Welcome to the long awaited review of Whitefield.
Many of you have asked for this since the LIC series began!
In case you missed it, I created a special page with all the LIC reviews so far, and charts with the dividend history of each. You can check it out here.
We’ve covered a few so far, but I think this company is also a solid choice for long term dividend focused investors.
As always there’s lots to cover, so let’s get started!
Whitefield was founded as an investment company and listed on the ASX in 1923. This makes it the oldest LIC in Australia.
Today, the company has grown to be around $400m in size.
Whitefield is well diversified, having investments in around 160 different businesses. This makes it like an index fund in some ways.
The key difference from the other old LICs, is that Whitefield has zero exposure to resource companies. More on that below.
The company invests with a long term focus, to benefit from the broad earnings growth of Australian industrial companies over time.
Whitefield is run at a reasonably low cost and the portfolio has low turnover, which makes it tax efficient.
The key focus for Whitefield is to grow wealth for shareholders through holding a very large diversified portfolio of industrial shares. All while paying a reliable income stream via fully franked dividends.
More specifically, it aims to slightly outperform the ASX 200 Industrials Accumulation Index (XJIAI), with low chance of underperformance.
So by design, the performance will be very similar to this index.
Mostly, Whitefield uses a quantitative approach (lots of data and numbers) to make portfolio decisions.
Basically, they will overweight and underweight certain companies and sectors, based on the earnings outlook and valuations.
Whitefield invests only in ‘industrial’ shares, which in this context, means all sectors except for resources (mining).
Now, for those following Peter Thornhill’s approach and teachings, you’d be very familiar with this.
In the company’s words…
“The high cyclicality of the resource industry has seen resource stocks generate high volatility earnings and lower through-the-cycle investment returns over the long term. By eliminating resource stocks from our portfolio, we are able to deliver higher through-the-cycle returns with lower volatility (that is, higher risk-adjusted returns) for our investors.”
Whitefield has a very large number of shares in the portfolio – around 160 companies.
As you’d expect, these are spread across many sectors, except resources of course!
Here’s the current breakdown of the portfolio…
So, we can see there’s a good spread of industries in the portfolio. But it’s still concentrated in some ways.
Because of the exclusion of mining companies, it means a higher level of exposure across the other sectors.
Now that’s not necessarily a bad thing, with most resource companies being poor or unreliable dividend payers. But it’s still something to be aware of.
Most of the time, Whitefield’s portfolio will closely replicate the entire ASX 200, minus resources.
You can check out the current top 20 holdings here.
Basically, the portfolio is much more index-like than say BKI and Milton, who are more hardcore dividend investors, and build their portfolios accordingly.
You can argue this index-like approach is lower risk, in the sense that it prevents poor stock selection and decision making to some degree.
And because of this, there’s comfort in the fact that the portfolio will probably always be a good representation of the Australian industrial economy, now, and in 50 years time.
Also, by owning pretty much every industrial company, it means Whitefield is much less likely to underperform over the long term, by missing any huge success stories.
Overall, I still feel Whitefield is reasonably diversified. But I do expect (and hope) the portfolio will become more diverse over time, as the Australian economy grows and broadens over the next few decades.
Let’s take a look at how Whitefield has done in terms of performance.
From the 2017 Annual Report…
And now the same thing in chart form…
As we can see, performance has been pretty good over the long term. Slightly ahead of the Industrials index, which was also slightly ahead of the broad market ASX 200 index.
But this isn’t quite the whole story.
See, ‘portfolio performance’ often means what the return is, before tax. And for an LIC which has low turnover and keeps its holdings for a long time, that’s a good place to start.
But I want to see the after-fee and after-tax return too. So here’s what else I found, from the 2018 Annual Report…
Now, there’s a lot going on there. But here’s what I’m looking at…
The bottom line. That’s Whitefield’s total returns based on their net asset value (NTA). After fees, after company tax, and before franking. 12.3% per annum.
