Whitefield (ASX:WHF) LIC Review

Whitefield is Australia’s oldest ASX listed Investment Company (listed 1923) that holds a diversified portfolio of industrial (non-resource) companies. They are an actively managed LIC which aims to outperform the S&P ASX200 Industrials Accumulation (XJIAI) index by creating their own ‘enhanced industrial index’ portfolio, as well as that deliberately excludes the resource (mining) sector from their portfolio. They currently manage over (AUD) $ 420 Million making them a fairly small LIC, and have an overall fee structure of .42% or 42 basis points which is typically high for a LIC.

This article will provide an overview of the Whitefield (ASX:WHF) Listed Investment Company and explore its structure, management, holdings, past performance and fee structure to explore whether I will personally add it to my ‘FI Portfolio’.

“A structured and disciplined investment strategy consistently applied over time”

Whitfield Investing statement
Whitefield (ASX:WHF) LIC review

Introduction to Whitefield (ASX:WHF)

Whitefield is Australia’s oldest Listed Investment Company having been first listed in 1923. It currently has a market capital of just over $424 Million dollars, which is significant but actually makes it one of the smaller ‘grand daddy’ LICs when we compare it to giants like AFIC and Argo which manage $7 and $5 Billion, respectively.

Whitfield fund managers baseline the LICs performance against the S&P/ASX200 Industrials Accumulation (XJIAI), although the fund is actively managed and currently holds 124 companies which are either over or under weighted from the index according to Whitefield’s quantitative data analysis. They completely avoid resources (mining) stocks.

Currently, Whitefield is trading at about a 2% discount to pre-tax NTA, and a 5% premium to post-tax NTA. Historically, it has traded at up to a 10% discount to NTA, suggesting the market was not fully confident in the LICs management at the time.

Overall, Whitfield has provided investors with a growing income stream of fully franked dividends, as well as portfolio capital growth. They are a tax effective option due to the franked dividends, and also offer a Provides a Bonus Shares Plan which can be a tax effective solution for high income earners.

Whitefield (ASX:WHF) holdings

The top 10 holdings of WHF make up just over 45% of the fund, and the top 20 makes up just under 60% of the fund. The top 20 holdings as of June 2020 include;

Whitefield (ASX:WHF) LIC review
Whitefield (ASX:WHF) LIC top 20 holdings. Source: Whitefield June 2020 quarterly report

The entire WHF portfolio consistsed of 123 stocks and funds according to their 2020 Annual Report. The entire list can be found in the Whitefield 2020 annual report – you will need to scroll nearly all the way to the end. This is pretty interesting – with so many holdings, Whitefield almost looks like an index fund. Management actually call it an ‘enhanced industrials index’, which they hope will outperform both the ASX industrials index and standard ASX200 index.

Whitefield (ASX:WHF) sector exposures

Because Whitefield deliberately exclude resources (mining and commodities), they are proportionately a bit heavier on other sectors than you might see with other LICs. Their biggest sector exposure is in financials (commercial banks and financials ex banks) which makes up about a third of the portfolio, but they also have significant holdings in real estate as well as cash and cash equivalents (bonds and fixed interest securities).

Whitefield (ASX:WHF) LIC review
Whitefield (ASX:WHF) LIC sector exposures. Source: Whitefield June 2020 quarterly report

Management of Whitefield (ASX:WHF) LIC

Whitefield is managed by an external provider – White Funds Management PTY LTD. They use a quantitative approach to selecting stocks for their portfolio of ‘enhanced industrials index’. Whitefield is run based on three core Investing objectives;

1- Reliable stream of fully franked income;

2 – Risk adjusted return higher than average of peer group

3- Portfolio return 0-100 basis points above the Benchmark over rolling five year periods

Whitefield’s 2020 core Investing objectives

Investing Strategy of Whitefield (ASX:WHF) LIC

Our structured index-enhanced approach to portfolio construction allows us to emphasise or de-emphasise stocks to provide our investors with a highly diversified portfolio that offers the potential to deliver returns in line with our key objectives without exposing our investors to undue risk.

