May 2019: Milton are Australia's 3rd largest LIC - Listed Investment Company - which is a listed company that makes its money from investing in other listed companies (or from investing more generally, but most of them invest predominantly in other listed companies). The largest is AFIC (AFI) - the Australian Foundation Investment Company. The second largest LIC is Argo Investments (ARG) which once had Sir Donald Bradman as one of their directors. They've been around for a LONG time.
Milton are heavily weighted to the banks (27.4% banking stocks) and Materials (11%), plus Energy (8.6%). They also invest in other LICs and fund managers like Perpetual (PPT). Their exposure to financials ex-banks was 8.3% at April 30.
They also have SOL (Washington H Soul Pattinson) as their third largest holding, and they have an association with SOL. Rob Millner is the Chairman of both MLT & SOL.
Now that Labor has lost the federal election and changes to franking credit refunds are off the table, LICs like Milton who are heavily exposed to yield stocks like the banks and the larger miners (who are now returning a lot more cash to shareholders) should do quite well I would think, at least in the short term.
Milton Corporation Monthly NTA and Top 20 Holdings Report for April 2019
15-Nov-2020: That was all written back in May 2019, but much of it still applies. Here's a link to their latest report:
Milton Corporation Monthly NTA and Portfolio Report as at 31 October 2020
While MLT's direct exposure to the banking sector has reduced over that 18 month period from 27.4% to 16.6%, it is still their largest single sector exposure, and their exposure to "Other Financials" has actually INCREASED from 8.3% then to 12.3% now, so their total financial sector exposure has reduced from 36% to 28.9% of their total portfolio of investments, which is still a LOT of financial sector exposure!
They have maintained their Materials sector exposure at 11%, and have increased their Energy sector exposure from 8.6% to 9.3%. That would usually be a positive in my view, because the energy sector has been smashed, and they've not only maintained their exposure, they've increased it. I believe that sector (energy) will be a BIG beneficiary of a recovery in the global growth outlook on a successful COVID-19 vaccine roll-out program being implemented globally. Energy is one of my favourite recovery plays actually. Materials is the other one. You can make a lot of money by buying cyclical stocks at or near the bottom of the cycle and then simply waiting for the cycle to do what it always does. Except for materials that are in a structural decline, such as thermal/energy coal - which is actually regarded as being in the energy sector, not in the materials sector.
It is important to note that 7.9% of MLT's 9.3% portfolio exposure to "Energy" is in one single company, being Washington H Soul Pattinson and Company (ASX:SOL), who are regarded by the ASX as being an Energy stock purely because SOL own half of New Hope Coal (ASX:NHC) which is a major Australian producer of thermal/energy coal. That's not positive energy sector exposure in my view. The best energy sector exposure in my opinion is to natural gas production and sales, and the worst exposure is via thermal/energy coal. Oil is in the middle. Still OK, but it won't be forever.
However, regarding SOL as an Energy stock is really quite misleading. They own 25.3% of TPG Telecom (ASX:TPG), 43.9% of Brickworks (ASX:BKW), 50% of New Hope Coal Group (ASX:NHC), 19.3% of Australian Pharmaceutical Industries (ASX: API), 100% of Round Oak Minerals, 3.3% of MLT, 30.3% of Apex Healthcare Berhad (APEX.MK), 19.9% of Palla Pharma Ltd (ASX:PAL), 43.3% of Ampcontrol Pty Limited, 22.6% of Clover Corporation Limited (ASX: CLV), 100% of Pitt Capital Partners and 8.6% of BKI Investment Company Limited (ASX: BKI). See here: https://www.whsp.com.au/investments/#investments
So - considering that 7.9% of MLT's 9.3% portfolio exposure to the energy sector is via SOL, which has some thermal/energy coal exposure themselves but are otherwise largely exposed to other sectors, I do not actually consider MLT have much exposure at all to energy.
Other notable increased sector exposures over the past 18 months for Milton Corporation (MLT) are as follows:
- Industrials - 7.8% to 9.4% of their portfolio;
- Health Care - 5.2% to 7.8%
- Consumer Discretionary - 7.0% to 9.2%.
