The big boys are liking Balamara

Argo Investments. THE news that fund manager Perpetual is creating its first listed investment company should add some spice to the sector. LICs have a long and storied history in Australia, particularly the big ones, Australian Foundation Investments and Argo. The first has been going for more than 80 years — which is a serious advantage. Argo (a youthful 68 years) once used the services of an Adelaide stockbroker and handy cricketer known as Don Bradman.

Between them, the two grandaddy LICs have a market capitalisation of more than $11 billion and are both a handy single company answer for giving investors large company diversification and healthy franked dividends. There is a big size gap between these two and the rest of the field but there is a very healthy array of LICs for almost every occasion.

Overall, there are 33 Australian equity LICs, 16 for international shares, nine specialist funds, eight absolute return and one private equity. All told, LICs speak for almost $26 billion of market capitalisation. The main advantage of LICs is that they are predominantly long-term investors that don’t churn their portfolios too much, so investors get lower capital-gains tax bills and lower management costs compared to more frenetic fund managers. They are also quick and easy to buy and sell compared to most unlisted funds. There are some disadvantages, the most common being that they can persistently trade at a premium or a discount to their net tangible assets. Buying an LIC that is trading at a premium means you are paying too much but if you snap up an LIC trading at a discount, it can take a long time for that discount to disappear, if it ever does. As a general principle, LICs will often trade at a discount when the market is booming and everybody believes they are an investing genius and a premium during a downturn when having an experienced team choosing stocks is seen as a valuable advantage.

The Perpetual Equity Investment Company looks like a nice match between Perpetual’s enviable conservative stock-picking methods and the aim to deliver regular income and long-term capital growth. With a focus on mid-cap Australian companies, it is tailor made for self-managed super funds, which will be a big target for the minimum $150 million capital raising between October 21 and November 28. Many SMSFs already hold AFI or Argo, so PIC’s mid-cap focus will be an ideal portfolio bolt-on. PIC has a few interesting variations, with the ability to hold up to 25 per cent of assets in global equities and up to 25 per cent in cash equivalents to ride out periods of volatility. Its launch after some fairly sharp falls on the Australian market is actually a big bonus for portfolio manager Vince Pezzullo, who will have no shortage of tempting targets to buy. AFI and Argo remain portfolio buys, while PIC is more of a watch and wait at this stage.

One thing you can’t accuse Balamara Resources of is a lack of ambition. Not only is it still in the mix for the Togo rock phosphate project in the west African nation of the same name, it is now progressing three Polish coal projects. While the Togo tender has moved very slowly, the plan to progressively ramp up the three coal projects is gathering pace. While coal and Europe are not exactly investment buzz words at the moment, low costs and strong demand might triumph, making Balamara a speculative buy.