where performance exceeds % over 12 month period 2% of returns above the RBA cash rate Exit costs Exit costs from LICs are generally limited to the brokerage paid on selling the shares. This is unlike retail managed funds, which can generally be exited at no charge. Exiting a LIC investment can have tax consequences. What income do investors receive from a LIC? Annual investor income from a buy-and-hold investment strategy in a LIC takes the form of dividends, just like other share investments. However, because LICs utilise a company structure, payment of dividends is at the discretion of the management of the LIC. In other words, just because the investment portfolio of the LIC has made a profit in a given year, it does not mean that all, or even any, of that profit will be paid to shareholders in that year. This is unlike managers of retail managed funds, which are required to pay out the income to unitholders in the particular tax year that it is earned. Generally, LICs will pay out a high proportion of earnings as dividends. Most of our selected LICs focus on blue chip stocks and pay out a high proportion of earnings as a dividend. Accordingly, they have healthy dividend yields (as shown in the following graph). Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page

11 FIG.: DIVIDEND YIELD FOR SELECTED LICS 16% 14% 12% Average 5.4% % 8% 6% 4% 2% % AFI AGF ALF ALR AMH ARG AUI BKI CAM CDM CIN CTN CYA DJW DUI HHV IBC IPE LSX MFF MIR MLT OZG PMC TGG WHF WAM WAX WIC Taxation issues The returns of the LIC are generally taxed at the company tax rate of 3%. Accordingly, when dividends are paid to shareholders of the LIC, they attach franking credits. These are a tax benefit for shareholders, as they receive a credit for the company tax already paid on the LIC income when the shareholder s ordinary income is assessed. Capital gains are managed by the manager of the LIC. Where the dividend paid to a shareholder of a LIC contains income derived from a capital gain of the LIC, it will be treated as a capital gain, not ordinary income, in the hands of the shareholder. Under current tax rules, only 5% of this amount is taxable for many investors. This tax treatment contrasts with that of unlisted retail managed funds, where investors incur an annual tax liability on interest and capital gains that the fund earns each year. LICs versus managed funds LICs are listed on the stock exchange so entry and exit costs are limited to brokerage. This means that diversification is achieved at little cost. LICs also offer a tax-effective structure, whereby dividends are fully franked and assessed as a capital gain in the hands of the shareholder. Therefore, only 5% of this amount is taxable for many investors. Contrast this with managed funds where investors incur an annual tax liability on the interest and capital gains that the funds earn each year. The fee structures of LICs are also favourable in comparison with managed funds. Our selected LICs have management expense ratios ranging from.12% to 1.5%, whereas managed funds often charge at least 1.5%. The difference in fees can have a substantial effect on long-term investments. For example, from an initial investment of $5, invested at identical returns for a decade, the LIC investment could be worth up to $6, more than the managed fund. LICs versus exchange traded funds (ETFs) LICs and EFTs both have low management fees and efficient tax structures compared with managed funds. However, ETFs have an open-ended structure, where units on offer can increase or decrease based on supply and demand, and trade at or close to their net asset value. ETFs are generally passive investment products and hence do not aim to outperform the market in the same way many of the LICs do. ETFs are required to distribute any surplus income to security holders, whereas LICs have the ability to conserve surplus income and take advantage of market opportunities as they see fit. This added flexibility is beneficial to the shareholder. Our selected LICs have management expense ratios ranging from %, whereas managed funds often charge at least 1.5% Despite speculation that LICs will face increased competition from ETFs, we feel that for the majority of our clients LICs provide a superior investment vehicle with the added possibility of returns above that of the underlying asset. Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 11

12 Australian Foundation Investment Company (AFI) AFI was formed in 1928 and is Australia s oldest and largest listed investment company. AFI is a long-term, low-risk investor in major companies on both the ASX and New Zealand Stock Exchange. The total shareholder return for the year to 31 March 214 was 13.7% with pre-tax net asset backing increasing 14.%. The active return was.5%. FIG.11: AFI SNAPSHOT Price (3 Apr 214) $5.96 $5. - $6.33 Shares on issue 1,49,55,166 $6252.4mn Pre-tax asset backing* $5.8 Post-tax asset backing* $4.89 Premium/(Discount) to pre-tax NTA 3.4% Premium/(Discount) to post-tax NTA 22.7% Dividend yield 3.7% Dividend per share 22.c Franking % Management expense ratio (FY13).19% FIG.12: AFI PORTFOLIO TOP Company Fund (%) Commonwealth Bank of Australia.5% Westpac Banking Corporation.% BHP Billiton* 8.7% National Australia Bank* 5.4% Wesfarmers 5.% Australia & New Zealand Banking Group 4.5% Telstra Corporation 4.5% Rio Tinto* 3.8% Woolworths* 3.6% Oil Search* 2.3% At 31 Mar 14 *Indicates that options were outstanding against part of the holding FIG.13: AFI VS ALL ORDS All Ords Index AFI Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 12

