IAN IRVINE | Compounding for the future

Listed Investment Companies have been around for a long time. They've been used by Aussies to help generate income and compound returns for nearly century. In this episode I'm joined by Ian Irvine from LICAT to do some investing 101 and talk about this sector of the market.

The Listed Investment Companies and Trusts Association (LICAT) represents the interests of Listed Investment Companies (LICs), Listed Investment Trusts (LITs) and investors holding over 700,000 interests in one or more LIC or LIT. The sector has proved popular with investors for over 95 years, providing easy access to professional fund managers who actively manage a range of underlying asset classes which extend from Australian shares to global equities, fixed income, infrastructure and property across a range of investment strategies. The investor base of the sector is made up predominantly of retail investors and SMSF trustees, many of whom are self-directed and who rely upon the investment expertise of the LIC or LIT manager to guide their investments.

Ian has over 40 years’ experience in sales, marketing and business development and has

worked in the financial services arena since 1986, including 14 years at the ASX until

December 2017. His role at ASX included developing and delivering educational sessions

for investors, self-managed super fund trustees and financial advisers. He is well acquainted with the listed investment companies and trusts sector, having worked with many of its member entities over his time at ASX. He has been Chief Executive of the Listed Investment Companies and Trusts Association since January 2018.

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Ian (5s):

So, the franking credits refers to the credit you have as an investor for the tax already paid by the company but paid on your behalf. Some people have trouble getting their head around and think, "Oh, why is the government just giving people money back?" It's not, it's similar to you as a PAYG taxpayer, your employer pays tax. At tax time you work out, is that too much or too little? And you make an adjustment. It's very similar in that regard. The company's paid tax from its profits that I'm an owner on that company. Have I paid too much or too little as an owner? 

Phil (36s):

G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. We hear lots about ETFs these days, but Australians have been investing in things called LICs and LITs for much longer. Joining me today is Ian Irvine, chief executive officer Listed Investment Companies and Trust Association. Hi there Ian, thanks for coming along. 

Ian (56s):

Hi Phil, good to see you again 

Phil (58s):

Now, is this the first one of the new year’s? I think this actually might be the first fresh interview of the new year 

Ian (1m 7s):

I feel privileged. 

Phil (1m 8s):

LICAT represents the interests of listed investment companies, LICs, listed investment trusts, LITs, and investors to protect, develop and grow the sector through advocacy and education. However, before talking about LICs, we're going to go back to share investing 101 and, Ian, let's kick off with some of what you believe to be the key investment principles when starting out in markets. First on your list is compounding. 

Ian (1m 32s):

Yeah, it is Phil. I think there's always a temptation when you start out in investing just to jump in and buy a stock or make an investment in a share. And that may be based on what someone else is doing, what someone else has told you or what you may have read in the media. But I think if you're going to be successful over the long-term, and that's what investing is it's a long-term decision to invest for the future, compounding once described by Albert Einstein, I'm told, as the eighth wonder of the world. And it sort of has a snowball effect. So, it may start out small and as it rolls down the hill, it picks up momentum. So, if you start off investing small, but consistently over a period of time, your investment will grow and the income it earns will also grow. 

Ian (2m 13s):

And if you reinvest that income, that will give you that snowballing effect. So once you get hold of how compounding can work, and I'll give you a brief So, example and this is something that some of our listeners may want to do with a bit of a spreadsheet, but if you started investing at the age 20 for 20 years up to your 40th birthday and you simply put away a hundred dollars a week or 5,200 a year and you invested that. Then put another 5,200 a year and the interest was reinvested and reinvested and reinvested until you were 40. Then you left that sitting wherever it was in your investment portfolio, the person alongside you start investing at 40 for 20 years, just like you, putting in there 5,200 a year. Where do you think you'd finish up side by side at the age of 60? 

Ian (2m 57s):

So, each invested for 20 years, you've let it run for the next 20 years, that person alongside you started 20 years after you both age 60. Do the calculation to see where it works out because even at a modest rate of interest, it's often the case that the person that started earlier and invested for the longer term is ahead. 

Phil (3m 17s):

And presumably if you're investing in the ASX, you're going to get the compounding effect of dividends and also the uptick in markets as well. 

