A specialist income fund manager
Today's Fund Manager interview is with Dr Don Hamson who runs Plato Investment Management. Don and Plato are specialist income investors and they have five funds, one of them was a listed investment company called the Plato Income Maximiser, the ASX code is PL8, and it invests only in their main Australian shares income fund which has got $1.4 billion in it and has produced a 12.7% return since inception. Now, the LIC, the listed investment company, has only been going for about 12 months but the income shares fund has been going for six years. 12.7%, basically a 9% fully franked income, 8.9% fully franked income and 3.8% capital growth over that time. They’ve also just recently launched a global shares fund and it’s very interesting, it was both the Australian and the global shares income fund. How they go about it, what they do, is they buy just to catch the dividend from companies they buy before the ex-dividend date and they sell afterwards. So they’re trading these shares all the time, getting in and out just in order to catch the dividend from them.
It’s an interesting strategy, very difficult for an ordinary person to do it at such a scale because they’re really backed by a lot of research and they’ve got a full database of all of the companies’ ex-dividend dates. As I said they get a reasonable income and are worth a look, they specifically design it for retirees by paying a monthly distribution, so rather than having to wait for a dividend distribution every six months they pay it every month.
Here is Dr Don Hamson from Plato Investment Management.
Don, you’re a specialist income fund manager and I think you’ve got five funds. Is only one of them a listed fund?
We have one listed investment company, yes, but it actually invests into a managed fund. It’s a strange structure but it’s the best way we can structure it to ensure it always pays income.
Explain that, which managed fund does it invest into, one of your other ones?
Yeah, it invests into our flagship Plato Australian Shares Income Fund. This is a complicated issue so I’ll give you the quick version of it but listed investment companies have to follow the accounting rules and the tax rules and a funny interplay there goes if you’re actively trading your portfolio and the market falls you may actually find that you can’t pay the income out, can’t pay the dividends out because you actually got a trading loss on your account. We got a lot of advice to show that the best way for us to structure this was for the LIC to actually invest into our existing managed fund and then even if the market falls it doesn’t make any difference. It’s a real quirk, it sounds stupid but that’s why we did it.
So, let’s just stay on the listed investment company for a moment. You started about a year ago, didn’t you?
Yeah, listed in early May last year and we built up some income. Obviously, we started with no income so we actually built up some income for about the first five months before we started paying dividends and now it’s the first LIC in Australia, I think the only LIC, that pays monthly fully franked dividends out to its clients. One of the attractions is for retirees is that they can get a regular constant sort of dividend flow. In fact, it’s actually increased, we increased the dividend at the end of April by 11%.
There you go, I didn’t know that. What are you paying, half a cent a month?
Yeah.
The price is $1.02 at the moment, $1.025, so help me out what sort of yield is that? I’m just trying to figure it out in my head.
That’s just under 6% and that’s before franking so when you gross that up you’re getting around 8%.
Yeah, and it’s 100% fully franked, yeah.
Yeah.
That’s great, a listed investment company paying a 6% fully franked yield every month, that’s fantastic.
Yeah, and that we think is attractive for a lot of retirees because we work and we get a regular wage but if you’re retired and you only get dividends maybe every six months out of a company then it’s a long time between drinks, isn’t it?
The question then is what’s it investing in and the answer is, as you say, your flagship Australian Shares Income Fund. Tell us what’s in that?
Yeah, effectively it’s owning just over 100 Australian equity stocks that pay dividends so we have an active portfolio where we actively trade that portfolio and it’s interesting, we’re able to generate an above market yield after fees but we’re not actually overweight banks. An interesting feature, I suppose, is by actively trading stocks for income you can generate the same amount of income than being just in banks but you don’t have to, particularly in the last twelve months, have that dead weight of being overweight banks.
Right, but is your income coming...
We hold some banks but we’re not overweight.
Does the income that you’re generating come entirely from dividends or from capital gains from the trading?
It’s entirely dividends at the moment. We couldn’t rule out the fact that we have capital gains in the future but the underlying fund has been going for over six years and has generated just under 9% gross yield and it’s all been dividends and franking credits.