13 AMP Capital China Growth Fund (AGF) AGF invests in shares in companies listed on China s Shanghai or Shenzhen stock exchanges, also known as China A shares, with an aim to achieve long-term capital growth for investors. China A shares are not readily accessible to foreign investors and access is granted through a Qualified Foreign Institutional Investors (QFII) license, which AMP holds. The total shareholder return for the year to 31 March 214 was 13.1% with pre-tax net asset backing increasing 2.3%. The active return was -2.7%. FIG.14: AGF SNAPSHOT Price (3 Apr 214) $.69 $.61 - $.87 Shares on issue 374,593,484 $256.6mn Pre-tax asset backing* $.84 Post-tax asset backing* $.84 Premium/(Discount) to pre-tax NTA -.7% Premium/(Discount) to post-tax NTA -.7% Dividend yield 2.8% Dividend per share 1.9c Franking % Management expense ratio (FY13) 1.65% FIG.15: AGF PORTFOLIO TOP Company Fund (%) China Minsheng Banking Corp Ping An Insurance Group Co of China Ltd 4.7% 4.7% China Merchants Bank Co Ltd 4.6% Shanghai Pudong Development Bank 3.4% CITIC Securities Co Ltd 3.3% China Vanke Co Ltd 3.1% Kweichow Moutai Co Ltd 2.9% Gree Electric Appliances Inc 2.5% Zhengzhou Yutong Bus Co Ltd 2.4% Byd Co Ltd 2.4% As at 28 Feb 14 FIG.16: AGF VS MSCI World Index The preparation of this report was funded by ASX in accordance with the ASX Equity Research Scheme. This report was prepared by Baillieu Holst and not by ASX. ASX does not provide financial product advice. The views expressed in this report do not necessarily reflect the views of ASX. No responsibility or liability is accepted by ASX in relation to this report. Please also refer to the general disclosure at the end of this report. MSCI World Index (AUD adjusted) AGF Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 13

14 Australian Leaders Fund (ALF) Australian Leaders Fund invests in leading Australian companies, focusing on the top 2, with strong business fundamentals on attractive terms. In addition, ALF short sell companies that they feel are fundamentally challenged. Their investment objective is to deliver superior returns over the medium term within acceptable risk parameters while preserving the company s capital. The total shareholder return for the year to 31 March 214 was 26.6% with pre-tax net asset backing increasing 15.6%. The active return was 13.4%. FIG.17: ALF SNAPSHOT Price (3 Apr 214) $1.68 $ $1.84 Shares on issue 229,722,22 $385.9mn Pre-tax asset backing* $1.52 Post-tax asset backing* $1.48 Premium/(Discount) to pre-tax NTA 9.9% Premium/(Discount) to post-tax NTA 12.8% Dividend yield** 7.1% Dividend per share 12.c Franking % Management expense ratio (FY13) 1.%, **Normalised FIG.18: ALF PORTFOLIO TOP Company Fund (%*) Australia & New Zealand Banking Group 8.1% Mayne Pharma Group Limited 6.8% Wesfarmers Limited 6.4% BHP Billiton Limited 5.4% Worley Parsons Limited 4.7% Westpac Banking Corporation 4.5% Transurban Group Ltd 4.3% National Australia Bank Limited 4.1% Brambles Limited 4.% Aurizon Holdings Limited 3.5% At 31 Dec 213 *Long Holdings Only FIG.19: ALF VS ALL ORDS All Ords Index ALF Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 14

15 Aberdeen Leaders Fund (ALR) ALR invests in companies within the S&P/ ASX 2 index with an aim of providing investors with regular income and long term capital growth. The total shareholder return for the year to 31 March 214 was 8.8% with pre-tax net asset backing increasing.%. The active return was -4.4%. FIG.2: ALR SNAPSHOT Price (3 Apr 214) $1.26 $ $1.39 Shares on issue 61,227,515 $77.1mn Pre-tax asset backing* $1.19 Post-tax asset backing* $1.13 Premium/(Discount) to pre-tax NTA 8.8% Premium/(Discount) to post-tax NTA 14.6% Dividend yield**.3% Dividend per share 13.c Franking % Management expense ratio (FY13) 1.5% FIG.21: ALR PORTFOLIO TOP Company Fund (%) BHP Billiton Limited 11.3% Rio Tinto Limited 6.9% ANZ Banking Group 6.5% Commonwealth Bank 6.5% Westfield Group 5.5% Woolworths Limited 5.4% Singapore Telecom 4.4% QBE Insurance 4.4% AMP Capital 4.3% CSL 4.2% At 31 Mar 14 FIG.22: ALR VS ALL ORDS All Ords Index ALR The preparation of this report was funded by ASX in accordance with the ASX Equity Research Scheme. This report was prepared by Baillieu Holst and not by ASX. ASX does not provide financial product advice. The views expressed in this report do not necessarily reflect the views of ASX. No responsibility or liability is accepted by ASX in relation to this report. Please also refer to the general disclosure at the end of this report. Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 15