Ian (3m 24s):

Yeah, I mean... And even this puts aside that uptick in market so this is just taking your income that you receive and reinvesting it back through your dividends, possibly even through a dividend reinvestment plan. 

Phil (3m 36s):

Yep. I was actually looking at something on Twitter the other day and a market commentator said that if you left your money in the ASX for the last 20 years or so that the compounding is 10% per annum around about that sort of figure, apparently. However, what I can understand is that the market is still only just a tiny, tiny bit above its peak in 2007, the ASX 200. Is that compounding just from dividends? 

Ian (4m 3s):

Yeah. So, when you look at the index, it's just the price index. So, there's a number of indices that can track an investment performance and that's a very good point that you should be aware if you're investing in a particular investment product: what's its benchmark and what's it tracking? So, the index we see on television most evenings is just the price movement. The accumulation index is actually the combination of price and reinvestment of those dividends before any franking. And then there's a third index that actually does include franking. So, for some investors, I know we're talking about getting started here but when you're investing for the long-term and planning for retirement, franking can be a very important consideration. 

Phil (4m 43s):

So, the next point you've caught is a cashflow. 

Ian (4m 46s):

Yeah, always good. Nothing like starting with a plan. So, if I'm starting out investing, I've got my head around compounding, where's the money coming from? So, a lot of people are saving for a range of things, whether it's a holiday, a motor vehicle, a house. Should I start investing and try and do all those other things? My answer would be, yes, you've got to do a little of each as appropriate. So, where's the money going to come from in getting my investment portfolio? 

Phil (5m 11s):

This is referring to the cash flow in your own personal position statement. 

Ian (5m 15s):

Yeah. And actually, that's another great point. 'Cause there's a couple of other cash flow considerations. The first is how am I going to invest? Where's that money coming from? Secondly, what's my portfolio going to give me by way of cash flow and I can reinvest that, get the compounding effect. And then thirdly, that cashflow many, many years down the track in retirement can become the source of my retirement income. 

Phil (5m 34s):

And there's a lot of people believe that you can retire early these days, especially if he can start this compounding at a very young age, which kind of make sense. 

Ian (5m 42s):

It does. And you often find, has been my experience, when you can afford to retire, you don't want to because you want to keep doing things just like this. 

Phil (5m 50s):

That's right. So, diversification, this is another really important aspect, isn't it? 

Ian (5m 54s):

Yeah. Simply put: not having all your eggs in the one basket. When you start out investing, you may start small, but you can start small on a number of ways these days and get a diversified portfolio that's not exposed just to one share or one class of share. It may be logical just to start with a share portfolio of a few Australian shares, then you can add some global shares and as your investment profile changes, you can also add some fixed income, property and those sorts of things to your portfolio. So that's the diversification. And that gives you a spirit of risk as well. So, cash in the bank is almost risk free. The big risks with cash in the bank is not earning enough: low interest rates. 

Ian (6m 35s):

Whereas if you invest in some other asset classes, they have higher risk and you should expect a higher return. So, there's that aspect as well. The other side of diversification is having liquidity and I spent many years at the ASX as you and some of your readers who are listeners may know, and we spoke a lot about actually having a liquid underlying. So, the ASX provides an ability to get in and out real time during market hours. 

Phil (7m 1s):

As opposed to buying a property, which is, you know, you can't sell a brick here or a brick there. 

Ian (7m 5s):

Exactly. You can't tell off the kitchen and then buy back the lounge room. You've got to sell the whole home. So, you'll have a lumpy concentrated portfolio in property. Nothing the matter of property, just in the right balance. 

Phil (7m 16s):

And diversification is not just buying particular companies, you know, you don't just sort of buy particular companies and say, "Well, I'm diversified." You've got to have diversification across different industries as well, which is something that people should consider. 

Ian (7m 28s):

Yeah. Well, just back to those indices we were talking about earlier on. The Australian index is awfully concentrated, and I don't say awful in a bad way, but very concentrated on mining stocks as well as financials: a Telstra, a Woolworths or a CSL and those sorts of things make up the top 10 or 12 stocks and they account for over half the value of the 200. So, you've gotta be very careful about having that, what's referred to as concentration risk, and then getting further down that 200, maybe buying some specialist funds that specialize in small caps, small companies that type of thing. 