How do you get that by trading, explain to us? That’s a very interesting thing to do.
Yeah. Put simply most Australian stocks pay two dividends a year. If you buy and hold you need to own them for the whole 12 months to get the dividend then the only way you’re going to get a much higher yield like that and close to 9% is the significant overweight high yielding stocks. You don’t need to own a stock for twelve months to get its dividend you only need to hold it for a couple of months. Clearly you need to hold it for at least 45 days to satisfy the franking credit rule but you don’t need to be there all year so we actively trade in and out of stocks to pick up more income than buy and hold strategy. By doing so we also essentially avoid having to be overweight the high yielding sectors like the banks and Telstra which have had shocking performance over the last twelve months. It’s an interesting thing, I did it until the end of last week, but the four banks and Telstra actually lost close to 20% over the last twelve months in capital terms which is a big number.
Yes, I’m sure our listeners are only too painfully aware of that.
Yeah, but the index went up about 7% so they were massively behind the index and because the banks and Telstra are such a large part of that index if you took the banks and Telstra out of the index or compared them to the other stocks in the index they underperformed by nearly 40% over the last 18 months.
Is that right? I haven’t done that sum, it’s a 40% underperformance, that’s unbelievable isn’t it?
Yeah, that’s in capital terms and I’m not counting the dividends but just in sort of share price so it’s a massive underperformance of the rest of the index over the last 18 months.
Let’s just clarify what you do. Obviously not with all of them but you tend to go into a stock in time to get its dividend and to hold it for 45 days minimum and then get out.
Yeah, that’s right.
The stocks that you’re doing that with what are they yielding on average?
Well we do tend to rotate through stocks with slightly higher than average yield because clearly you’re not going to do that on a CSL which pays a very low yield and is not franked anyway. They do tend to be higher than market yield but we actually do it through even average yield stocks as well. All I can say is if you think about that and if you can rotate through stocks – I’ll give you an example. We were overweight Commonwealth Bank in February, it paid its dividend and then we sold it or sold quite a bit of it and rotated that into some other banks that go ex in May. We can then pick up a lot more bank dividends but we’re not actually overweight the banks because we’ve sold Commonwealth Bank and then moved that money into Westpac and pick up more of each dividend. By doing that through a range of stocks you can get a lot more income than the market and do it very consistently. We have a portfolio which is very well diversified but gives a lot more income than the market without being overweight those nasty banks and Telstra which have had a pretty tough time recently.
I thought you might have been doing it using options as some funds do. I think they’re called buy right options to boost income but you’re not doing that?
No, I mean we’ve actually steered away from that because I think options are difficult to explain, I think a lot of investors and mums and dads find it hard to understand what options do. The reality is we don’t need to trade in those. In fact, it is a strange thing, our research has shown that the typical or the average dividend paying stock actually tends to outperform in the couple of months before it actually goes ex its dividend. Our preferred strategy is you own the stock for two to three months in the sort of cum dividend period before it goes ex and we tend to find that it outperforms. It wouldn’t actually suit our strategy to sell at option because you’re then actually selling some of the upside and we want to keep the upside for our clients. We hold it through to when the stock goes ex and then you get the dividend as well and the franking credit, clients get extra income that they, on average but not all the time, actually get outperformance.
Your most important tool then would be the list of ex dividend dates of the ASX 200.
Yes, we have a very large database that goes back over sort of 20 years and we track these meticulously year to year, we forecast when we expect dividends to pay but we also track the underlying performance and fundamentals of all the stocks because you don’t want to buy everything that goes ex you only want to buy the good ones and arguably try and avoid the underperformers. There is an extensive process behind this but yes, we do focus a lot on forecasting the actual dividend ex dates.
When you rotate out of a stock after it’s paid the dividend do you try to always go into another stock that’s about to pay a dividend or do you often go to cash?