Whitefield (ASX:WHF) 2020 Investing strategy statement

Essentially, White Funds Management PTY LTD fund managers pick stocks based on what they think is undervalued at the time within the industrials sector. Once a stock or company is on their ‘investment radar’ they then thoroughly analyse and vet their books (accounting data) and then screen and rank them into Whitefield’s ‘Enhanced industrials index’ according to over 60 quantitative features. Finally, they choose to strategically under or over weight according to this index based on what they think is undervalued and market movements will be.

Management fees of Whitefield (ASX:WHF) LIC

Currently, Whitefield report having a .25% or 25 basis point management fee, but also quote additional other operating expenses of up to an additional .17% or 17 basis points, making the total effective MER .42% or 42 basis points. This is pretty high for a LIC. This is likely due to Whitefield’s outsourced management, very active management style (stock picking) of industrials to produce their ‘enhanced index’ as well as their low capital pool when compared to other LICs.

Performance of Whitefield (ASX:WHF)

WHF has performed generally well over the long term. They have provided investors with a strong, reliable and increasing dividend stream, as well as some capital growth – but the focus is clearly on dividend and dividend growth. Here, I will try to break down their performance into Dividends, Capital Growth, Share price vs NTA, and finally to Total return.

Whitefield (ASX:WHF) Dividends

Whitefield provide an awesome dividend yield and growth. The 2020 Net dividends per (ordinary) share was 20.5c, and with the current Whitefield share price of about $4.70 (September 2020) this represents a current net dividend yield of 4.36%. Accounting for the 100% franked dividend, the current grossed up dividend yield is 6.23% – which is pretty amazing for such a diversified fund.

Whitefield (ASX:WHF) LIC review
Earnings growth of Whitfield (ASX:WHF). Source: Whitfield 2020 Annual Report

Rather than picking the ‘instantaneous’ yield, if we look over the past 5 years, we see a steadily rising dividend yield despite a plummeting RBA cash rate. Whitefield has generally been able to increase its earnings per share, and thus have been able to a produce steadily increasing dividend yield. Check out the graph below which shows this relationship (Noting that Gross yield includes franking credits attached to the net dividend yield).

Whitefield (ASX:WHF) LIC review
Dividend Yield of Whitfield (ASX:WHF). Source: Whitfield 2020 Annual Report

The average of the previous 5 year dividends is around a 4% net yield, or a 5.7% grossed up yield due to franking credits. Over the past 10 years, the average dividend yield was closer to 4.5% net, or 6.4% grossed up yield.

Dividends are comprised of ordinary and final dividends. Whilst Whitefield has a record of over 30 years of increasing ordinary dividends (the years first half or initial dividend), it can be seen the final dividends were cut and therefore total dividend yield from 2013 to 2016 did fall. However, it is back on the uptick now with over 5 years of growth which most investors will find positive.

Whitefield (ASX:WHF) LIC Capital Growth (Share price)

WHF has experienced capital growth over the past 20 years, where it has nearly doubled in value. Based off data from Google Finance, the trailing 20 year annualised share price growth is around 3.2% per annum. This has been subject to some significant volatility which even at times showed some negative 10 year returns.

Performance of Whitfield share price (ASX:WHF). Source: Google finance

Whitefield (ASX:WHF) Share Price vs NTA

It is important to realise that because Whitfield is a LIC with a closed end structure, when it gets traded on the secondary market (i.e. the ASX) it does so at ‘market rate’ or according to investor sentiment or market conditions, rather than at its NTA or the true value of its portfolio. This means like other LICs, Whitefield can trade at either a premium or a discount to its NTA, depending on how investors feel about its management.

As can be seen below, Whitefield typically trades at a discount to its pre-tax NTA (when dealing with LICs, we generally use pre-tax NTA as post-tax NTA can be difficult to calculate and not all LICs readily supply or report on this information). This leads to the preposition that you could buy Whitefield shares at a discount, and essentially get a proportional boosted dividend yield for your investment.

Whitefield (ASX:WHF) LIC Total Return

Of course, to get an idea about the funds total performance we should combine both the ‘accumulated’ Dividend yield and the share price (capital) growth. Helpfully, Whitefield has done exactly this for its annual shareholder report;

Whitefield (ASX:WHF) LIC review
Performance of Whitfield (ASX:WHF). Source: Whitfield 2020 Annual Report

The graph looks impressive (similar graph produced by WHSP), but I feel it could be a tad misleading. The WHF share price & dividends accumulation is using pre tax and fees results, which is a bit higher than the post tax and fees results. This is a common tactic used to make reports look good, and actually most companies (and LICs) report this way.