Phil (8m 1s):

Yep. And BHP is going to take a huge chunk of the ASX 200 shortly. 

Ian (8m 5s):

Yeah. We're talking in January. So, at the end of this month, BHP will repatriate itself, for want of a better description, from the dual listing in London to be solely listed on the ASX in Australia and take its share of that index from around about six to estimated 10% of the entire 200. So, the big Australian is back in a big way and providing Australian investors who track an index or invest through a fund that tracks an index with very concentrated exposure to mining stocks. Add the other couple in there, Rio and Fortescue, four or five banks, you're really concentrated in those sectors. 

Phil (8m 43s):

How much is the index comprised of, say, those stocks that you just talked about? 

Ian (8m 47s):

As I mentioned, they account for about half of it. 

Phil (8m 50s):

Wow. 

Ian (8m 50s):

So, you could raise that and buy those 10 stocks or buy the whole index and a lot of wisdom in the past was well, the other 190 are going to give you the diversification. But if BHP has a bad day, it's the whole story of BHP sneezes, the index catches a cold. 

Phil (9m 7s):

Yep. Wow. Okay, so risk and reward. 

Ian (9m 10s):

Yeah. That's the trade-off. So, let's start with the really obvious one, if it seems too good to be true, it probably is. And particularly in low interest rate environment, very, very high returns. I'd be very sceptical, but do your research and educate yourself about what you may be investing in. 

Phil (9m 24s):

Are you talking about particular companies that might be flavour of the month or hot new things to invest in? 

Ian (9m 29s):

It could well be. And that could be word of mouth and someone could have made that investment already wants you to follow them. Who would've thought? But for some sense, that's self-gratification from their perspective in that "I've done the right thing, others are following me." But yeah, across that spectrum, cash, as I mentioned, can be considered low risk. Whereas there's some other alternative asset classes, cryptocurrency, could also be viewed as very high risk. 

Phil (9m 55s):

It's looking very high risk at the moment, crypto. 

Ian (9m 58s):

Very volatile. Volatility as the price moves around almost on a daily basis in quite considerable movements. 

Phil (10m 5s):

So, when you say risk reward, what do new investors need to be considering in this equation? Is it... This like risk reward as well with different kinds of companies that they might be buying, for example? 

Ian (10m 17s):

Yes. We're all aware of the recent developments with technology stocks, there're some great tech stocks, some great start-ups and Australia has got a lot of world-leading technology companies listed in our market and I know the ASX is doing a lot more to encourage tech stocks to come here. Some of us can recall back to the beginning of the century, 2000, the so-called tech wreck didn't affect the Australian market as much as it did overseas markets, because that's where the focus was for those companies to list. Yep. So, there can be higher risk sectors or companies within those sectors, I'll come back to it. You start with cash and you sort of move up through term deposits, property, then possibly shares and equities can be among the higher risk. I didn't say risky, but higher risk types of asset classes in which to invest 

Phil (11m 0s):

And liquidity. Are we talking about the liquidity of a company, the amount of funds are available to the company or your own personal liquidity? 

Ian (11m 7s):

Well, yeah, again, once again, it's all of those things. When I'm referring to how diversification helps with liquidity, it's how you choose to invest. So, as I mentioned, if you used the ASX, there's an on-market liquidity. Now the prices on the ASX are set by real investors dealing with one another in most cases, certainly with shares. So that's an investor talking with another investor "I want to sell to you" or "I want to buy for you at..." And they agree a price and they exchange on the market. That's the underlying liquidity of your share or your investment available through the ASX. 

Phil (11m 41s):

So, it just means that you've got access to that money anytime that you want. 

Ian (11m 44s):

You have access, you have the potential to buy and sell on the market at a price that the market will determine. You'll have your money in two days after the settlement, T plus two is the expression. So, the ASX manages that for you. So, you'll a broker on either side, they'll pass the money through the ASX, it'll hold it for two days to organize settlement and then money passes from the buyer to the seller. 

Phil (12m 6s):

And hopefully soon it'll be electronic and we won't have to get those paper statements anymore. 

Ian (12m 12s):

Indeed. It could be real time, who knows? 

