Creating this topic in the General Forum as there seems to be references to LICs in various locations and there was an extensive discussion in the SSMF section when Kan_Guru raised the matter.

I have just looked at the performance of LICs on the ASX web-site at

http://www.asx.com.au/markets/l3/LMIList_AM3.shtm

Must admit if one held a number of these, either in a SSMF or outside, over a 5+ year period then you would have to wonder why you would even be bothered trying to select particular stocks. If I haven't shuffled of this mortal coil in another 10 years time, I will be interested to see how these LICs have performed. If they achieve anything like ARG has over 20 years (16.5% compound according to its web-site), you really could not complain!

satayking had a good post on these in the 'hybrid issues' thread a while back.near convinced me.the great thing is that as closed funds,they don't have to panic sell to fund redemptions,or chase stock hard to use new fund inflows.

I have held a few LIC's over the last five years or so and many of them have done very well, better than most of my other shares. They are great for set and forget investors and self managed super funds.

Just a note about ARG. For some reason it is trading at about 20% higher than its asset value, and this has contributed to its very good return. I would guess that in the long term the price will return to a more balanced level. Why pay such a high premium for an LIC when you can buy the underlying shares for less and get the same dividend.

Other LIC's trading above asset value are MLT WAM and AFI. I believe this to be because they have performed so well at a time when a lot of unlisted funds have gone backwards. Investors disillusioned by conventional managed funds are switching to the better performing listed ones. The entry fee is only the cost of brokerage, the Management Expense Ratio is usually a lot lower and the investment is much more liquid than an unlisted fund.

However there are still a lot of LIC's trading below asset values. ALR is one of these and a lot of the newly listed funds such as WAB, WIL and MMA.


Cheers

LJ

Hey Lanie, you should come over to Adelaide for ARG's next AGM, in October/November. We went to the last one and it was a hoot! Greg and I lowered the average age of attending shareholders by several decades, I'm sure. Many of the shareholders there have held their ARG shares for many years, some since inception.

I had to laugh at a couple of women I overheard in the ladies' room, complaining about the quality of the morning tea! I reckon that was the main reason a lot of them went!

It was a good AGM, though, and Rob Patterson spoke very well, as did Chris Harris.

J

hybridbloke. Have searched and found the posts by satayking to which you referred. There are some strong arguments if you wish to take the hands off, very long term approach. Suppose it depends on the time frame and how much longevity you have. Also noticed the matter of ETFs which may also have some legs. Now, if we could only place these thoughts into a child, or the parents of the child, on the day it was born......

LainieJean, don't disagree with your statement about the 20% premium for ARG but one silly question. What would be the 20 year impact on the compound return if this premium, which may have only been in place for say less than 2 years, was removed? Would it account for 5%, 10% or even 0.1% on the overall return. Usual problem with averages I suppose about which professionals could argue about until the cows come home.

Still, it makes for interesting reading. Personally, I am looking at some LICs as a core holdings. Bought MIR on Wednesday at $1.25 and may buy WIL. HHL seems to a tad pricy to me but need to bear in mind that it is a "ticket clipper" in much the same way as is SOL, which I may add I hold.

umm, Judd, what's a ticket clipper?

J

Judy,

A ticket clipper is an organisation that gets a cut of the action no matter what usually happens. For example, HHL gets a management fee for operating the underlying funds such as the Value Growth Trust. Soul Pattinson gets a cut for managing the funds under management, say from, the listed Brickworks Investment (BKL). In the long-term it gets down to what you want, either the anticipated steady income from these "ticket clippers" with possible capital growth or anticipated capital growth with possible income from the funds they manage.

Neither is certain but the odds are probably towards the ticket clippers.

Judd and Judy

I loved the ticket clipper defination. It is very apt. I now have a new sharemarket term. It reminds me of the old saying that in a rising or a falling market the stockbrokers are the ones who always make money.

Yes I do agree with you that ARG trading at a premium at present would not affect the twenty year term return by all that much, but it would affect the three and five year return quite a bit. Dividing the premium by the number of years eg 1% for 20 yrs, 4% for 5 years would not be accurate, but it would be ball park. I could work it out for you, but the day is too hot.

It certainly gave me an excellent one year return. I bought ARG this time last year at around $4, which was then about their asset value, and recently sold them at $5.10.

I do think they are a great LIC. I just feel they are currently a bit overpriced. A great buy and hold share though, as Judy's octagenarian friends will no doubt agree.

