How many times have you looked up an investment manager, be it an LIC, managed fund, or other and read an investment philosophy along these lines: “We’re a bottom up, fundamental focused value stock picker”. Or, “We look for quality businesses with good management that can grow their earnings”. These one-liners are almost cliché now. And every second manager out there will rattle off a very similar spiel.
How many times have you heard managers say they have the above investment philosophy and they have a completely different view on the same stocks? It happens a lot. Quality and value can be completely different in one person's eyes when compared with another.
What I have done today is pull together 21 different LICs, all with a fundamentally driven investment process and through their disclosure of their holdings I want to see what stocks they all agree on. Which stocks tick the boxes of the clichéd sayings? I selected a mix of small, mid and large cap managers. When it came to the large cap managers I wanted to select ones who are not index type investors and are more active managers.
The managers used for this browsing exercise:
Acorn Capital (ACQ)
Glennon Small Companies (GC1)
Arowana Australasian Opportunities Value Fund (AWQ)
Mirrabooka Investments (MIR)
Aberdeen Leaders (ALR)
NAOS Absolute Opportunities (NAC)
Bentley Capital/CBG Funds Management (BEL)
NAOS Emerging Opportunities (NCC)
BKI Investment Company (BKI)
Perpetual Investment Company (PIC)
Clime Capital (CAM)
QV Equities (QVE)
Cadence Capital (CDM)
Sandon Capital (SNC)
Contango Microcap (CTN)
WAM Capital (WAM)
Contango Income Generator (CIE)
WAM Research (WAX)
Flagship Investments (FSI)
Barrack St Investments (BST)
And the results? This is taken from the last available portfolio update from each LIC. For some this includes up until November and others it will date back to the end of October. Of course, some LICs disclose far more than others – for instance, some showing as many as their top 25 holdings and others as few as five. So we made do. There were a number of holdings that were only held by the one LIC. In total there were 57 stocks held by two or more LICs. Below is a table of stocks held by three or more LICs, and the LICs that hold them. I have counted WAX and WAM one entity, as there is a large cross over in holdings because WAM is half-comprised of the Wilson Asset Management’s research driven process and shorter-term opportunity driven activity.
No of LICs holding
QVE, BKI, ALR
FSI, ALR, WHF
ACQ, BEL, NAC
BHP Billiton Limited
CAM, ALR, BKI
CDM, BKI, MIR
BEL, WHF, BKI
US Dollar ETF
CAM, NAC, AWQ
CAM, MIR, FSI
Macquarie Group Limited
CDM, FSI, WHF
MIR, ALR, WHF
MIR, NAC, WAM & WAX
Automotive Holdings Group
BEL, CTN, WAM & WAX
No of LICs Holding
QVE, CIE, ALR, BKI
BEL, PIC, WHF, BKI
BEL, NAC, NCC, GC1
CAM, FSI, ALR, WHF
National Australia Bank
CAM, CDM, WHF, BKI
Westpac Banking Corp
BEL, FSI, BKI, ALR, WHF
BKI, CAM, FSI, PIC, WHF
ALR, BKI, CAM, FSI, WHF
ANZ Banking Group
ALR, BKI, BEL, CAM, CDM, WHF
ACQ, BEL, BST, CDM, GC1, WAM & WAX
ALR, BKI, BEL, CAM, CDM, FSI, WHF
It is important to keep in mind when looking at the holdings we do not know when they were purchased or at what price and if the managers would be happy to pay current prices for these stocks. But it is interesting to see the stocks that tick the quality box.
It is no surprise the banks feature heavily amongst the active large cap managers, with CBA featuring the most prominently. Financials and medical related stocks feature most commonly among the LICs for both large and small cap managers.
Speaking with the team at Cadence Capital, portfolio manager Simon Bonouvrie commented they like CBA due to its predictable earnings and dividend. The team also believes the pressure on banks to raise additional capital and the fear of recession has been overplayed in the market and there is opportunity in CBA.
John Abernethy, Chief Investment Officer at Clime Capital (CAM) says CBA is “just fair value above $80”, and it is better to buy around the $75 mark. “Buying at that price should deliver adequate returns in 2016,” he says.
Second in line to CBA is the enormously successful IPH Limited (IPH). The intellectual property company has increased fourfold since listing in 2014. Bonouvrie says despite the stock having a high P/E they think it is justified given the growth outlook for the business. IPH revenues are mostly in US dollars and its cost base is in Australian dollars leveraging the company to the much talked about decline in the Australian dollar.
Michael Glennon from Glennon Small Companies Limited (GC1) said, “IPH is a great business, blue chip clients who stay with them for long periods, growing their offshore earnings, great margins and great cash conversion.”
Another common thread among the growth orientated investors is Sirtex Medical (SRX). Glennon, who is a holder, believes SRX “has the potential to be the next CSL or Cochlear.” He admits it’s a big call but the potential is there.
Sebastian Evans from Naos Asset Management agrees with Glennon when it comes to Sirtex. “We’re attracted to the story and its many long term growth drivers. We’re looking forward to the results from their trials but anticipate the company can grow dose sales by a minimum of 20 per cent pa. The majority of revenue is earned offshore, they can part take in M&A where Australia has largely lagged behind the U.S, enter into new markets such as China and Japan as well as explore new cancers such as kidney cancer.”
Speaking of CSL, it is also held by a number of the larger cap managers, but comments from Abernethy suggest CSL has been a long term holding for CAM and they are not seeing real value currently. “CSL is just fair value and the low yield means total return must be driven by capital gain. A weak Australian dollar will be supportive over the next 12 months,” he says.
I noticed also that ASX Limited is held by a number of managers, including the previously cashed up Contango Income Generator (CIE). Given CIE only listed in August, the investment in ASX was made recently. George Boubouras from CIE commented, “ASX is a good diversified financial sector business with very high market share that spins off good quality cashflow with effectively no gearing. In a portfolio context it work very well in a dividend focused portfolio."
One of the most widely held and disappointing stocks on the list is Woolworths (WOW). It is interesting to note Perpetual Investment Company (PIC), which had a large amount of cash up until recently, chose to deploy that into the unloved retailer.
WOW is also a key holding for Abernethy at CAM, who is very optimistic about performance in 2016. “It’s been heavily discounted by the market due to trading issues and appalling Board risk management with no CEP appointment. Despite this we believe that value will rise in 2017 as the issues are dealt with. It’s likely to be one of the better performing stocks in late 2016,” he says.
The key take away from all of this is if you are an investor in LICs, you can get comfort in the amount of transparency offered. If you are not an investor but select your own stocks, LICs should not be ignored.