Phil (12m 14s):

So, investment styles: active and passive. I mean, this is something that I made mistakes with for many years; thinking that you had to be active to make money in the share market. So, what's the difference between an active and a passive the driver or the passenger approach? 

Ian (12m 29s):

Well, that's a good analogy. You can be a passenger and be passive: passenger for passive. So that means you just, you invest in a fund, such as an exchange traded fund or an index fund, that religiously tracks an index. So, it follows the ups and downs. So effectively that price index we spoke of earlier, when you see that on the TV at night or hear reference made to it in a news report, that's what you're getting. But the bus that you're a passenger on always goes the same route. Whether there's an obstacle there, it'll weather the obstacle, it will wait if there's a traffic jam and those sorts of things. The alternative is active management where you have an active manager. And the active investment manager's role is to look for those traffic jams. And they may not be tracking an index as such, but they'll say "We'll be actively involved in the market and the management of your investment portfolio that you've given to us and we'll seek to exceed this benchmark." 

Ian (13m 21s):

Depending on the nature of the underlying investment, it could be starting with "We want to do better than the RBA, reserve bank rate, by this much, X percent. And that's our benchmark by which we should be measured." Or "We wish to do better than the ASX 200 accumulation index. So, the growth plus the income being reinvested." And they see those roadblocks coming up, they may say, "Well, we're still going to stick to that index, but this is how we're going to do it. We're going to not hold that stock and we're going to buy a little bit more of that." Whereas on the bus, the passive manager or the system that they use to actually track that index says "That share has appreciated in value, we must buy more." 

Ian (14m 2s):

The active manager might be saying, "Ooh, that's running hot, we'll step back from that." The passive manager is buying that stock. On the other side of the mountain as stocks come down, and yes, that's the unfortunate truth, they do, the passive manager is selling into a falling market. Whereas the active manager might be saying "We'll wait, we'll wait, we'll wait. Ah, there's real value there now. We'll buy into that market and we may pick up on the next increase." 

Phil (14m 28s):

There's a number of actively managed products and these can be ETFs, they can be LICs or LITs or they can be managed funds, is that correct, is that the way usually that active management takes place? 

Ian (14m 42s):

Just to put a finer point on it, ETFs, the nomenclature, ETF exchange traded fund, they tend to be the passive index tracking funds that we spoke of. They are by value and by number, the vast majority listed on the ASX. And around about a quarter, from memory, actually track an ASX Australian index, such as the 200 or the 300 or the 20 or the 50. So, they are heavily focused on the Australian market, passively tracking those indices. And over the years, there has been an evolution to more active style exchange traded products, or actively managed ETFs where we can say that. Where they may track a bespoke index or they may be more sector oriented. 

Ian (15m 23s):

So, if, as we're talking about, they focus on some mining stocks or they focus on tech stocks or they focus on financial stocks. So, you actually buy a concentration. Or in fact, some of them actually track prices such as the gold price or a currency like the US dollar. But they actively manage against some sort of benchmark. "We're going to track that currency; we're going to track this bespoke index of tech products and funds. That's what's in there, that's what we're going to buy and sell." So, they're sort of, again, buy into those as demand for their idea increases. That's an open-ended structure. That means if I wanted to invest, and I can do this through the ASX, you're one of those actively managed ETFs, I give my $5,000 to the manager and they go out and buy the underlying index and replicate that with my money against their active strategy. 

Ian (16m 12s):

If I want my money back and there're more people like me wanting money back than wanting new units, they will actually sell the stocks that they hold to help me redeem and give me the cash back. They'll charge a fee for that as well. And they charge a fee along the way. The other style of active management is closed end. And that's why I'm particularly interested in the listed investment companies and listed investment trust structures, they're actually closed end. And the really important thing there is that they manage their capital, their stock and trade completely different from those open-ended, whether they're index tracking or actively managed ETFs. They actually have a closed pool of capital. The manager decides and talks with their investors about "This is the strategy we're going to pursue; this is the benchmark we're going to follow; this is the outcome you still expect from us, but you've given us your capital to do that with. 