It should always be remembered however that Milton Corporation (MLT) is Chaired and partly controlled by Rob Millner, who also Chairs and certainly controls Washington H Soul Pattinson and Company (ASX:SOL) which is now MLT's largest single investment (7.9%), being WAY MORE of an exposure to SOL than ARG, AFI or any other major LIC has. MLT also has 1.9% of their portfolio invested in Brickworks (BKW) - BKW is MLT's 14th largest position (or was, on 31-Oct-2020). BKW has a cross-shareholding arrangement with SOL. SOL own 43.8% of BKW and BKW own 39.4% of SOL. And SOL owns half of New Hope Coal (NHC), a major Australian producer of thermal/energy coal, as I've already mentioned.
I note that SOL is the ONLY substantial shareholder left on the NHC register, with Vinva Investment Management, JP Morgan Chase & Co and its affiliates, National Australia Bank Limited and its associated entities and Mitsubishi Materials Corporation ALL ceasing to be substantial sharehholders of NHC between February and June (inclusive) this year (2020). NHC is considered a subsidiary of SOL, and is the reason why SOL has been categorised by the ASX as being in the "Energy" sector. See here: https://www2.asx.com.au/markets/company/sol
You will also see (if you scroll down) that for a "Peer Analysis", the ASX have chosen WOR, ORG and BPT as peer companies for SOL.
Rob Millner who chairs MLT, SOL and NHC, is widely regarded as being an outspoken sceptic about climate change caused by humans. While Rob accepts that our climate is changing, he regards us humans as having very little to do with it. Furthermore, he believes the benefits of burning coal to produce cheap electricity for third world countries and emerging economies far outweighs the negatives. Further info on his views and actions can be read here:
https://www.afr.com/policy/energy-and-climate/soul-patts-meeting-shut-down-over-coal-20191206-p53hod
https://www.afr.com/companies/mining/new-hope-chairman-says-taxpayer-money-wasted-fighting-coal-20190917-p52s0k
https://www.marketforces.org.au/washington-h-soul-pattinson-flies-the-coal-flag-and-tells-concerned-shareholders-to-sell-their-shares/
I think it's sensible to keep that in mind when thinking about investing in MLT. The Chair of the LIC is also the Chair of SOL, being MLT's largest single portfolio position (7.9% of MLT), and SOL own half of New Hope Coal. The Chair of all three companies (Rob Millner) is a strong advocate for Australia to not only maintain its thermal/energy coal production, but to actually increase it. This flies in the face of the recent position taken by the world's largest fund manager, Blackrock, who have now removed exposure to any company that derives 25% or more of its revenue from thermal/energy coal from their managed discretionary portfolios, and have begun to create ETFs that specifically exclude such companies (as a "greener" alternative to their traditional passive index-tracking ETFs). While many thought this was another cynical example of "greenwashing", it appear to be a much more reasoned stance.
Larry Fink, Blackrock's Chief Executive, said at the beginning of 2020 - in his annual letter to the bosses of the companies BlackRock invests in - that climate change has become a factor in companies' long-term prospects.
"I believe we are on the edge of a fundamental reshaping of finance," Mr Fink wrote.
"Investors are increasingly reckoning with these questions and [recognising] that climate risk is investment risk."
"In the near future — and sooner than most anticipate — there will be a significant reallocation of capital."
See here: www.abc.net.au/news: World's largest fund manager BlackRock cuts thermal coal exposure on climate concerns
In short, Larry's view is that regardless of everyone's personal opinions on Climate Change and its causes, the fact remains that there is going to be increasing investment risk associated with companies that are viewed as contributing to the problem rather than to the solution.
That is also my view. And that is the main reason why I choose NOT to invest in MLT. I regard ARG (Argo Investments) as a better alternative, and AFI (Australian Foundation Investment Company) as an even better option. However, I don't currently hold shares in those LICs either. I do hold a number of LICs, but they are all much more managed, so much less index-tracking, and they are all run by investment managers who I think are adding significant value over and above what I can get via a passive ETF. ETFs generally are your cheapest option, in terms of fees. LIC's are still usually quite cheap, but not as cheap as ETFs. However, one advantage with LICs is you can often pick them up at a discount to their underlying net asset value (NAV) or net tangible asset (NTA) backing, sometimes up to a 20% to 30% discount to their NTA/NAV, which is a substantial discount. The flipside of that coin is of course that they can also trade at similar PREMIUMS to NTA/NAV. If you're really good/lucky, you can buy them at NTA discounts, the NTA can rise at a good clip, and you can then sell them at an NTA premium, giving you gains derived from multiple means. And collect decent dividends along the journey. It's an area I do like to dabble in. Just not via MLT.
