Summary: The vast majority of LMIs only publish their Management and Performance fees but never their Total Expense Ratios (TER). The dirty secret is that for many LMIs the TER is 2-3% without performance fees and 3-8% when performance fees apply. And for LMIs with net assets below $100m the TER gets much higher as the size gets smaller.
In comparison, a Vanguard Diversified Index ETF has a TER of 0.27%. Thus, even before tax, many LMIs are starting way behind. After tax, the handicap is even higher, particularly for LMIs that trade the most and don't return most tax paid through franked dividends. It's virtually impossible for LMIs with TERs over 2% to outperform alternative low-cost index ETFs over the long run. Indeed, the higher the TER over 1% the more likely it is to underperform early and fall further and further behind.
Details:
Notes:
- All expenses are taken from the FY 2017-18 Annual Reports unless otherwise noted.
- The only expense listed in annual reports not usually included is Interest (typically borrowing to invest extra.) However, if Interest expense is high and not clearly related to increased investment exposure I include an additional calculation or note.
- An expense not listed in most annual reports is fees embedded within investments such as with ETFs or managed funds. MEC which puts 70% into ETFs doesn't state this expense. Nor does GVF. DUI does in its commentary.
- Net Assets are of 30 June 2018 (typically you take an average across the year but for look-forward purposes it makes more sense to take the final figure.)
- Tax does reduce NTA. LITs don't pay tax but the investor is usually taxable. LICs that have sufficient size and a dividend and franking policy to return all franking credits to investors could ultimately return most of the tax paid. However, many LMIs - particularly small ones - have reduced NTA via tax paid but returned much less via franking. Thus, their TER inc Tax is worth referring to.
- The buy-and-hold, large-cap focused LICs (AFI, ARG, MLT, DUI, etc) report only dividend income and realised profits in the income statement. All other LICs that don't meet the buy-and-hold exception report unrealised profits annually and the accounting tax payable but the actual tax effect (negative or positive) is deferred till realised. Taxes can be substantial and it's rare for virtually all of it to be returned via franked dividends. Unrealised taxes make a big difference so it's important to distinguish between Tax Paid (realised tax plus effect of prior losses) and Deferred Tax changes.
- The main TER I refer to is Total Expenses inc Performance fees ex Tax. I also refer to the Total Expenses inc Performance fees inc Tax for LICs that don't return much of their tax paid via franked dividends.
1. DUI
I use DUI as a benchmark for LMIs as its fees and expenses are kept very minimal, it aims to limit trading (thus capital gains tax) and it discloses expense information transparently.
Total Expenses ex Tax: $1.143m (no performance fees exist)
Tax: $1.547m
Total Expenses inc Tax = $2.69m
Net Assets: $798.271m
Total Expenses ex Tax / Net Assets = 0.143% TER
Total Expenses inc Tax / Net Assets = 0.337%
*No performance fees exist
ACQ
Total Expenses ex Performance fee and Tax: $1.326m
Performance fee = $0.299m
Performance fee / (Gross Profit - Interest) = 1.63%
Total Expenses inc Performance fee = $1.625m
Tax: $4.856m
Total Expenses inc Performance fee and Tax = $6.481m
Net Assets: $66.608m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.99%
Total Expenses inc Tax / Net Assets = 9.28%
Total Expenses inc Performance fee ex Tax / Net Assets = 2.45%
Total Expenses inc Performance fee inc Tax / Net Assets = 9.73%
Notes:
- The amount of franking credits available as at 30 June 2018: $1,059,795.(2017: $66,982).
