Welcome to the latest LIC review in the series.
Today, we’re taking a look at an investment company that flies under the radar of most investors – AUI.
While it is similar to the others we’ve covered, it doesn’t get much love. But despite its lack of popularity, I think it’s worth considering for income-focused investors. And you’re about to see why…
Australian United Investment Company (ASX:AUI)
AUI was founded 65 years ago, in 1953, by the late Sir Ian Potter, a prominent stockbroker, businessman and philanthropist.
Leaving most of his wealth to charity, today the Ian Potter Foundation is the largest shareholder in AUI.
The company listed on the ASX in 1974, and today is valued at just over $1 billion.
AUI is conservatively managed, with a strong focus on providing a reliable and growing income for shareholders.
This should come as no surprise, given the founder’s charity is the largest shareholder. A charity needs reliable cashflow, and as dividend investors, so do we.
AUI is an extremely lean company, with only a board of (well experienced) directors meeting monthly to make investment decisions. It invests for the long term and rarely sells holdings.
Philosophy & Objectives
From the company itself:
“Our objective is to take a medium to long term view and to invest in a diversified portfolio of Australian equities which have the potential to provide income and capital appreciation over the longer term. AUI is an investment company which seeks, through portfolio management, to reduce risk and improve income from dividends and interest over the longer term.”
“Investments are purchased on the basis of the directors’ assessment of their individual prospects for income and growth. The directors do not invest by reference to any pre-determined policy that any particular proportions of the capital will be invested in particular investment sectors.”
In short, AUI invests where it sees good prospects for income and growth over time.
The company also uses a very modest amount of gearing. It has an ongoing bank facility, usually worth around 10% of the portfolio, to access additional funds for investment.
While this is unusual for an LIC, the interest rates are favourable and it’s managed conservatively. And in any case, it’s only a small amount of debt.
AUI has a medium-sized portfolio of between 40-50 companies – a similar amount to BKI.
While AUI holds a group of mid-cap stocks, the portfolio is heavily weighted towards the largest dividend payers on the ASX. The company also has tiny investments in 2 small-cap managed funds.
Clearly, the board of directors has decided to outsource the selection of small companies to others better researched in this area.
Here’s the portfolio breakdown by sector…
Similar to the other Aussie LICs, AUI is heavy on financials. But digging deeper, it’s not as concentrated as it first appears.
For one thing, this chart is from 12 months ago and banks have fallen since then.
As of AUI’s most recent annual report, banks make up 24% of the portfolio – (see here for full list of shares owned starting page 38).
Other Financials and Insurance is 11%. And 6% of that is their holdings in other investment companies, Washington H Soul Pattinson and sister-company DUI.
So the portfolio today is really about 30% financials in total. A decent weighting, but hardly nosebleed levels.
You can find AUI’s current top 25 holdings here.
The portfolio will likely change slowly over time, as it makes further investments and various companies succeed while others stagnate.
No question, AUI has a less diverse portfolio than the likes of Argo. But that hasn’t stopped it providing a good flow of income to shareholders.
Long term performance data is frustratingly hard to find in Australia. But we’ll work with what we have.
I’ll just apologise now that I don’t have a clear one or two charts to show you. More like a collage of data!
Here’s the last 10 years of performance from AUI’s recent report…
AUI has lagged the market a bit in the last decade. But this isn’t quite the whole story.
There’s fees for the index which aren’t included. Then there’s franking credits, which would be a bit higher for AUI. And finally, the fact that AUI regularly trades at a discount – more on that later.
Essentially, anyone who bought AUI over the last decade would’ve received a return close to that of the index.
As you can see, the numbers are still skewed downwards by the GFC bang on 10 years ago. In about 6 months, the 10 year figures will look a lot different, even though little has changed!
Since I think in time-frames much longer than 10 years, I went in search of more data. And I found this chart from AUI’s 2001 Annual Report (click to enlarge).
OK, so this runs from 1980 to 2001. And this compares the All Ords Accumulation Index and AUI. Both including dividends. A very large difference. Even if you pick different starting points on that chart, AUI still did better.
Well, what about since 2001?
As luck would have it, 2001 is when the first index fund in Australia was listed. So we can compare against that using Sharesight. Here’s what it shows from 2001 to today (29 Sep 2018)…
These figures account for franking credits and fees for both.
So, over longer time periods, AUI has done pretty well. It’s beaten the index for most of the last 40 years. And only in the last 5-10 years it has started lagging.
But with the amount of fund managers and analysts in the market now, this could be the new normal.
Why? Because more competition between professionals tends to compete away excess returns.
The same goes for the other LICs we’ve looked at previously.
AUI may never return to its old performance. But at least we have more history and context when thinking about the company.
As you know by now, our focus isn’t getting the highest possible return at all times. It’s about the income stream!
And I think you’ll be pleasantly surprised with AUI in this area. I know I was.