We always try and remain fully invested. Our mandate is it is an equity fund and so our mandate is to be fully invested. There’s not a lot of income in cash these days either so at best you can get 1.5% out of cash, you’d probably get a little less with what custodians pay but we like to always look for the next opportunity. What I like to say is we work our capital hard and we’re always looking for the next stock that pays a dividend. Once you’ve received a dividend from one company you can then look forward to the next one. There’s a nice spread of dividends across the calendar in Australia and so there’s plenty of opportunities to look for stocks that might pay a dividend two to three months later.
What do you charge for this service, what’s your fee?
The listed investment company is 80 basis points plus GST but you get some of that back so that’s the fee which is similar to the managed fund, you can actually go by the managed fund if people like that and that actual charge is 90 basis points and that’s inclusive of GST. We think that’s reasonable value for a well-diversified portfolio that’s got a consistent track record of delivering good above market income.
Does the managed fund charge the listed investment company a fee as well, is there a double fee?
No there’s no double counting, the listed investment company invests in a zero-fee option, actually. There’s certainly no double counting but that’s a question that is often asked but there is no double counting of fees.
You’ve got a global shares income fund as well now, how has that been going and are you doing the same thing with the global shares as you’re doing with the Australian ones, that is to say in and out?
Yes, we are actually. That’s been going for two and a half years now and it’s delivered about 6% income after fees which may not sound all that great compared to the high yields we know in Australia but typically global equities yield something – the index yields about 2% so by, again, trading in and out of stocks because there are literally thousands of stocks globally that pay dividends so we can trade in and out of stocks and pick up a much higher level of income than a buy and hold strategy. That’s why we can convert – say if you just bought the index you’d be lucky to get 2%, you’re getting 6% after fees out of our global income fund. We think that’s pretty good income from globals in equities and you’ve also got the diversification benefits because the one thing it hasn’t had is it hasn’t had any exposure to Australian banks or Telstra which obviously have been poor performers. It hasn’t been affected by the impact of the Royal Commission and other things. We see that as a good diversifier.
Is the global shares fund getting any capital growth?
Yeah it has, it’s got something like a 10% return since inception so you’ve got about 6% income and about 4% capital growth. Again, we are long stocks all the time so we don’t sit in cash, there’s always something to invest in to get income and our aim is to have a well-diversified global equity portfolio that delivers more income than the market particularly again for retirees who need money to live off. It also pays a regular sort of monthly dividend or distribution I suppose, it’s a fund so technically it’s a distribution rather than a dividend but it’s distributing out those dividends that we receive off global companies.
Obviously, it’s completely unfranked.
Yeah, that’s right. That’s just what you get out of global shares, there’s no franking of global companies so that’s really where the difference is. In Australia the icing on the cake is the franking credits although there’s some uncertainty about them with the latest ALP proposal on them but we like them while we can get them at the moment. A lot of things are going to happen before that ALP proposal ever sees the light of day.
You’ve got two other funds, something called the Australian Shares Income Fund (Managed Risk) and Australian Shares Core Fund. Why are they different, in what way are they different?
I’ll take the managed risk fund first. The managed risk fund, interestingly we got some feedback from some clients saying we love the level of income that you’re distributing out of these Australian share sort of income strategies but listeners of yours have to realise this is 100% equity portfolio that moves up and down with the market. If the market goes up, great, you get that performance but you also have the downside risk because it is fully invested in equities. We looked around and we’ve found there is a technique around and a number of other groups use it as well which uses a system of derivatives so it uses hedging to just take some of the risk out of the market and so actually the risk is managed. It has less risk than a full equity exposure but it still gives you roughly just a little bit less, still a high level of income but with less equity risk along the way. Risk and return go hand in hand so if you get less risk you also tend to get less return over time as well so there is a trade off there.
The other fund is just an equity fund without an income target, so it’s just got a normal market level of income. It’s not an income product and that’s why we call it our core product.
Just back to the managed risk product. If the market corrected 10% what would your managed risk fund do?
Well it would certainly correct less than 10% because it always has some futures hedging in place and the more the market declines the more hedging it does put in place but it’s not a hard and fast rule so we can’t tell you in advance whether it would take half the risk off or two thirds, it depends a little bit on the state of the environment. Every time the market has fallen it has fallen a lot less than the market so in earnings drawdown it’s actually fallen less but the flipside is when the markets rebound, it tends to get less of the upside as well. It’s there for people who really can’t accept the full risk of equities although in a balanced portfolio you reduce a lot of that risk by having other assets in your mix of investments.