Long term these LIC's do tend to fluctuate around their asset value. They can only pay in dividends what they receive in dividends plus any capital gain they make, so you are reducing your yield if you buy at higher than asset value and increasing it if you can buy below asset value. You are also putting a premium on their ability to pick growth stocks compared to your ability. In this case quite a high premium.

I am reasonably confident of buying ARG back in later at a lower price. I may be wrong. In fact with the market soaring up, the asset price could well catch up with the current share price in a month or two. I may be sorry I sold.

Their largest holding is MBL and interestingly their second largest holding is MLT which is itself another LIC, also slightly overpriced. A lot of their top 20 shares are banks.

Judy, you are probably on the mark about the shareholders at the meeting and the tea. But why not, it gives them a day out, and they get to talk to other experts in company afternoon tea.

But do not knock these people, Judy! Old age is not itself a crime and they did a very, very astute thing to buy ARG shares years ago. Not everyone had the confidence to buy shares then and they chose the right way to go about it, one investment instead of a heap of share picking and following prices in very small print in newspapers. No stockbroker or fund manager or financial planner would ever have advised them of this strategy because there would be nothing in it for the advisor.

The long term ARG shareholders are the cream of the financial self managers in their age group. A lot of that generation lost their money in dicey property schemes that were floating around in the eighties or had it eaten up in fees charged by fund managers. And as for the ones that just left the money in the bank in 3% savings book account (now less than 1%). Well they are all now in pension queues. I believe the quality of the teas served in pension queues is not all that high. (no disrespect intended)


Cheers

LJ

G'day Judd,
Don't know if this will help .

Lets assume the asset value is $1 and that the annual earnings are 10%.
Compounded out over 20 years I see this resulting in a figure of $6.73.

Or $1 at 10%p.a. over 20 years will give you your $1 back plus interest of $5.73.

If in lieu of paying $1 for the asset one paid $1.20 and earned the same 10%p.a. on asset value this also is a resultant $6.73

Using $1.20 as the base and receiving $6.73 over 20 years is equivalent to earning 9%p.a.

So , on this basis the difference is 1%.
I am no mathematician so the above is on an E & O.E. basis.

Anyway someone like Mutt or Raptor will pick up on this for sure so you should get your answer.

Looks like I need to turn on the air conditioner (very hot here today) and get calculating

The current share price is $5,10. Assuming this is 20% higher than the asset backing, gives a hypothetical trading price of $4.25. In their latest asset amount they give about $4.60 before tax and just above $4 after tax. This has come up quite a bit from the previous announcement.

You need to take into account dividends. The annualised return the company gives is usually calculated with all dividends reinvested and all rights issues etc taken up. Not sure about share purchase plans as these have a $5000 cap, so the effect would be greater for a small investor than a large investor.

The easiest solution here is probably to assume that 5% of the return is dividend (not reinvested) and 11% share price growth.

For a 11% return over the last 20 years, to reach $5.10 the share price had to start at about 63c (Surprisingly low! No wonder those retirees come to the meetings to applaud the directors).

If the share price was now $4.25 rather than $5.10 then the return reduces to 10%

So the 20% higher price does approximate 1% more per year over 20 years.

For 5 years, the share has to start at $3.02 to reach the $5.10 share price for a return of 11%

If the share price is now $4.25 the return is just over 7%, so the reduction is about 4%. Again the 20% divided by the five years.

For three years, the price starts at $3.72 for the 11% return to reach $5.10, but if you have only reached $4.25, then the return is 4.5% which is about 6.5% less, again multiplying by three years gives you about 20%.

This works aproximately for 2 years, giving about 10% difference and also for one year except that for one year the return for the $4.25 scenario is about 8% negative, giving a difference of about 19%.

However you look at it though, it is a really good effort on the part of the company to sustain that level.

LJ

hybridbloke, LainieJean and Pedro-Egoli,

Thank you all for your input. It is very appreciated. I must now admit that, when I think about it, ie the impact of the premium to NTA, I may have sent you on a wild goose chase. Reason being that at some stage in the past the share price must have been trading at below NTA. End result is whether the price is above or below NTA now it is the 20 year performace which is relevant to the person who has held the share for that period. And when you consider that that period covers the 87 downturn, the 94 downturn and the 2000-2 years of weeping, to return some 16% compound is amazing. And they, and other LICs, seem to have achieved it by being totally boring!

hybridbloke again thanks for referring me to the comments from satayking. Can see why the comments near convinced you as there are some sound arguments presented.