Here’s the dividends paid each year going back to 1993…
Wow! AUI’s dividend history is a thing of beauty. There were no cuts during the GFC. Most years the dividend has increased, and other years it was kept stable.
If you’d owned AUI during the last couple of decades, you wouldn’t know what all the fuss was about. And recent underperformance? With an income stream like this, my bet is shareholders wouldn’t have cared!
Over the last 25 years, dividends have grown at a rate of 6.3% per annum. And during that time, inflation was 2.5% per annum.
As a side note, since 1992, capital growth has also averaged close to 6% per annum.
So AUI has done an excellent job of providing reliable and increasing income for shareholders. If this was your chosen source of cashflow in retirement, you’d be very happy indeed. Honestly, this is about as good as it gets!
AUI is a low-cost operator. Very low-cost!
The cost of managing the company is currently 0.10% per annum. And this includes the fees paid on the small-cap managed funds that AUI invests in.
Put another way, AUI is cheaper than AFIC, despite being 1/7th the size!
Also, AUI is internally managed. So as the company grows over time, the expense ratio tends to fall. And this means we can expect it to get a little cheaper in the future.
As mentioned, there’s no analysts or expensive research teams. The board of directors simply meets to discuss the portfolio and make decisions every month.
Another sign of frugal funds management, is their website. It looks older than the internet!
Now, I know some are turned off by that. But I think it’s a good thing. It shows AUI doesn’t spend a fortune on glitzy presentation material or marketing.
In any case, the dividend history speaks for itself!
As you might know, shares in LICs can trade at a price that’s different to the value of its assets. All depending on what price people are willing to buy and sell for.
Most of the time, the older LICs we discuss, trade somewhere close to its net tangible assets (NTA). But in the case of AUI, shares trade at a discount almost all the time.
This could be for a variety of reasons. AUI is smaller and not as well known. It makes no effort to market itself or give presentations to analysts. Or it could be that people simply prefer the larger old LICs like AFIC or Milton.
Another reason might be the more concentrated portfolio. Or because it’s less liquid, meaning less shares are traded each day. It could also be everyone expects AUI to lag the market going forward, so buyers demand a discount to compensate.
These things can create a feedback loop of course and result in nobody wanting to pay full price, because it never trades at NTA!
Whatever the case, AUI tends to trade at a discount to NTA of around 0-10%.
As an example…
The recent monthly portfolio statement shows AUI has a net portfolio value of $9.35 per share. And today (28th Sept) AUI shares are currently trading at $8.50. So you’re getting shares at a 9% discount.
Put another way…
Let’s say AUI traded at NTA value, $9.35.
This year’s dividend was 35 cents per share, which is a yield of 3.7%, or 5.3% including franking credits.
But because you can buy shares for $8.50, your gross purchase yield is actually 5.9%.
This yield is locked in on purchase. So whatever AUI’s performance is going forward, your return will be 0.6% higher.
Don’t get too wrapped up in the details of this. Just a point I wanted to make.
AUI has an impeccable dividend history. As an income focused investor, that’s very hard to ignore!
They’ve managed their earnings well, so as to not have to cut the dividend during leaner times. It has the most reliable dividend track record of any LIC I’ve looked at.
For some people, this factor will make up for any underperformance.
AUI is tax-efficient, doing very little selling. Because of this, they can pass on the CGT discount to shareholders when they do sell shares. So on the odd occasion, we’ll receive a tax deduction attached to our dividend, along with those franking credits. More info can be found here.
I like AUI’s long, successful history and the focus on keeping costs ultra-low.
Also, being able to buy shares on the market at a discount is a plus, as it boosts our purchase yield versus the underlying portfolio.
AUI has a slightly more concentrated portfolio than the bigger LICs. It’s more similar to BKI in this regard, having only 40-50 holdings.
The top 25 holdings account for around 80% of the value. So I’d prefer the portfolio was more diverse. But I can’t really argue with the income stream they’ve provided.
The lack of small companies is a negative too. While I understand medium and large companies tend to be better dividend payers, some small dividend-paying companies in the portfolio couldn’t hurt.
Also, recent performance could be chalked down as a negative. But as mentioned earlier, it’s not a dealbreaker for me.
I’d like to see more shareholder communication as well. Nothing much, just some extra commentary on the AUI portfolio and the market would be good.
Overall, I like AUI and we own it in our portfolio.
While it doesn’t get much mention, it’s been a very strong income provider for a long time. Think of all the ups and downs in the sharemarket over the last 25 years…and then look at that dividend history again!
It’s a little bit different to the other LICs we’ve talked about. But I think it’s worth considering as part of an Aussie shares portfolio.
Currently, AUI trades on a dividend yield of 4.1%, or 5.9% including franking credits.
AUI is well managed, low cost and very focused on providing reliable returns for shareholders. They’ve done a great job so far and I don’t expect that to change anytime soon.
A dependable and growing income stream for financial independence, what more could you ask for!
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