Djerriwarrh still pricey

Because with the level of diversification that lics achieve across the top 50 to 100 Australian stocks it's the general direction of the market that determines their performance. That, in our view, is not the way to achieve outstanding returns.

Having said that, if a lic does trade at a discount to net tangible assets (NTA) - in other words, if it were to sell its portfolio and the money that generated was greater than its market capitalisation - it's a different story. That's the rationale for our recommendation on Amcil. But it's not the case with Djerriwarrh Investments.

Premium rating

In issue 96/Feb 02 (Better Value Elsewhere - $3.64) we weren't keen and we still aren't. The reason is simple. As at 30 June Djerriwarrh's after tax NTA figure was $3.15 per share. That means the stock is currently trading at a 12% premium to its inherent value - the stocks it owns.

Despite outperforming the S&P 50 leaders accumulation index by 4.4% in the last financial year, we can't justify that. Especially when there are some management issues worth considering. The first is the use of call options to generate extra income.

By writing call options against nearly 40% of the fund's portfolio, the potential upside of those stocks is limited. And of course, the costs of writing those options also eat into income, which in this case goes to JB Were, with whom Djerriwarrh has a close association.

The other point is that although net debt-to-equity is only 16%, were the market to fall further, losses would be magnified and the ratio would automatically increase, although the company wouldn't go broke.

What it has going for it is a high dividend – 6.1% fully franked, excluding the special dividends shareholders enjoyed in 2001.

In a gloomy market it isn't a big surprise that Djerriwarrh is down 8% since we last looked at it in February. Back then we recommended Australian Foundation Investments or Argo Investments as better for beginners who lacked the confidence to buy stocks themselves. That recommendation still stands. BETTER VALUE ELSEWHERE.