Ian (16m 60s):

If you want to try it out of your investment with us, you do so on the market with another investor." So, another investor says "I like that, I wish to buy in." So, I'll talk electronically a lot of the times through an online broker to another investor about, "I want to buy it from you at this price, I want to sell to you at this price." And we sort of move around a bit through a broker and that's the price at which we're exchange on market. 

Phil (17m 23s):

And so that's traded like a regular share. 

Ian (17m 24s):

It is a share. So, a listed investment company is a share, the name says everything. But it has all of those traits that we talked about earlier on: diversification, because it's not just one share, it's quite often a range of shares within that company structure or other asset classes such as global shares. But the capital remains until the manager says, "I need some more capital. I'll go to the market and say, who wants to participate through a rights or entitlement issue?" 

Phil (17m 55s):

So, am I correct in hearing that with an LIC, if you want to get out, you just sell it as you would, any other exchange traded product, an ETF feels the same way, but in fact, it's via another system? Like you put a dollar into an ETF and 10 cents of that dollar, if it's an ASX 200 ETF, is going to BHP and they're buying that amount of BHP on your behalf. And then the same as it goes out the other end. 

Ian (18m 22s):

Yeah, you're right. And the very important thing is that the experience on the surface of it, it's the duck, right? On the surface looks very similar between a share, a listed investment company and exchange traded fund: the way you would access it through a broker on market. The differences are when you're dealing with an ETF or you're going to buy some managed funds on the ASX as well, you're actually talking through their system to the fund manager, not to another investor, necessarily, the vast majority of the time. There can be some natural trades but the vast majority of time you're talking to the manager saying, "I want to buy $10,000 worth of your investment idea." But then works out exactly as you say, the Black Boxes, BHP will probably be 10% of that index that you want to invest in. 

Ian (19m 7s):

So, you're a dollar 10 cents there. Next one, Commonwealth bank probably CSL and so on down through the others. 

Phil (19m 13s):

Wow. So, let's talk about LICs. LICs have been around for a long time. 

Ian (19m 19s):

Next year in '23 we'll celebrate a hundred years. 

Phil (19m 22s):

And which one is that? 

Ian (19m 24s):

That's Whitefield 

Phil (19m 25s):

That's right, Whitefield. 

Ian (19m 27s):

Formed in 1923. A hundred years and this reflects not just their tenure and their stability and their ability to weather the course of events. They were the first fund managers, if you like, who saw the real benefits that an exchange product could bring; an exchange traded or an exchange available product. So, they chose to list, they are companies that are listed under the same listing rules as the BHPs, who's the Commonwealth Banks and the Westpacs we've been speaking about, they're admitted to the official list of the ASX. So, they've been around for that a hundred years, they've weathered the storms, as I've said, and they hold a basket. So, they deliver the diversification out there. They hollered a basket of assets within that company structure, they get all the benefits of patient, effective, active capital management. 

Ian (20m 11s):

They decide when to invest, how to invest, why to invest and when to retreat over time and they pay dividends. So as a company generate profits, they're taken to its balance sheets, they pay tax. After the pay tax, they're entitled to pay fully franked dividends in many cases, if not most cases. 

Phil (20m 29s):

And a lot of these original LICs are set up as vehicles for providing income, aren't they? 

Ian (20m 36s):

Yeah, that's a pretty standard definition for a listed investment company and trust, is that they're income producing vehicles. Some will appreciate in value in terms of the share price over time and that reflects their growing portfolios more than HP has found a new copper strike or the new iron or strike or those sorts of things out, great news for BHP, or China's really buying more iron ore from BHP. Whereas these guys are sort of, "Okay, well, we'll take a piece of BHP, put it into our portfolio, get the benefit of that, run that through our company structure. At the end of the year, we'll pay, or throughout the year, we'll pay a couple of dividends, if not more. And because we've made a profit, pay tax in Australia, they can be franked." 

Phil (21m 15s):

Quickly explain the difference between LICs and LITs, I believe it's only just a tax set up, isn't it? 

Ian (21m 21s):

They both closed end, but the listed trust structure, listed investment trust structure, or LIT, has a lot of the characteristics of the exchange rate of funds we talked about. But the big differences are, as you point out, tax. A trust, as an ETF or a managed fund, doesn't pay tax itself. It passes all of the income, be it capital gain or income derived from other distributions or investments that are holes or rent through to the end investor. If you're getting excited, sorry, I have to inform you, you do have to pay tax, but you do that at tax time. The company is structured, which is pretty much the same for the 2200 companies listed on the ASX, is that companies structure pays tax on their income on an annual basis. 