Notes:
- The amount of franking credits available as at 30 June 2018: $1.897m
CVF
Total Expenses ex Performance fee and Tax: $1.326m
Performance fee = $4.959m
Performance fee / (Gross Profit - Interest = $35.79m) = 13.85%
Total Expenses inc Performance fee = $6.219m
Tax: $8.666m
Total Expenses inc Performance fee and Tax = $14.885m
Net Assets: $87.261m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.52%
Total Expenses inc Tax / Net Assets = 11.45%
Total Expenses inc Performance fee ex Tax / Net Assets = 7.13%
Total Expenses inc Performance fee inc Tax / Net Assets = 17.02%
D2O
Total Expenses ex Performance fee and Tax: $2.211m
Performance fee = $2.31m
Performance fee / (Gross Profit - Interest) = 15.49%
Total Expenses inc Performance fee = $4.521m
In comparison, a Vanguard Diversified Index ETF has a TER of 0.27%. Thus, even before tax, many LMIs are starting way behind. After tax, the handicap is even higher, particularly for LMIs that trade the most and don't return most tax paid through franked dividends. It's virtually impossible for LMIs with TERs over 2% to outperform alternative low-cost index ETFs over the long run. Indeed, the higher the TER over 1% the more likely it is to underperform early and fall further and further behind.
Details:
Notes:
- All expenses are taken from the FY 2017-18 Annual Reports unless otherwise noted.
- The only expense listed in annual reports not usually included is Interest (typically borrowing to invest extra.) However, if Interest expense is high and not clearly related to increased investment exposure I include an additional calculation or note.
- An expense not listed in most annual reports is fees embedded within investments such as with ETFs or managed funds. MEC which puts 70% into ETFs doesn't state this expense. Nor does GVF. DUI does in its commentary.
- Net Assets are of 30 June 2018 (typically you take an average across the year but for look-forward purposes it makes more sense to take the final figure.)
- Tax does reduce NTA. LITs don't pay tax but the investor is usually taxable. LICs that have sufficient size and a dividend and franking policy to return all franking credits to investors could ultimately return most of the tax paid. However, many LMIs - particularly small ones - have reduced NTA via tax paid but returned much less via franking. Thus, their TER inc Tax is worth referring to.
- The buy-and-hold, large-cap focused LICs (AFI, ARG, MLT, DUI, etc) report only dividend income and realised profits in the income statement. All other LICs that don't meet the buy-and-hold exception report unrealised profits annually and the accounting tax payable but the actual tax effect (negative or positive) is deferred till realised. Taxes can be substantial and it's rare for virtually all of it to be returned via franked dividends. Unrealised taxes make a big difference so it's important to distinguish between Tax Paid (realised tax plus effect of prior losses) and Deferred Tax changes.
- The main TER I refer to is Total Expenses inc Performance fees ex Tax. I also refer to the Total Expenses inc Performance fees inc Tax for LICs that don't return much of their tax paid via franked dividends.
1. DUI
I use DUI as a benchmark for LMIs as its fees and expenses are kept very minimal, it aims to limit trading (thus capital gains tax) and it discloses expense information transparently.
Total Expenses ex Tax: $1.143m (no performance fees exist)
Tax: $1.547m
Total Expenses inc Tax = $2.69m
Net Assets: $798.271m
Total Expenses ex Tax / Net Assets = 0.143% TER
Total Expenses inc Tax / Net Assets = 0.337%
*No performance fees exist
ACQ
Total Expenses ex Performance fee and Tax: $1.326m
Performance fee = $0.299m
Performance fee / (Gross Profit - Interest) = 1.63%
Total Expenses inc Performance fee = $1.625m
Tax: $4.856m
Total Expenses inc Performance fee and Tax = $6.481m
Net Assets: $66.608m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.99%
Total Expenses inc Tax / Net Assets = 9.28%
Total Expenses inc Performance fee ex Tax / Net Assets = 2.45%
Total Expenses inc Performance fee inc Tax / Net Assets = 9.73%
Notes:
- The amount of franking credits available as at 30 June 2018: $1,059,795.(2017: $66,982).
