26-May-2019:  In a recent wire for Livewire - see here - Marcus Padley argues that it's time to get back into Australian Banks.  One of the simplest ways to get exposure to the 5 largest banks in our market (including MQG) - is via one of our largest three LICs - and the two with the biggest exposure to the banking sector are likely to be MLT and ARG. 

At April 30, Argo had Macquarie (MQG) as their #1 holding (largest position), with Westpac very close behind at #2.  ANZ were ARG's fourth largest position, CBA were #5, and NAB were #9.  Together those 5 positions represented 22.5% of Argo's entire portfolio at April 30th.

Argo are Australia's 2nd largest LIC, behind AFIC (AFI) who had 21.4% of their portfolio in the same 5 banks at April 30th (and once again those 5 positions were all within their top 10 holdings).

However, the largest bank sector exposure can be achieved via owning shares in Australia's third largest LIC, Milton Corporation (MLT) who also had those 5 banks in their top 10 and said in their April report that the bank sector was 27.4% of their portfolio.  MLT also had 8.3% of their portfolio in "Other Financials" which includes fund managers such as Perpetual - PPT.

If you agree with Marcus, and think that the outlook is looking a little less risky for our banking sector going forwards (he's not so bullish on capital gains but he thinks the income component of investing in the banks looks a lot more solid now, especially since the Coalition retained Government Federally last weekend), then having some exposure to one or more of our big three LICs is certainly one way to gain immediate exposure to that theme.  Of the three, it looks like MLT has the highest exposure to the Australian Banking sector, and ARG has the second largest exposure.

Argo Investments Limited (Argo, ASX:ARG) is Australia's second largest LIC (listed investment company), with a market capitalisation of around $5.6 billion.  AFIC (AFI) is the largest ($7 billion) and the third largest is Milton Corporation (MLT, $3 b).  Together, AFI, ARG & MLT are known as the big 3, in terms of LICs - and manage almost $16 billion between them.

Company profile:  Argo was established in 1946 and is a long-term investment company listed on the Australian Securities Exchange (ASX).  Argo shares offer investors a professionally managed, diversified and easily traded exposure to the Australian share market, without the need to pay fees to an investment manager. The Company has over 86,000 shareholders and a market capitalisation of $5.6 billion, which places it within Australia’s top 100 listed companies.

Investment process:  Argo uses extensive research and direct company visits to identify well managed, listed Australian businesses that operate in sound industries, have good cash flow and the potential to grow dividends. The Company seeks to buy or add to its longterm holdings in those businesses at times when share prices compare favourably to long-term valuations.

Low management costs:  Argo is internally managed and does not charge fees to shareholders. This internal management structure helps to maintain low operating costs. For the year ended 30 June 2018, total operating costs were 0.15% of average assets at market value.

Dividends: Argo has paid dividends every year since its inception. In the past 12 months Argo has paid two fully franked dividends to shareholders which were both 16c fully franked.

Net Tangible Asset backing per share (NTA):  The NTA of Argo (ARG) as at 30 April 2019 was $8.14 per share. This figure allows for all costs incurred, including company tax and any tax payable on gains realised from portfolio sales. Under ASX Listing Rules, the Company is also required to provide for tax that may arise should the entire portfolio be disposed of on the above date. After deducting this theoretical provision, the above figure would be $7.16 per share.

That $7.16 number is generally referred to as their post-tax NTA but would only be relevant in the event of a wind-up when everything had to be sold.  Post-tax (or "after tax") NTA numbers can be more relevant with more actively managed LICs that exhibit higher portfolio turnover, but with our big 3 (AFI, ARG & MLT) who are far more passive and have very low portfolio turnover - those post-tax numbers are pretty irrelevant.

Argo's April 30 NTA and Top 20 holdings report can be accessed here and their website is also a useful place to find further information about the company.

06 June 2019:  Argo (ARG) have released their NTA & Top 20 Investments Report - as at 31 May 2019 this morning.  During May, their NTA rose 10c from $8.14 to $8.24, which is a modest +1.2% rise, suggesting that (like Milton Corporation - MLT), Argo benefitted from their large weighting to the banking sector (and the rise of the big four banks post the federal election on May 18) but had other major holdings that detracted somewhat from that positive movement.  Three of the big four banks rose by around +8% in May and the fourth (NAB) rose +10.7%.  Argo's banking sector exposure should have added between +1.7% and +1.9% to ARG's NTA, and I therefore estimate that they had other positions that caused around a -0.5% to -0.7% fall in their NTA.  I don't personally own any ARG.  I added them to my Strawman.com scorecard for a short term trade - based on the expected NTA uplift from the post-election relief rally in the banking sector.  That uplift has been less than I anticipated.  I'll be removing ARG from my scorecard today.