Ian (22m 3s):

And they pay that to the Australian government. And in fact, they'll pay it at the company rate, which is generally 30%. That's paid on behalf of the investors holding that listed investment company or listed company. Come tax time, around about the time you'd be paying the tax through the trust structure, you work out, "Hang on. I paid too much tax. My tax rate is less than the company tax rate. I get a refund." And in some cases, many years down the track for some of our listeners today, if you're investing in your retirement fund, you pay zero tax. So, you get a fully refunded tax cheque from the government. 

Phil (22m 35s):

And these are franking credits? 

Ian (22m 37s):

It's franked. So, the franking credit refers to the credit you have as an investor for the tax already paid by the company but it's paid on your behalf. Some people have trouble getting their head around and think, "Oh, why is the government just giving people money back?" It's not. It's similar to you as a PAYG taxpayer, your employer pays tax. At tax time you work out, is that too much or too little? And you make an adjustment. And it's very similar in that regard, the companies pay tax from its profits, that I'm an owner on that company. Have I paid too much or too little as an owner? 

Phil (23m 9s):

So LICs aren't just about Australian shares, there's other assets that these companies will invest in aren't there? 

Ian (23m 13s):

Yeah, Phil. They're well-known for holding a basket of Australian shares and when we're talking about some of those traditional ones, that's what they've been doing for many, many years and doing it very well. But probably about 10, 15 years ago, there started to be a growing number that were actually holding global assets. So again, in the listed investment company space, you have an Australian listed company, an LIC, going overseas and investing in international stocks or global stocks but as an Australian entity. I've just described how franking works because they are an Australian listed investment company, they pay tax here, they actually pay you a franking credit. 

Phil (23m 47s):

Even though these things aren't available overseas? 

Ian (23m 49s):

Typically, if you're invested in a trust structure in overseas shares, you just get all the flow through income and then you pay tax on it. But there's no consideration for any income being received in Australia and then tax paid on that. 

Phil (24m 3s):

This active management that you mentioned, AFIC, which is another LIC which has been around for a very long time. I was reading this morning because today we're recording in late January and the markets are going up a little bit up and down. There's a lot of volatility and things are going down. And the manager is saying that "Well, we see some opportunities coming, but we're not ready to buy yet." So, they have the ability to wait for markets to reach a point where they feel comfortable to buy in and hopefully generate some more returns for their investors. 

Ian (24m 38s):

Exactly, so they're looking at the market, they're seeing the volatility. They're saying, when will we see value in the stocks we wish to own? 

Phil (24m 43s):

Value. That's the word I was looking for. 

Ian (24m 47s):

And you might say, "Oh, well, they're just going to peddle along for a while. Why would I invest in someone who's waiting and waiting and waiting? They're being patient. The other thing is, on their balance sheet, they've already had some many good years and they've actually stored up some profits, which they can continue to pay out into the future. So, they've got stored value in their own balance sheet. 

Phil (25m 9s):

They've got a bit of cash in the bank, have they? 

Ian (25m 10s):

They've got cash in the bank and the investment manager and their investment committees and the company structure that's around it, the board of directors, can make a call on, "Yes, we'll pay a dividend to our investors, even though it's been a difficult year." And we did see this through the pandemic, many LICs that had stored value on their balance sheets were able to maintain some, actually increased their dividends. 

Phil (25m 32s):

So, this sector, they all still doing the same thing, or they're looking at other investment opportunities around the world? 

Ian (25m 37s):

Those larger, and I say with the greatest of respect, traditional listed investment companies that have been around for almost a hundred years have continued to do what they do with their Australian share portfolios for ever. However, of late, someone like an AFIC, which we're just speaking about, has been running a mirrored portfolio of global shares, thinking that it might expand into that space as well, whether it's a separate LIC or contained within the one of the AFIC stable, they have four already. Another interesting one is Argo, another well-known, long-term, long running LIC. A number of years ago started an infrastructure fund, a global infrastructure fund. 