ALI
Total Expenses ex Performance fee and Tax: $4.746m
Performance fee = No performance fees exist
Performance fee / (Gross Profit - Interest = $27.658m) = n/a
Total Expenses inc Performance fee = $4.746m
Tax: $6.67m
Total Expenses inc Performance fee and Tax = $11.416m
Net Assets: $301.564m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.57%
Total Expenses inc Tax / Net Assets = 3.79%
Total Expenses inc Performance fee ex Tax / Net Assets = n/a
Total Expenses inc Performance fee inc Tax / Net Assets = n/a
Performance fee = No performance fees exist
Performance fee / (Gross Profit - Interest = $27.658m) = n/a
Total Expenses inc Performance fee = $4.746m
Tax: $6.67m
Total Expenses inc Performance fee and Tax = $11.416m
Net Assets: $301.564m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.57%
Total Expenses inc Tax / Net Assets = 3.79%
Total Expenses inc Performance fee ex Tax / Net Assets = n/a
Total Expenses inc Performance fee inc Tax / Net Assets = n/a
- The amount of franking credits available as at 30 June 2018: $1.897m
CVF
Total Expenses ex Performance fee and Tax: $1.326m
Performance fee = $4.959m
Performance fee / (Gross Profit - Interest = $35.79m) = 13.85%
Total Expenses inc Performance fee = $6.219m
Tax: $8.666m
Total Expenses inc Performance fee and Tax = $14.885m
Net Assets: $87.261m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.52%
Total Expenses inc Tax / Net Assets = 11.45%
Total Expenses inc Performance fee ex Tax / Net Assets = 7.13%
Total Expenses inc Performance fee inc Tax / Net Assets = 17.02%
D2O
Total Expenses ex Performance fee and Tax: $2.211m
Performance fee = $2.31m
Performance fee / (Gross Profit - Interest) = 15.49%
Total Expenses inc Performance fee = $4.521m
Tax: $3.127m
Total Expenses inc Performance fee and Tax = $7.648m
Net Assets: $148.966m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.48%
Total Expenses inc Tax / Net Assets = 3.58%
Total Expenses inc Performance fee ex Tax / Net Assets = 3.03%
Total Expenses inc Performance fee inc Tax / Net Assets = 5.13%
*Performance fee involves a High Water Mark and accrues monthly
EGD
Total Expenses ex Performance fee and Tax: $3.295m
Performance fee = No performance fees exist
Performance fee / (Gross Profit - Interest) = n/a
Total Expenses inc Performance fee = n/a
Tax: n/a is a LIT
Total Expenses inc Performance fee and Tax = n/a
Net Assets: $255.053m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.29%
Total Expenses inc Tax / Net Assets = n/a
Total Expenses inc Performance fee ex Tax / Net Assets = n/a
GVF
Total Expenses inc Performance fee inc Tax / Net Assets = 5.42%
MA1
Total Expenses ex Tax: $1,552,893 (no performance fees this period)
Tax: $1,430,015
Total Expenses inc Tax = $2,982,908
Net Assets: $49,229,465
Total Expenses ex Tax / Net Assets = 3.15%
Total Expenses inc Tax / Net Assets = 6.06%
Total Expenses inc Performance fee (if it had applied) ex Tax / Net Assets = ~5%
Total Expenses inc Performance fee (if it had applied) inc Tax / Net Assets = ~8%
*Performance fees involve a High Water Mark otherwise hurdle is only RBA rate
NAC
Total Expenses ex Performance fee and Tax: $1.616m
Performance fee = $224,876
Performance fee / (Gross Profit - Interest = $6.256m ) = 3.59%
Total Expenses inc Performance fee = $1.841m
Tax: $534,171
Total Expenses inc Performance fee and Tax = $2.375m
Net Assets: $57.441m
Total Expenses ex Tax / Net Assets = 2.81%
Total Expenses inc Tax / Net Assets = 3.74%
Total Expenses inc Performance fee ex Tax / Net Assets = 3.21%
PAF
Total Expenses ex Performance fee and Tax: $1.135m
Performance fee = $0
Performance fee / (Gross Profit - Interest = $7.21m) = n/a
Total Expenses inc Performance fee = $1.135m
Tax: $1.629m
Total Expenses inc Performance fee and Tax = $2.764m