16 AMCIL (AMH) Amcil was formed in 1996 with an initial focus on the media and telecommunications sectors. The limited scope of attractive investments within these sectors resulted in a change of strategy, and Amcil now has a diversified portfolio of 3 to 4 of Australia s largest companies. The total shareholder return for the year to 31 March 214 was 14.1% with pre-tax net asset backing increasing 12.1%. The active return was 1.%. FIG.23: AMH SNAPSHOT Price (3 Apr 214) $.92 $.8 - $1.2 Shares on issue 228,77,116 $29.8mn Pre-tax asset backing* $.94 Post-tax asset backing* $.87 Premium/(Discount) to pre-tax NTA -1.6% Premium/(Discount) to post-tax NTA 6.3% Dividend yield 8.7% Dividend per share 8.c Franking % Management expense ratio (FY13).84% FIG.24: AMH PORTFOLIO TOP Company Fund (%) Oil Search 8.1% BHP Billiton 6.5% Commonwealth Bank of Australia 5.9% Santos 4.8% Westpac Banking Corporation 4.3% Australia and New Zealand Banking Group Brambles Telstra Corporation Transurban Group QBE Insurance Group At 31 Mar 14 FIG.25: AMH VS ALL ORDS % 4.2% 4.1% 3.9% 3.5% 5 5 All Ords Index AMH Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 16

17 Argo Investments (ARG) Argo was formed in 1946 and is based in Adelaide, South Australia. It is the second-largest LIC by market capitalisation. Argo s portfolio contains investments in about 13 companies, with many of Australia s major enterprises represented. The total shareholder return for the year to 31 March 214 was 15.6% with pre-tax net asset backing increasing 13.7%. The active return was 2.5%. FIG.26: ARG SNAPSHOT Price (3 Apr 214) $7.2 $6.3 - $7.44 Shares on issue 661,673,597 $4764.mn Pre-tax asset backing* $7.29 Post-tax asset backing* $6.4 Premium/(Discount) to pre-tax NTA -.3% Premium/(Discount) to post-tax NTA 13.6% Dividend yield 3.8% Dividend per share 27.c Franking % Management expense ratio (FY13).18% FIG.27: ARG PORTFOLIO TOP Company Fund (%) Westpac Banking Corporation Australia and New Zealand Banking Group Ltd 7.3% 6.3% BHP Billiton 6.2% Westfarmers Ltd. 4.8% Commonwealth Bank of Australia 4.4% Telstra Corporation Ltd 4.4% National Australia Bank Ltd. 4.2% Milton Corporation Ltd. 3.5% Rio Tinto Ltd. 3.4% Woolworths Ltd. 3.1% At 31 Mar 14 FIG.28: ARG VS ALL ORDS All Ords Index ARG Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 17

18 Australian United Investment Company (AUI) AUI was founded in 1953 by the late Sir Ian Potter and The Ian Potter Foundation. AUI utilises a traditional investment philosophy, focusing on reduction of risk by investing in a range of large and mid-cap companies on the ASX. Investments are chosen on their individual merits, with no pre-determined policy that any particular proportions of the capital will be invested in particular investment sectors. The total shareholder return for the year to 31 March 214 was 18.8% with pre-tax net asset backing increasing 14.5%. The active return was 5.7%. FIG.29: AUI SNAPSHOT Price (3 Apr 214) $8.15 $ $8.3 Shares on issue 9,138,45 $889.5mn Pre-tax asset backing* $8.52 Post-tax asset backing* $7.31 Premium/(Discount) to pre-tax NTA -6.2% Premium/(Discount) to post-tax NTA 9.3% Dividend yield 3.7% Dividend per share 3.5c Franking % Management expense ratio (FY13).13% FIG.3: AUI PORTFOLIO TOP Company Fund (%) ANZ Banking Group 8.8% Westpac Banking Corp 7.9% Commonwealth Bank 7.5% BHP Billiton Ltd 7.3% National Australia Bank 7.2% Wesfarmers Ltd 5.7% Rio Tinto Ltd 5.3% Woodside Petroleum 4.7% Woolworths Ltd. 4.2% Diversified United Investment 4.1% At 31 Mar 14 FIG.31: AUI VS ALL ORDS All Ords Index AUI Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 18