I noticed your recent exchange in regard to bikers and I see from wayneL's reply that he may be taking the view to building capital quickly to then become a long-term investor. I have the suspisicion that satayking may already be there but took the slow steady and safe way as opposed to the fast lane approach.

I feel that the slow but steady is not a bad approach. Gives one time to smell the scenery and look at the fresh air.

I am a fan of LICs as I have stated prevously in the forum; I own some AFI and MIR, and am well pleased with their performances. Attractions include that I don't have to make any decisions, and that I can sleep at night. My LIC allocation is only 15% of portfolio, and I want to be there enjoying a cup of tea with fellow s/holders in 20 years time!! Meantime the dividends come in regularly.

Its all about risk, I reckon, and I found an article that encapsulates what I am thinking, and says it so much better than I can:

from bloomberg.com

"

The Charms of Managing Money Alan Greenspan-Style:

Chet Currier Jan. 9 (Bloomberg) --

In his first speech of the new year, Alan Greenspan came as close as he ever does to dispensing investment advice.

The Federal Reserve chairman told the American Economic Association that policy-making at the central bank has come increasingly to be guided by what he called ``risk management.''

The term, well known to actuaries and institutional money managers, is less familiar to everyday people as they make financial plans and decisions. With a push from Greenspan, maybe it's now ready for prime time.

That would be good, because risk management can be the basis of an honest, realistic approach to personal finance -- a much-to- be-preferred alternative to idle games like guess-the-future or beat-the-market.

Buying an insurance policy is risk management in one of its simplest forms. For a fee known as the premium, an insurance company assumes a risk that naturally occurs in your life, such as the chance of a house fire or a lawsuit.

In a broader sense, all investing can be seen as risk management, in both its goals and its methods. Just as a life insurance policy hedges the risk of dying too soon, before important obligations are met, so its opposite number, an annuity, protects against the risk of dying too late, i.e. after one's money has run out.

Sophisticated Stuff

Mathematicians can take the idea of risk management into deep and distant realms. The next time you want a rainy-day diversion, run an Internet search on ``Bayesian decision-making,'' which Greenspan mentioned in his talk.

Without that kind of sophistication, the rest of us can still look to it for some practical philosophy.

One thing to love about risk management is its basic humility. Where many amateur investors try to show the world how smart they are, the risk manager admits up-front that the future is a mystery.

The variables include both risks, which can at least be estimated, and uncertainty, where even the probabilities are hidden. ``It may be best to think of a continuum ranging from well- defined risks to the truly unknown,'' Greenspan said.

Kitchen-table financial decisions can then be based on a careful assessment of what these risks and uncertainties are for the individual or family in question.

School Days

Got two children between five and 10 years old? There's an odds-on chance both will want to go to high-prestige colleges about a decade from now -- and an equally strong likelihood that the tuition cost will be, oh, twice what the best schools charge now.

Getting close to retirement age? Ahead lies a range of risks and uncertainties from the chance of near-term health problems to the possibility you might have 30 or 40 years of life left to bankroll.

How to allocate one's assets to meet the defined needs and goals? That decision uses risk-management thinking too.

For example, from experience we know that stock returns are highly variable and unpredictable from one year to the next. Over longer periods of time, the odds mount in favor of decent or better returns.

No matter how much time you have, though, the stock market carries a certain amount of plain old uncertainty. One may hope, even believe, that the next 50 years will bring economic growth comparable to the last 50 years. All the same, one cannot count on that, or expect to quantify all the possibilities that could stop it from happening.

Eschatology

So even a young person with distant goals might consider diversifying an investment plan to allow for wild-card surprises.

As any insurance buyer knows, it's impracticable to protect against every imaginable risk. While some may stash away gold and canned goods in case of worldwide catastrophe, others may conclude the end of the civilized world is a hazard that cannot usefully be hedged.

Also, some circumstances may call for abandoning caution. A once-in-a-lifetime chance to start a business of your own, for instance, may dictate staking everything you're worth on it.

When you think about it, even that kind of choice really comes down to risk-based decision-making. The best candidates for all-in bets of this type are people who know they can pick themselves up and start over if the venture doesn't pay off. In effect, they enjoy a kind of time-diversification.

Working with ``incomplete knowledge,'' said Greenspan, ``a central bank needs to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path.'' It's a worthy starting point for non- central bankers too.

"

So, Benthonic's words again :- Basically, shares outperform other assets, but they jump around a bit in price. So, find something where costs are not excessive and management is sensible, and LIC seem to fit that bill better than most. (and it is almost self-evident that you should only buy at or near NTA)

"Diversity is the only free lunch" - Farleigh