Ian (26m 17s):

So, here's a way you can use a well-known manager who's using other managers' expertise to invest globally in an asset class like infrastructure. Very difficult for direct investors to buy airports or toll roads or tunnels, but through the structures that they use, you can invest in small, bite-size chunks into the company structure. Investing in an asset class such as global infrastructure, which helps your diversification and also gives you exposure to other income producing asset classes that weren't normally easily available to Australian investors to invest in themselves. 

Phil (26m 47s):

And this is something that I'm going to bore listeners with again, is that diversification also means asset classes. And this is something that you can actually see when you look in your superannuation statement. You can see all the asset classes where your money is being put in and infrastructure is one of those asset classes. And this is where true diversification comes, is understanding that there's not just buying different companies in different industries, but there's also assets in sectors like infrastructure that are important for any kind of balanced portfolio. 

Ian (27m 21s):

Absolutely. It would be very difficult for an investor to buy the airport. Some of those superannuation funds buy the airport or by a 50% interest in an airport in Australia or overseas. So, they use their grunt and their capacity to do that. They pass that through to their superannuation members. Well, here's an example for people willing to build a diversified portfolio. To get a slice of infrastructure, or to even get a slice of real estate without actually having to buy a physical property through an ASX listed A-REIT, which is a trust that invest in various types of properties, such as offices or shopping centers, or in a growing way these days, warehouses that have been used for logistics and distribution centers. 

Phil (28m 3s):

So, I don't want to wish to be unkind, but I was speaking with someone from an ETF provider and I mentioned LICs to them. And they said that LICs are dead because actively managed ETFs can do exactly the same thing at a lower cost. 

Ian (28m 16s):

Well, I don't think they can do the same thing. And I'm always very conscious of trying to enstyle the virtues of listed investment companies rather than talk about the negatives, the alternative investment products. But actively managed ETFs do have that open structure. So, they're subject to the ebb and flow of money coming in and money going out and cannot patiently manage their capital. 

Phil (28m 38s):

Even in active managed ETFs? 

Ian (28m 41s):

Even an active managed. On any day, if they have more demand for redemption of units than they do for applications for new units, they need to sell the underlying assets to realise the they to pay you your cash. Closed end structure of an LIC says "You sell to another investor on market and he, or she, or pick up where you left off." So, there's that consideration. So that's the force of buying and selling on demand forced into a market they might be tracking or a benchmark they may have created to track if that's rising. So, on the other side, on the way down, it's falling. Given that sort of scenario, they don't have the opportunity for long-term investment thinking. So, investment, as we started out, there's a long-term process, get the basics right, and plan for a longer, longer term. 

Ian (29m 23s):

So, we talked about infrastructure. If you're investing in real assets, such as infrastructure or property, you need a closed end structure to maintain the So, capital so you're not forced to see a runway or an aircraft hangar, which you cannot do. Now, I know there's ETFs that do track infrastructure, they track an infrastructure index. So here we go again, you're following an index that is tracking a range of infrastructure, underlying assets, not the real assets themselves. 

Phil (29m 49s):

Gee, I could go down so many rabbit holes here, but anyway, we better keep on track. So, wrap up LICs for us, Ian, what are some of the main features and benefits for investors to think about? 

Ian (30m 0s):

Yeah, firstly, they've got that long-term track record, close to a hundred years. They use that closed in structure so they can actually be proactive with their capital. They make considered investment decisions, not ones that are forced upon them by buyer seller demand. Buyer-sellers connect to use the liquidity of an ASX or another exchange to actually transact, move in and out of their investments. So, they've been able to focus in on doing what they do well for the long-term, they have very much a long-term focus on their investment principles. And they've also been diversifying beyond just Australian shares. Over recent years we've seen an expansion into global as well as to things such as infrastructure. We've also seen the growth of listed investment trusts, which have a pass-through income profile. 

Ian (30m 43s):

So, all the income that they generate passes through to the end investor before the investor pays tax. Now, because they're closed and they're not subject to buying and selling to meet demand for new units or sell down existing units. They actually do that in the same as a share or an LIC on market. But what allows them to actually stream that income is the nature of their underlying and what you're seeing now is none of those listed investment trusts are investing in, not guaranteed, but where there's a great deal of certainty about the underlying income profile: bonds. That could be government bonds, that could be investment bonds, that could be a range of sub-investment bonds, but across a diversified portfolio. That could also be investing in corporate loans to Australian businesses where they'll lend to that business at a rate above the current RBA rate and they'll take out their costs and they'll distribute the balance above that RBA rate to their investors. 