There is a difference because Whitefield holds property securities which are unfranked, as well as they rebalance their ‘enhanced index’. Due to this they are subject to both income taxation and capital gains tax events.

When we dive a little deeper into the annual report, we get to this table which summaries returns post tax and post fees. Returns that are (bracketed) indicate negative returns – which is to be expected in the 1 year returns due to the COVID-19 market crash.

Performance of Whitfield (ASX:WHF). Source: Whitefield 2020 Annual Report

We are mostly interested in the 20 year returns as we are analyzing the LIC as something to potentially buy and hold long term. So what does this tell us?

  • Pre-Tax/fees The 20 year annualised Whitefield Portfolio growth was 7.42%
  • Post-Tax/fees The 20 year annualised Share Price (including dividends) was 7.11%
  • Post-Tax/fees The 20 year annualised Whitefield Post-deferred Tax NTA was actually 6.46%

When we fact check this against Sharesight’s share checker, we see that the total return was in line with Whitefield’s lowest reporting figure.

Whitefield (ASX:WHF) 20 year total performance. Source: Sharesight

Using the historic share prices we worked out an approximate 3% capital growth over 20 years, which suggests that Whitefield’s 20 year average dividend was somewhere around the 4% (Gross) mark – I think its reassuring to see current dividend yields are much higher.

Looking back over the past 3 decades, Whitefield has actually managed to grow its dividend by nearly 5% each year, or double the rate of inflation! This is an attractive performance, particularly for someone wanting to create a growing stream of passive income to live off.

Whitefield (ASX:WHF) LIC vs index

Using Sharesight‘s share checker functionality, we can go back up to 20 years and check out the historic performance of Whitefield against a number of other shares – you could do this ad-nausea, but I thought I would just compare it to the index which a number of Aussie ETFs track – the S&P ASX 200. You can see that based of total adjusted accumulated returns, Whitefield under performed the basic index over the last 20 years.

Performance of Whitefield against the S&P ASX 200 accumulation index. $ represent dividend payments

Would I own Whitefield (ASX:WHF) LIC?

I personally do not invest in Whitefield, due to their significantly high management fee and highly active investment style. Whilst their returns over the long term (35 year periods) have outperformed the index, this is likely due to trading at a heavy discount to NTA during the 1980s (up to 10% discount to NTA) – as it progressively traded at less and less of a discount to the point where it is today, this makes it look like a great performer. After you factor in the additional management fees and tax, the 20 year returns actually under perform the S&P ASX 200 index as shown by Sharesight’s share checker.

I am not entirely sold on the all index vs industrials debate; Mining is one of Australia’s biggest industries as we are so resource rich. Whilst mining is typically a very cyclical industry and very much depends on foreign trade and exchange rates, when it booms it really goes off. Completely avoiding a market sector sounds akin to stock picking, and I am not sure it is the right move for me.

I personally favor a low-fee, total market index passive style of investing. I believe this to be a lower overall risk return to be achieved with a core holding of ETFs, but I am still interested in good quality, low-cost LICs.

Overall, I find Whitefield to be way too expensive in terms management fees, too small in terms of total capital pool, and too actively managed for me personally.

Conclusion

Whitefield is Australia’s oldest ASX listed Investment Company (listed 1923) that holds a diversified portfolio of industrial (non-resource) companies. They are an actively managed LIC that deliberately excludes the resource (mining) sector from their portfolio, and they aim to outperform the S&P ASX200 Industrials Accumulation (XJIAI) index by creating their own ‘enhanced industrial index’ portfolio. They currently manage over (AUD) $ 420 Million making them a fairly small LIC, and have an overall fee structure of .42% or 42 basis points.

An investment in Whitefield could be suitable for a ‘Thornhill’ style dividend investor, who is seeking consistent franked dividends with reliable earnings and dividend growth that outpaces inflation, as well as wanting some additional capital growth in their shares price. Whitefield have proven themselves in this regard, with strong dividends – currently providing a grossed up dividend of 6.2%, and a dividend growth of nearly 5% over the past 30 years. Personally, though, I am not investing in Whitefield.

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