How much is in that fund versus the other, the main fund?
That one is quite a bit smaller, it’s only a bit over $20 million. It’s a more difficult, I think, product for people to understand because there’s no guarantee on how much it will save you. It’s, if you like, a best effort, it undertakes hedging to reduce the risk but it’s not guaranteeing that you’re going to eliminate that risk. We found most people in a balanced portfolio are willing to accept the equity market risk. We would expect they would get higher returns out of the main fund and the main fund is approximately $1.4 billion so you can see where all the money is, that’s for sure.
How much is in your main fund?
$1.4 billion, that’s clearly where most of the demand is but there is some demand for that lower risk product. Interestingly what we’ve tended to find is that if you have a market fall then a lot of people say maybe I should be invested in this product and it’s provided some protection but the reality is that you need to be in there before the market falls, not after.
It’s interesting, both of those two funds, the managed risk one and the main one on your website, it says that they are managed specifically for zero tax investors. What do you mean by that?
The primary target is essentially retired investors who are in pension phase which is tax exempt. They’re also targeted to charities so we have quite a few charities that are invested into those funds as well. If you think about retirees they get the full value of franking credits refunded so that’s good to top up their income with those franking credits but they need to live off the income of their investments and a high-income strategy is what a retiree wants. Having said that it’s actually good for lower tax rates, so people who are lower tax rate than the corporate rate. Even accumulation super, and I have my accumulation super in those funds, it’s pretty good for those people as well because you still get a net tax credit out of the franking credit. It’s targeted to tax exempt pension phase investors or retirees but I think it’s still pretty good for accumulators as well.
That main fund that’s been going for six years hasn’t been getting capital growth, you said that didn’t you? Its total return has been 9% per annum.
It’s had a little bit of capital growth, it depends on the period.
What’s its performance since inception?
I’m just looking it up for you, Alan, actually. Let me get to our latest fact sheet to do that. Performance since inception has been 12.7%.
There you go, that’s right, I’m looking at it too. As we speak I’m looking at it, five years performance 9.2% but since inception 12.7. That’s okay, that’s a respectable return, isn’t it, for accumulation phase as well as income phase.
Yeah, and particularly for retirees we think getting around that – well, it’s 8.9% income since inception and 3.8% capital growth. If you’re living off that you’ve seen your capital increase but you’ve still had very good income along the way because there’s not too many things that pay 8.9% income in the current environment.
Is that matched and will that be matched in the LIC, is there any reason that the LIC would be any different?
The LIC hasn’t been going along for nearly as long but we would expect they should have the same returns because essentially the LIC just invests into this managed fund so it should get the same return, the cost structure is roughly the same so the clients should be pretty indifferent between whether they invest in the listed fund or whether they invest into the managed fund. That was our intention, was to have basically for people who like listed investments or want the benefit of monthly income they can go into the LIC which is Plato Income Maximiser. If they’re happy with managed funds and they don’t need monthly income because the managed fund only pays quarterly income then they can go into the managed fund or stay there if they’re already there. Clients have a choice really, and they can also access it via mFund if they prefer.
What’s the minimum investment in each of the funds, the unlisted funds?
At the moment the minimum investment in the Plato Australian Shares Income Fund and the Managed Risk is $100,000. We actually raised that because we’ve virtually got enough money so we don’t want to grow that fund too fast. Whereas the global fund which is still relatively small, it’s about $50 million, the minimum is $30,000.
You don’t want to grow it that fast but if someone wants to give you $100,000 that’s fine, you’ll take it?
Yeah, we’ll take it. $100,000, a lot of people haven’t got that sort of money. You can actually invest into the listed investment company and you just have to see what your minimum your stock broker will take because you can literally buy 100 shares if you want. If you want income you want to buy probably a decent multiple on that.
That was Don Hamson from Plato Investment Management.