Ann: SOL: Merger with Milton Presentation, page-40

The way I see this is that SOL have decided they need more capital for their ambitions. They did a few fancy gearing things at very very cheap prices. So they got $225million at a rate of around 0.625% and the conversion price is $34.99.

They have been slowly applying a small amount of gearing into the mix.

There are always things that add and detract from the mix.

Owning coal for example is a thorny issue plus add to the fact that TPG is now Vodafone... I don't think I have ever considered using them. I wasn't even sure that Vodafone could be profitable here.

However these don't show the true underlying value in SOL and they are deep investors - something that normal LIC's wont do. Imagine owning a large stake in CLV (Clover ) between 2012 and 1 July 2015 it actually went down then since then its gone up 10 times. LIC's don't like those because they detract from performance which we all measure monthly. So often the LIC strategy must be to keep in the thick middle of the index weightings and then try to use their stock picking skill to either pick winners , avoid losers or a combination.

So before you reject the idea of value in SOL look at their relative charts.

From 1 January 1992 to date (even with an overvalue MLT) SOL has increased by 1597% and MLT has increased by 658%. So you think that is a flash in the pan - Over 10 Years SOL has increased by 170% and MLT by 108%. Over 5 years SOL increased by 92.5% and MLT by 45.7%.

I discovered this as I invested in a few LIC's - I wont name them but a Kiwi friend told me how great IFT ( Infratil) was doing - I found they had a professional firm managing them and they in fact they did do a lot better than the market but when comparing them to SOL they still came in a poor second. That led to my next thesis - the one where people move to ETF's. That move is logical because these stock pickers are great when interest rates are 5% and their 1% only adds 20% as returns should be higher than debt as risk is higher. So we now live in a low or no interest rate environment and PE's have pushed prices way out there. Now if the PE is 20 then if you give the management company 1% you are then only getting 80c in the $1.00 to have the same 20 PE. The ETF is a fraction of that so every broker and LIC is talking about MER (Management expense ratio) and how low theirs is.

I started selling my LIC's a few years ago - I was dismally disappointed with ALF, ARG, WAM etc as the price these stocks commanded in their heyday was greater than NTA yet their returns were lower than the ETF. However I started feeling I didn't want an ETF as something like Afterpay gets into the index and the ETF buys it- I am old enough to remember the Dotcom bubbles and I have never found it a great idea to value businesses on multiples of revenue. That sounds much like the Dick Smith IPO...

After looking around I found a few SFC, SOL being the standouts - businesses where management has as much to lose as I have.

There is a great reason to be in SOL. The overheads are paid for and they don't (or Haven't done to date) do a Hunter Hall moment and go all in on things. They are diversified and they use conservative gearing to amplify earnings. I don't (or try not to) live of capital I live of the return they pay me. So dividend flow and the growth of the income stream is as important as the share price.

I think that SOL with additional (MLT) capital is a compelling investment.