For passive investors who prefer to outsource a substantial part of the decision making process to a fund manager, listed investment companies (LIC) can be an appealing option.
In recent years there has been a proliferation of LICs on the ASX but for the most part there is a significant difference between these newer LICs and their older, larger and more established peers – fees!
While most of the newer LICs utilise external fund managers that charge both a large management fee as well as a performance fee, older firms such as Argo Investments Limited (ASX: ARG) and Australian Foundation Investment Co.Ltd. (ASX: AFI) have an internal management structure and a very low running cost.
Given the massive fee disparity it's important that shareholders in any LIC take into account the expected performance of a portfolio compared with the expected management expense ratio (MER). The reason being is that it only makes sense to pay a high MER if a commensurately large portfolio return is achieved.
The just announced results of Argo for the full year ending 30 June 2015 show that the group achieved a 16.5% increase in profit to $228 million. That's a superb achievement, made all the more attractive thanks to Argo operating with a MER of just 0.15%.
Here are some highlights from Argo's results…
- Earnings per share increase 13.6% to 34.3 cents per share (cps).
- Total dividends for the financial year increased 5.4% to 29.5 cps.
- Net tangible asset (NTA) backing added 2.3% to $7.52.
- The group's investment portfolio outperformed its benchmark, achieving a total return of 6.1%; in comparison the accumulation version of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) returned 5.7%.
Argo has a market capitalisation of $5.5 billion and during the past financial year the group purchased $283 million of stock for its long-term oriented portfolio. Major acquisitions included Medibank Private Ltd (ASX: MPL), Santos Ltd (ASX: STO) and Commonwealth Bank of Australia (ASX: CBA).
The group currently trades at a slight premium to its NTA which means investors interested in adding Argo to their portfolio may want to wait for an opportunity to acquire the stock if and when it trades at a discount.