19 BKI Investment Company (BKI) BKI was listed on the ASX in December 23 with an objective to provide investors with sound dividend yields and long-term capital growth. BKI invests in a diversified portfolio of Australian shares, trusts and interest-bearing securities. The total shareholder return for the year to 31 March 214 was 15.% with pre-tax net asset backing increasing 9.6%. The active return was 1.9%. FIG.32: BKI SNAPSHOT Price (3 Apr 214) $1.64 $ $1.66 Shares on issue 524,24,486 $859.8mn Pre-tax asset backing* $1.63 Post-tax asset backing* $1.5 Premium/(Discount) to pre-tax NTA -1.8% Premium/(Discount) to post-tax NTA 6.7% Dividend yield 4.2% Dividend per share 6.8c Franking % Management expense ratio (FY12).19% FIG.33: BKI PORTFOLIO TOP Company Fund (%) National Australia Bank 9.7% Commonwealth Bank of Australia 9.2% Westpac Banking Corporation 8.3% BHP Billiton 6.1% Telstra Corporation 5.2% New Hope Corporation 5.1% ANZ Banking Group 4.8% Wesfarmers Ltd 4.3% Woolworths Ltd 3.7% TPG Telecom Ltd 3.4% At 31 Mar 14 FIG.34: BKI VS ALL ORDS All Ords Index BKI Baillieu Holst Ltd acts in a corporate advisory role for BKI. In line with the company s internal compliance guidelines, our investment recommendation is restricted. Baillieu Holst Ltd has acted in a corporate advisory role for BKI earned fees in relation to that activity in the past 12 months. Please also refer to the general disclosure at the end of this report. Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 19

20 Clime Capital Limited (CAM) Clime Capital, listed on the ASX in 24, offers investors the opportunity to participate in a long-term approach to portfolio investing using value investing principles. Clime invests in a diversified portfolio of Australian businesses, trusts and interest bearing securities. The total shareholder return for the year to 31 March 214 was 1.1% with pre-tax net asset backing decreasing 6.7%. The active return was -12.1%. FIG.35: CAM SNAPSHOT Price (3 Apr 214) $.98 Shares on issue $.96 - $1.13 8,729,317 $79.1mn Pre-tax asset backing* $1.7 Post-tax asset backing* $1.4 Premium/(Discount) to pre-tax NTA -4.2% Premium/(Discount) to post-tax NTA -1.4% Dividend yield 5.% Dividend per share 4.9c Franking % Management expense ratio (FY13) 1.% FIG.36: CAM PORTFOLIO TOP Company Fund (%) BHP Billiton Ltd 7.47% ANZ Banking Group 5.1% Brickworks 4.4% Multiplex Convertible Note 3.84% Westpac Banking Corp 3.61% Woolworths Limited 3.44% The Reject Shop Limited 3.26% National Australia Bank Notes 2.86% Telstra Corporation Limited 2.76% SMS Management & Technology Ltd 2.7% At 31 Mar 14 FIG.37: CAM VS ALL ORDS All Ords Index CAM Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 2

21 Cadence Capital (CDM) Cadence Capital is an actively managed investment company with a portfolio of Australian securities. Although it focuses on a fundamental bottom-up approach to portfolio management, it also uses technical analysis over the short term to supplement returns. The manager targets 2 to 4 core investments and up to 4 trading opportunities in the portfolio. The total shareholder return for the year to 31 March 214 was 13.9% with pre-tax net asset backing increasing 8.6%. The active return was.8%. FIG.38: CDM SNAPSHOT Price (3 Apr 214) $1.42 $ $1.54 Shares on issue 167,583,459 $238.mn Pre-tax asset backing* $1.44 Post-tax asset backing* $1.45 Premium/(Discount) to pre-tax NTA 5.% Premium/(Discount) to post-tax NTA 3.9% Dividend yield 7.5% Dividend per share.7c Franking % Management expense ratio (FY13) 1.% FIG.39: CDM PORTFOLIO TOP Company Fund (%) Henderson Group plc. 8.7% Macquarie Group Ltd 7.6% National Australia Bank 4.6% Australia and New Zealand Banking Group 3.6% Bluescope Steel Ltd 3.3% IInet Limited Retail Food Group Bank of Queensland Ltd Rio Tinto Ltd At 31 Mar 14 FIG.4: CDM VS ALL ORDS 3.3% Melbourne IT Ltd 3.1% 15 3.% 2.5% 2.4% All Ords Index CDM Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 21