Ian (31m 34s):

In fact, some of them actually doing it on a monthly basis. For those income needing investors, they have to wait to do that. So, I stress that the closed instructor has a lot of those benefits: patient and persistent management of capital in a positive way. 

Phil (31m 47s):

Is there any particular LIC that you wanted to talk about as a great example? 

Ian (31m 51s):

It's an interesting one and I'll pick it because, you know, it's like having kids, you know, 

Phil (31m 59s):

Yeah, no fear or favour 

Ian (32m 0s):

You can't favour a child. It is the longest running one, which is Whitefield 1923. And we're recently doing a presentation where the managing director created a chart and placed all these points. This is how we've performed in an accumulation way against our benchmark. But the benchmark actually used the ASX 200 accumulation index to a certain point in time and then had to go back to the all-ordinaries accumulation index before that, because it's been running for so long. So, ETFs started around about the time the ASX 200 index was created, around about the turn of the century 2000. These guys have been going for many years before that. So, it's sort of strange to look at and that's it, of course the return was quite significantly ahead of that index. 

Ian (32m 41s):

So, you just get that, see the power of the compounding over that period of time, almost a hundred years and is reflected by the change in the nature of the index. We had to use this one pre 2000 and this one has been the benchmark since. So that's an interesting insight to how these companies have operated. 

Phil (32m 58s):

So, we've got a couple more questions that we're going to cover and that's, what's been your best investment decision? 

Ian (33m 4s):

Yeah. Everyone talks about the best investment decisions, hardly mentions their poor ones, but we all have both. But my best one really was getting myself educated. You'd find this hard to believe, Phil, you're looking at me sitting here. About 50 something years ago, I went to what was the Sydney Stock Exchange at the time with my dad for a number of education sessions. And I sort of picked up on my parents' interest in investing. And that helped me understand a little bit more about the market. So shortly after that, I bought some BHP shares, which I still have. They sit in the self-managed super fund these days. But what I learned from that was the twists and turns of a company, the life of a company, even over the period of which I've held it. So, I've seen spinoffs and growths and I've got a whole lot of other stocks as a result of that. 

Ian (33m 47s):

And some of us will be aware, not right now with the unification, but a few years ago, BHP created South32, 1 Steel, BlueScope. I think they even had an interested fosters at one stage. And then I remember my first here's some shares in a gold company ‘cause they sold BHP gold. So, I've learned a lot about how the why's and wherefores of shares and holding, investing over the time through that stock. I also have a whole bunch of other stuff. So, I'm diversified and that, don't look at me like that, but I've learned I've learned from that experience and I'm going to learn a little bit more at the end of this month in what turns out to be the one of the biggest corporate actions in Australian corporate history. 

Phil (34m 22s):

It's interesting that you say that. Another guest has said that the best way to learn is to find a particular company that you know and to buy a small holding in that and then learn as much as you can from their particular company. It's kind of like the education process you had with BHP. 

Ian (34m 36s):

Pretty much what I did. And I got my dividends and what I was doing as a young bloke, a lot younger, I was working out "Okay, money received. I saw, I invested X. Money received this time, this time, this time, how much?" And I eventually got ahead. So, I had a period of time that I was actually recording it, the distributions and dividends actually paid for my investment. So yeah, you learn a lot like that. And there's also another saying, is that for many, this will be the first boom we are in a boom, there's no question of that and I wouldn't call any downturn at all, but we were experiencing a purple patch. There's another saying is you learn a lot from your first bull market. You make most of the money in your second bull market. 

Ian (35m 19s):

Unfortunately, you learn on the wrong side of the bull market. 

Phil (35m 23s):

So, we wouldn't say anything about worst investment decisions, but what's a decision that you wish you didn't make? 

Ian (35m 29s):

Not to buy more BHP. 

Phil (35m 30s):

Ian Irvine, thank you very much. 

Ian (35m 32s):

My pleasure.

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