Independent Investment Research has upgraded listed investment company Argo Investment, giving it a “highly recommended” rating in its most recent review of the LIC sector.
According to IIR, Argo’s strength has been in delivering steady growth in full-franked dividends over a long period.
IIR says: “The team is well qualified and stable, and is supported by a strong board. It’s a culture of no surprises and, given the rigour of the investment process under the stewardship of Jason Beddow, we believe past performance is very much repeatable.”
IRR also likes the fact that Argo’s fee is low, with its 15 basis point management expense ratio one of the lowest in the sector. Argo uses internal investment management, rather than a third party, and there is no risk of “fee leakage”.
Argo is one of the largest LICs on the Australian Securities Exchange, with a market capitalisation of around $5.2 billion. It was established in 1946 and has more than 80,000 shareholders.
It has an all-market Australian equity investment strategy, with about 60 per cent of its holdings in the ASX 20 stocks.
With its emphasis on a steady dividend flow, IIR says Argo is best suited to “investors in the later stages of their investment lifecycle, during which stable income and capital preservation are particularly important.”
Its record of paying full franked dividends makes it especially well suited to investors on lower marginal tax rates, including SMSF investors.
Its company structure allows it to smooth the distribution of income through its ability to retain earnings.
IIR says Argo’s large and loyal shareholder base is important for supporting its stock price, which usually trades around its net tangible assets backing or a little above. Argo is not one of those LICs that suffer from deep discounts to NTA and this gives shareholders liquidity.
Over the past three years Argo shares have traded at a premium of about two per cent to NTA, allowing investors an opportunity to exit the stock at a higher value than the underlying portfolio of shares.
On the downside, IIR says that Argo’s size creates some drawbacks. The portfolio has some significant embedded unrealised capital gains tax liabilities, which means that stocks that may otherwise be divested, based on investment merit, are retained in the portfolio.
Its size limits the degree to which it can invest in high-growth small cap stocks and it may restrict the manager’s ability to react to unforeseen changes in the market.
Over the three years to the end of February, the Argo portfolio has produced an average total return of 5.6 per cent a year, compared with an average return of 6.5 per cent a year for the S&P/ASX 200 Index over the same period.
Argo is one of only three LICs that IIR rates “highly recommended”. The others are Milton Corporation and Future Generation Investment Company.