22 Carlton Investments (CIN) Carlton Investments strategy is to invest in established listed blue chip stocks that provide high levels of sustainable income through fully franked dividends. Investments are held for the long term and not for trading purposes. Carlton is primarily exposed to banking, tourism and leisure sectors. The total shareholder return for the year to 31 March 214 was 24.6% with pre-tax net asset backing increasing 14.6%. The active return was 11.4%. Carlton had the lowest management fee of our selected LICs. FIG.41: CIN SNAPSHOT Price (3 Apr 214) $26. $2. - $26.7 Shares on issue 26,474,675 $688.3mn Pre-tax asset backing* $29.47 Post-tax asset backing* $25.1 Premium/(Discount) to pre-tax NTA -11.8% Premium/(Discount) to post-tax NTA 4.% Dividend yield 3.7% Dividend per share 95.c Franking % Management expense ratio (FY13).12% FIG.42: CIN PORTFOLIO TOP Company Fund (%) Amalgamated Holdings 34.5% National Australia Bank 9.1% Westpac Banking Corporation* 7.8% Commonwealth Bank of Australia 5.5% Australia & New Zealand Banking Group 4.1% BHP Billiton 3.3% Westfarmers 3.3% Telstra 2.7% AGL 2.6% Perpetual 2.6% At 31 Mar 14 *Includes $1.78 million of Westpac SPS II securities FIG.43: CIN VS ALL ORDS All Ords Index CIN Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 22

23 Century Australia Investments (CYA) Century Australia Investments was listed in April 24 and is managed by Perennial Value Management, a leading boutique fund manager. Its investment strategy is to provide long-term capital growth and income by investing in quality, undervalued Australian companies. The total shareholder return for the year to 31 March 214 was 14.8% with pre-tax net asset backing increasing 9.6%. The active return was 1.7%. FIG.44: CYA SNAPSHOT Price (3 Apr 214) $.89 $.72 - $.92 Shares on issue 79,689,496 $7.5mn Pre-tax asset backing* $.92 Post-tax asset backing* $.92 Premium/(Discount) to pre-tax NTA -4.6% Premium/(Discount) to post-tax NTA -4.6% Dividend yield 5.% Dividend per share 4.5c Franking % Management expense ratio (FY13) 1.% FIG.45: CYA PORTFOLIO TOP Company Fund (%) BHP Billiton 9.7% Westpac Banking Corporation 8.4% ANZ Banking Group 7.4% National Australia Bank 7.4% Commonwealth Bank of Australia 6.7% Telstra 5.7% Macquarie Group 3.3% Woodside Petroleum 2.9% Rio Tinto 2.8% QBE 2.7% At 31 Mar 14 FIG.46: CYA VS ALL ORDS All Ords Index CYA Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 23

24 Contango Microcap (CTN) Contango Microcap was listed on the ASX in March 24 and is managed by Contango Asset Management. Contango invests in companies with a market capitalisation of generally between $ million and $35 million and aims to hold 6-12 securities. Its investment philosophy revolves around the premise that microcap companies are underresearched and hence offer considerable upside potential. The total shareholder return for the year to 31 March 214 was 4.2% with pre-tax net asset backing increasing 5.9%. The active return was -8.9%. FIG.47: CTN SNAPSHOT Price (3 Apr 214) $1.1 $.94 - $1.15 Shares on issue 157,638,993 Pre-tax asset backing* $159.2mn $1.22 Post-tax asset backing* $1.15 Premium/(Discount) to pre-tax NTA -16.1% Premium/(Discount) to post-tax NTA -11.1% Dividend yield 7.9% Dividend per share 8.c Franking 37.5% Management expense ratio (FY13) 1.25% FIG.48: CTN PORTFOLIO TOP Company Fund (%) Slater & Gordon Ltd 3.6% G8 Education Ltd 3.2% Mayne Pharma Group 3.2% Tiger Resources Limited 3.% BT Investment Management Ltd 2.7% Cedar Woods Properties Ltd 2.6% Automotive Holdings Group Ltd 2.6% Villa World Limited 2.5% Prime Media Group Ltd 2.5% iproperty Group Ltd 2.4% At 31 Mar 14 FIG.49: CTN VS ALL ORDS All Ords Index CTN Baillieu Holst Ltd ABN Please read the disclaimer at the end of this report. Page 24