Net Assets: $66.55m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.71%
Total Expenses inc Tax / Net Assets = 4.15%
Total Expenses inc Performance fee ex Tax / Net Assets = n/a
Total Expenses inc Performance fee inc Tax / Net Assets = n/a
TEK
WMI
Note:
- Annual Report is 8 Mar 2017 to 30 June 2018 so relevant expenses have been annualised pro rata in ratio calculations
Total Expenses ex Performance fee and Tax: $2.839m
Performance fee = $1.749m
Performance fee / (Gross Profit - Interest = $47.032m) = 3.72%
Total Expenses inc Performance fee = $4.588m
Tax: $11.762m
Total Expenses inc Performance fee and Tax = $16.35m
Net Assets: $180.264m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.89%
Total Expenses inc Tax / Net Assets = 8.41%
Total Expenses inc Performance fee ex Tax / Net Assets = 3.05%
Total Expenses inc Performance fee inc Tax / Net Assets = 9.39%
WQG
Total Expenses ex Performance fee and Tax: $2.196m
Performance fee = $0
Performance fee / (Gross Profit - Interest = $17.788m) = n/a
Total Expenses inc Performance fee = $2.196m
Tax: $4.684m
Total Expenses inc Performance fee and Tax = $6.88m
Net Assets: $106.194m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 2.07%
Total Expenses inc Tax / Net Assets = 6.48%
Total Expenses inc Performance fee ex Tax / Net Assets = n/a
Total Expenses inc Performance fee inc Tax / Net Assets = n/a
Notes:
- The amount of franking credits available as at 30 June 2018: Not disclosed
Further Info:
I will first compile this info for LMIs in my top two categories:
Opportunistic: ACQ, WMI, CVF, EGD, GVF, VG1, NGE, RYD, PGF, PAF, EGI, EAI, APL, WLE, AFI, ARG, FGG, FGX, BKI,, PL8, WIC, PIA, SEC, FOR, QVE
Investible: D2O, ALI, OPH, HM1, MFF, WQG, MGG, CLF, CIN, MIR, AUI, DUI, AMH, MLT
Cuffelinks - Why LICs differ in dividend sustainability
<<
The apparent disconnect between the good portfolio returns from the large-cap focused LICs and the lower reported earnings reflects the fact that most, particularly the larger, long established LICs, report only dividend income and realised profits in the income statement. These LICs are long-term investors, so unrealised portfolio revaluations are not recognised in the income statement. Many of the newer LICs, particularly a number of the small-cap focused LICs, tend to hold investments for shorter periods and their reported earnings rely more on capital appreciation, with both realised and unrealised gains and losses reported through the income statement.
>>
Cuffelinks
Total Expenses inc Performance fee and Tax = $7.648m
Net Assets: $148.966m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.48%
Total Expenses inc Tax / Net Assets = 3.58%
Total Expenses inc Performance fee ex Tax / Net Assets = 3.03%
Total Expenses inc Performance fee inc Tax / Net Assets = 5.13%
*Performance fee involves a High Water Mark and accrues monthly
EGD
Total Expenses ex Performance fee and Tax: $3.295m
Performance fee = No performance fees exist
Performance fee / (Gross Profit - Interest) = n/a
Total Expenses inc Performance fee = n/a
Tax: n/a is a LIT
Total Expenses inc Performance fee and Tax = n/a
Net Assets: $255.053m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.29%
Total Expenses inc Tax / Net Assets = n/a
Total Expenses inc Performance fee ex Tax / Net Assets = n/a
Total Expenses inc Performance fee inc Tax / Net Assets = n/a
GVF
Total Expenses ex Performance fee and Tax: $4.424m
Performance fee = $0.735m
Performance fee / (Gross Profit - Interest = $17.677m) = 4.16%
Total Expenses inc Performance fee = $5.16m
Tax: $3.588m
Total Expenses inc Performance fee and Tax = $8.748m
Net Assets: $161.35m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 2.74%
Total Expenses inc Tax / Net Assets = 4.97%
Total Expenses inc Performance fee ex Tax / Net Assets = 3.2%