So, after accounting for fees and tax, performance was a little lower than the Industrials index, but still ahead of the ASX 200, over the long term.
Some tax is unavoidable of course, as Whitefield must pay tax on any dividends it receives which are unfranked. This includes income from property trusts, infrastructure and companies with mostly international earnings.
Also, the portfolio needs to be changed slightly over time, which of course creates some capital gains tax events. But not all is lost. Because both of these things create extra franking credits to attach to the dividend.
Some of you may prefer to look at share price plus dividends instead. But this paints an unusually rosy picture.
Why? Because it seems Whitefield was trading at a huge discount back in the early 1980’s, boosting performance since then.
So, looking at the NTA figures above (or whichever you prefer), they’re pretty solid. And if we were to add in franking credits too, the long term returns would be quite high indeed.
Honestly, I’d be impressed if Whitefield outperformed the ASX 200 going forward. Especially on an after-fee, after-tax basis.
Now let’s take a look at this all-important factor. And we’ll see how Whitefield has done in terms of providing a growing income stream to shareholders over the long term.
Here’s the dividends paid since 1990…
As you can see, Whitefield hasn’t cut the dividend at all over this time. That’s almost 30 years!
Clearly, Whitefield makes a point of providing a reliable income to shareholders, even when its earnings have fallen.
This includes the recession in the 90s, as well as the GFC.
When many companies and even LICs cut their dividends, Whitefield has continued to pay the same amount. Now earnings have caught up and they’ve begun boosting the dividend once again.
It’s been a long wait for shareholders, receiving flat dividends from 2009 to 2016. But is that better than a dividend cut, which then grows to catch up?
I’ll leave that for you to decide. But I expect that shareholders were very happy having no cut to income during the scariest financial period in a generation.
Recently, Whitefield has forecast a decent jump in the dividend for this coming year too.
So looking at these figures, dividends have grown at a rate of 4.9% per annum, over almost 30 years. And during that time, inflation was 2.5% per annum.
This means Whitefield has provided an income which has comfortably grown faster than inflation over the long term.
Despite the dividends being flat for multiple years at a time, I think the average is what matters. And the extra stability of income is definitely worth something. Especially if this is a person’s retirement income stream.
Given Whitefield’s diversified portfolio of 160 stocks, dividends should grow nicely over time. And this growth should be broadly in line with the earnings of Australia’s non-resource companies.
Unfortunately, Whitefield isn’t as low cost as the other LICs we’ve covered so far.
As of the latest report, the management expense ratio (MER) is 0.40% per annum. There’s a couple of reasons for that.
Firstly, Whitefield is much smaller than the others, at only around $400 million in size. Quite different from the likes of Argo at $5 billion, and AFIC at $7 billion. Benefits of scale mean the bigger LICs have a cost advantage.
Also, Whitefield is externally managed, like BKI now is. So this means that even as Whitefield grows, it’s unlikely the MER will come down much.
Now, I could be wrong on that and the management decide to reduce fees over time to stay competitive.
But there’s also the chance they decide the costs are fair, given they have a company/product that is unique in the sense that it is pure industrials.
To be clear, management own a sizeable chunk of the company, so it’s not like they’re out to milk the shareholders.
But given fees are one of the only things we can control as investors, some people will rule out Whitefield straight away. And I wouldn’t blame them for that.
Others will be willing to pay a bit extra for an all-industrials LIC and the chance of outperforming the market. That’s up to you.
Resources vs Industrials
If you’re mainly interested in Whitefield for the resources vs industrials thing, and expecting permanent outperformance on that basis, I’m not sure that’s a slam dunk.
While the earnings and dividends from mining is volatile, there are valid reasons why the other old LICs own these companies in their portfolios.
The truth is, there’s a number of mining companies that have far outperformed the market average over the last couple of decades. BHP, Rio and Woodside are some that come to mind.
Australia has some of the largest and most competitive mining companies in the world. And whether we like it or not, it’s still an important part of our economy, so we should probably own a piece of the action.
Not to mention, when they’re profitable, they’re extremely profitable. So it’s quite clear that some resource companies are worth owning.
And excluding these companies, may actually lead to underperformance over time. Also, it gives your portfolio less diversification, because you’re excluding an entire sector.
If you prefer not to have exposure to mining for other reasons, that’s perfectly fine. But expecting all mining companies to underperform forever, probably shouldn’t be one of them.
Now, I wouldn’t buy these companies if I was picking my own stocks, simply because they’re too hard to predict and the income is less reliable.
But I’m quite happy to own some inside my LICs or an index fund, because the performance and dividends are levelled out by so many other holdings inside those funds.
Resources as a group may not perform as well as industrials well into the future, who knows. But hopefully this gives you another angle to think about it.
Like AUI, Whitefield also has a small amount of ongoing borrowings – around 10% of the portfolio value.
I’m no expert in this area by any means. But basically, this debt either gets rolled over, or converted into new shares, or both.
Actually, this is one of the reasons Whitefield has flagged a large dividend increase for this year. Because they effectively refinanced this debt at a lower interest rate, giving a boost to earnings.
Of course, having some debt is an additional risk, albeit a small one. But Whitefield has been doing this for a long time. And given the amount is only small, it doesn’t concern me.
Also like AUI, Whitefield tends to trade at a discount to the value of its assets – or its NTA.
This could be because it’s a smaller LIC. So it’s less well known, and less shares are traded. Maybe the higher fee puts people off. Maybe people expect it to underperform. Or investors simply prefer the other old LICs.
Either way, shares in Whitefield often trade at a discount of between 0% and 10%.
The point is, investors are able to buy the income stream of those underlying companies at a discount. And this often means a higher yield and higher total return than would otherwise be the case.
Here’s what I mean…
Today (7/12/2018), Whitefield trades at $4.26 per share.
As of its last portfolio statement, its asset value was $4.76 per share on October 31.
Since then, the market is down almost 3%. So we can guess the NTA is somewhere around $4.62. This means we can buy this portfolio of assets for roughly 7-8% discount.
Based on the this year’s forecast dividend of 19.75 cents, the yield would be about 4.3%. Or 6.1% including franking credits.
But because Whitefield is trading at a discount, our purchase yield is actually 6.6%, including franking. A whole 0.5% per annum higher.
By locking in this discount and higher yield, it means a higher total return than whatever Whitefield produces with its investments.
This goes a long way to making up for any shortcomings of the company.
Share Purchase Plans
Whitefield also offers shareholders Share Purchase Plans (SPPs) on a regular basis. Usually each year.
Shareholders can top up their holding, brokerage free, up to $15,000 worth.
And these SPPs are usually offered at a discount to the market price (yes, a further discount).
Some shareholders love it, some hate it. And the rest are either conflicted or couldn’t care less!
Why the difference?
Well, some people love a discount. But issuing more shares at a price lower than the NTA, actually dilutes the value of each share slightly.
Here’s roughly how it works…
If a company raises 10% more capital, at a 10% discount to the current NTA, then overall each share is diluted by 1%. (A tenth of 10%, is 1%)
Despite this, smaller shareholders can actually be better off when this happens. Naturally, there’s a break-even point with these types of things.
Using the figures above, an investor with $150,000 in shares will just break-even, even if they take up the offer in full.
Reason being, $150,000 shares being diluted by 1%, will be worth $1,500 less. But taking advantage of the SPP and buying $15,000 shares at a 10% discount, will mean an extra $1,500 of value for the investor.
So investors with holdings smaller than this, are the ones who reap the benefit.
Obviously, if the discount or the capital raised is only 5%, then the dilution is halved. So anyone with a holding under $300,000 would benefit by participating.
My apologies for taking you down that rabbit-hole, but I felt compelled to mention it!
Some investors hate this type of dilution, simply out of principal. And I have to agree with them. But I don’t think it means Whitefield has poor management or makes it a bad LIC.
Long term performance has been good despite these capital raisings. And some investors are quite happy to keep topping up at a discount and not worry about such issues.
So it’s really a personal thing, and I’ll let you decide how you feel about that!
Whitefield didn’t always invest the way it does today.
In the last 5-10 years, the company has really increased the number of holdings it has.
Back in the mid 2000’s and before, Whitefield was more of a value focused investor. It owned a portfolio of around 50 companies, focused more on stock selection, aiming to provide superior returns.
These days it’s much more of an industrial index fund, with some tinkering round the edges. Or ‘enhanced index’ is the correct term.
Certainly, the current approach is lower risk overall. Since they own pretty much every company in the index, there’s little chance of underperformance, but also less chance of outperformance.
And I think most shareholders are happy enough with that.
So, we’re really looking at an industrial index LIC, which aims to outperform and provides a dependable and increasing income over time.
Maybe Whitefield can use its data-driven quantitative approach to squeeze some outperformance. We’ll have to wait and see on that one.
Either way, I think the Industrial index should perform pretty well over the decades and prosper with the Australian economy. And that’s what I’d be focusing on.
Remember, owning shares is about generating wealth and a growing income stream. And that’s done through regularly investing in a big basket of companies for the long term. Not through fancy footwork.
What I Like
I like Whitefield’s long track record of shareholder returns.
Also, the dividend history is quite attractive. That reliable income stream has been paid whether the market is experiencing rain, hail or shine.
In addition, the company is considered a long term investor in the eyes of the ATO. This allows them to pass on the Capital Gains Tax Discount to you, when it pays out dividends which are sourced from capital gains.
Despite the fancy sounding strategy (if you’ve read about it), Whitefield is still a low turnover, long term investor. So I do feel this LIC suits investors like us. That is, those who approach the sharemarket as a long term business owner looking for the income stream.
Lastly, I do like the industrials focus. Though I’m not quite convinced it will always outperform. But in general, it’s still true that resource companies are more volatile and pay less reliable dividends.
So for those of us who prefer to invest for income, a focus on industrials makes sense.
What I Don’t Like
As mentioned before, I think the higher fee than its peers is a negative. And the external management means that costs are unlikely to come down much.
Also, the fact that Whitefield seems to raise new capital every year at a heavy discount.
Whether you participate or not, and whether you like it or not, you’d have to admit it isn’t a great practice. At least in principal.
I’m not overly keen on the high level of financial companies in the portfolio.
But given this roughly matches the industrial index, that’s just the way it is. So this ex-resources strategy gives Whitefield less diversification overall.
This means when mining companies are doing well, Whitefield will underperform its other LIC brethren. But if you expect industrials to continue beating resources over the long term, that’s only a short term issue.
Despite not owning Whitefield, I do like it as an LIC. And if I was a high tax bracket investor, I would strongly consider using Whitefield and AFIC as a core part of my portfolio for reasons discussed here.
Overall I expect Whitefield to perform well over the next few decades, alongside the Aussie economy.
I think they’ve proven to be a reliable LIC over the years. And they’ve managed to deliver on that all important criteria – providing a reliable and growing stream of dividends over time.
Currently, Whitefield trades on a forecast dividend yield of 4.6%. Or 6.6% including franking credits. That’s a very attractive starting point. And that dividend should continue to grow over the years.
Whitefield is a long term, diversified, tax efficient vehicle focused on wealth creation through investing broadly in industrial shares.
So if you’re sold on the industrials approach that Peter Thornhill teaches, this is the most targeted way to carry out that plan. And maybe Whitefield is the right LIC for you!
While it’s a little different to the other old LICs, it’s worth considering. I think it’s still a solid choice for anyone looking to build a dependable stream of dividend income for early retirement.
What are your thoughts on Whitefield? Let me know in the comments.
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