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Secrets of a top investor

This article appeared in the July 2013 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

Learn how this investment company uses traditional buy-and-hold tactics to outperform the market.

Photo of Tom Millner From ASX

As global markets become more complex, BKI Investment Company CEO, Tom Millner, has a refreshingly straightforward, effective investment strategy: own high-quality companies with attractive, sustainable fully franked dividends for years or decades.

This approach might seem dangerously simplistic in volatile global sharemarkets - even outdated in a market where the concept of long-term buy-and-hold investing has taken a beating after the GFC. But BKI, a listed investment company (LIC), has consistently outperformed the sharemarket over long periods.

Over one year to April 2013, BKI's portfolio (not the LIC itself) returned 23.2 per cent, compared with a 22.7 per cent return in its benchmark index, the S&P/ASX 300 Accumulation Index (which includes dividend reinvestment).

Over three years, the portfolio has an average annualised return of 8.8 per cent, compared with 7.0 per cent for the ASX 300 Accumulation Index. Over nine years, the portfolio has returned 10 per cent annually. Importantly, BKI's portfolio returns are after operating expenses and tax provisions.

(Editor's note: Do not read this story as a recommendation. Do further research of your own or talk to your adviser before acting on themes in this article).

Because BKI Investment Company is an LIC, investors buy shares in it, rather than units in the fund itself. Unlike unlisted unit trusts, LICs are bought and sold on ASX, just like shares. They manage closed-end funds, or a set pool of investment capital, rather than an open-end fund, such as a unit trust, that increases or decreases based on fund inflows and outflows.

The $664-million BKI is the sixth-largest LIC by capitalisation on ASX. It was formed in October 2003 to take over and manage the investment portfolio for Brickworks, an ASX-listed company. BKI is chaired by the investor Robert Millner, and veteran newsletter publisher Ian Huntley is a director.

BKI traded at a slight discount to its pre-tax net tangible assets (NTA) in April 2013, ASX data shows. The ASX Managed Funds Market Update provides useful reports on LIC premiums and discounts to NTA, as well as monthly fund and quarterly performance reports. There is also information on LIC basics.

ASX Investor Update asked Tom Millner for his views on markets, investment strategy and favoured stocks, and the main features of investing through an LIC.

ASX Investor Update: The S&P/ASX 200 index hit a so-called correction (a 10 per cent fall from the previous peak) in June. When will the sharemarket recover this lost ground?

Tom Millner: It could take some time. I suspect many investors are holding off buying until the full-year profit reporting season begins in August for companies with a June 30 year end. We might see some buying before some key household-name stocks go ex-dividend, but my hunch is people will wait until the federal election in September. We then might not see significant buying until after the February interim reporting season next year, so at least another six months of a sluggish, grinding market seems likely.

ASX Investor Update: Will we see a much stronger sharemarket in 2014?

TM: I hope so. The global economic backdrop is not encouraging. The US economic recovery is playing out slowly, Europe is still a mess, Japan is not great, and some recent data from China is not as bullish as the market had hoped. Locally, we might see confidence improve once the election is concluded, as interest rates are cut again and the Australian dollar continues to fall. But it will take time, so I expect more a sideways, slightly higher market in 2014, than a very strong one.

ASX Investor Update: How would you describe BKI's investment style?

TM: We are active, long-term Australian equities managers with a very strong focus on dividend yield. Shareholders in the BKI LIC want reliable, rising dividends, so we spend plenty of time analysing high-quality companies with strong balance sheets and attractive, fully franked yields. The Commonwealth Bank is a good example: on traditional valuation metrics, such as price/earnings (P/E) multiples, a valuation of 15 times earnings looks expensive. But CBA is offering a 5.5 per cent fully franked yield, so we believe it is still more attractive than investing in cash, so we own the stock. On an overall yield basis, the Australian sharemarket still looks reasonable value.

ASX Investor Update: Are you concerned about a possible "yield bubble", where investors drive up the share prices of dividend-paying stocks to unsustainable levels, to access the yield?

TM: Yes and no. The dividend theme was getting a bit overheated when the sharemarket peaked earlier this year. But as I said, on a relative basis, yields still stack up well against competing assets, such as cash and fixed interest, albeit with higher risk. I do expect more investors will buy high-yield stocks just before they go ex-dividend in a couple of months.

ASX Investor Update: Do you expect other companies to follow Woodside Petroleum and Westpac's lead and pay a special dividend this year?

TM: No. Their special dividends were a nice surprise, but we should not count on a run of companies paying special one-off dividends to shareholders.

ASX Investor Update: Do you still favour bank stocks at current prices?

TM: Yes. If you cut through all the noise, not a lot has changed for the banks. They are still getting customers to buy more products, including investment in their wealth-management funds. They still have more costs to cut and will benefit if business lending and mortgage markets pick up as interest rates are cut again this year. And on a yield basis, they still look relatively attractive.

ASX Investor Update: What about resource stocks?

TM: There are very different types of resource stocks within the sector. Those with strong balance sheets and high-quality assets, such as BHP Billiton, Rio Tinto and New Hope Corporation, should do well over the long term. Small explorers or producers with one mine or project, exposure to one commodity and a very stretched balance sheet will be challenging investments for some time.

ASX Investor Update: When choosing a stock, what are some key traits you look for?

TM: Dividend yield. For a company to pay out dividends the balance sheet needs to be strong. We also like businesses that have clear scale. That is, as they grow, their costs fall because their fixed costs are spread across a bigger business. We also favour companies that have recurring income and get a "clip of ticket" every time they sell another product. A strong board and management is essential, as is a good market position in an industry with solid long-term growth prospects.

ASX Investor Update: So which companies has BKI invested in?

TM: We own the banks, BHP, New Hope, Woolworths, Wesfarmers, Coca-Cola Amatil and Telstra. Among small and mid-size stocks, four-wheel-drive parts manufacturer ARB Corporation, funeral operator Invocare, and TPG Telecom are held in the portfolio.

ASX Investor Update: How long do you hold stocks for?

TM: The BKI portfolio has 53 stocks and only about 8 per cent of the portfolio is turned over each year, which is low by industry standards. Once we like the company's business model, market position, balance sheet and management, we are happy to hold it for years to access an expected rising dividend stream. It's been a simple, effective strategy that has created returns in excess of the market over the long term.

ASX Investor Update: What do you like about the LIC structure?

TM: The main benefit is having a set pool of money to manage. Unlike open-end funds, LICs don't have to buy shares at the top of the market because more money is flowing into the fund, or sell shares at the bottom when funds are being withdrawn. LICs are also well-suited for long-term investors, such as self-managed superannuation funds (SMSF) that want attractive, fully franked yield but don't want to pay high annual management fees to access it. BKI, for example, charges 18 basis points annually, which is less than many exchanged-traded products that provide an index return. The other advantage is administrative simplicity; it is much easier for an SMSF to deal with the paperwork of holding one LIC than 53 stocks.

From ASX

ASX Managed Funds has information on the features, benefits and risks of investing in listed funds.


The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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