Notes:
- The amount of franking credits available as at 30 June 2018: $5.879m
MA1
Total Expenses ex Tax: $1,552,893 (no performance fees this period)
Tax: $1,430,015
Total Expenses inc Tax = $2,982,908
Net Assets: $49,229,465
Total Expenses ex Tax / Net Assets = 3.15%
Total Expenses inc Tax / Net Assets = 6.06%
Total Expenses inc Performance fee (if it had applied) ex Tax / Net Assets = ~5%
Total Expenses inc Performance fee (if it had applied) inc Tax / Net Assets = ~8%
*Performance fees involve a High Water Mark otherwise hurdle is only RBA rate
NAC
Total Expenses ex Performance fee and Tax: $1.616m
Performance fee = $224,876
Performance fee / (Gross Profit - Interest = $6.256m ) = 3.59%
Total Expenses inc Performance fee = $1.841m
Tax: $534,171
Total Expenses inc Performance fee and Tax = $2.375m
Net Assets: $57.441m
Total Expenses ex Tax / Net Assets = 2.81%
Total Expenses inc Tax / Net Assets = 3.74%
Total Expenses inc Performance fee ex Tax / Net Assets = 3.21%
Total Expenses inc Performance fee inc Tax / Net Assets = 4.14%
PAF
Total Expenses ex Performance fee and Tax: $1.135m
Performance fee = $0
Performance fee / (Gross Profit - Interest = $7.21m) = n/a
Total Expenses inc Performance fee = $1.135m
Tax: $1.629m
Total Expenses inc Performance fee and Tax = $2.764m
Net Assets: $66.55m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.71%
Total Expenses inc Tax / Net Assets = 4.15%
Total Expenses inc Performance fee ex Tax / Net Assets = n/a
Total Expenses inc Performance fee inc Tax / Net Assets = n/a
TEK
WMI
Note:
- Annual Report is 8 Mar 2017 to 30 June 2018 so relevant expenses have been annualised pro rata in ratio calculations
Total Expenses ex Performance fee and Tax: $2.839m
Performance fee = $1.749m
Performance fee / (Gross Profit - Interest = $47.032m) = 3.72%
Total Expenses inc Performance fee = $4.588m
Tax: $11.762m
Total Expenses inc Performance fee and Tax = $16.35m
Net Assets: $180.264m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 1.89%
Total Expenses inc Tax / Net Assets = 8.41%
Total Expenses inc Performance fee ex Tax / Net Assets = 3.05%
Total Expenses inc Performance fee inc Tax / Net Assets = 9.39%
WQG
Total Expenses ex Performance fee and Tax: $2.196m
Performance fee = $0
Performance fee / (Gross Profit - Interest = $17.788m) = n/a
Total Expenses inc Performance fee = $2.196m
Tax: $4.684m
Total Expenses inc Performance fee and Tax = $6.88m
Net Assets: $106.194m (fair market value is correct figure)
Total Expenses ex Tax / Net Assets = 2.07%
Total Expenses inc Tax / Net Assets = 6.48%
Total Expenses inc Performance fee ex Tax / Net Assets = n/a
Notes:
- The amount of franking credits available as at 30 June 2018: Not disclosed
Further Info:
I will first compile this info for LMIs in my top two categories:
Opportunistic: ACQ, WMI, CVF, EGD, GVF, VG1, NGE, RYD, PGF, PAF, EGI, EAI, APL, WLE, AFI, ARG, FGG, FGX, BKI,, PL8, WIC, PIA, SEC, FOR, QVE
Investible: D2O, ALI, OPH, HM1, MFF, WQG, MGG, CLF, CIN, MIR, AUI, DUI, AMH, MLT
Cuffelinks - Why LICs differ in dividend sustainability
<<
The apparent disconnect between the good portfolio returns from the large-cap focused LICs and the lower reported earnings reflects the fact that most, particularly the larger, long established LICs, report only dividend income and realised profits in the income statement. These LICs are long-term investors, so unrealised portfolio revaluations are not recognised in the income statement. Many of the newer LICs, particularly a number of the small-cap focused LICs, tend to hold investments for shorter periods and their reported earnings rely more on capital appreciation, with both realised and unrealised gains and losses reported through the income statement.
>>
Cuffelinks
It includes a note 1:
