NCC – A LIC with high concentration bets

I recently noticed that I hadn’t mentioned NCC here, probably as the holding was very small for me and the stock was just quietly doing a good job including some sizeable franked dividends on the way. I bought a year or two ago when the discount was probably a lot larger but didn’t get set with that much.

I was emailed an invitation recently to their investor presentations, as I am staying back in Melbourne probably until Christmas now I figured for something new I would start to attend more investor meetings. So one thing I learnt already is next time I will go on an empty stomach and arrive a little early. I was very impressed with the refreshments including some nice looking muffins with egg but I had already had breakfast so didn’t take advantage. Some may argue the food may contribute to NCC’s high expense ratios but I will forgive this aspect. I don’t know whether I am serious here or not.

I ended up buying some more stock recently at $1.18 so that the position kind of means something to me now. Their style is often to become substantial shareholders of companies they like, own very few companies in the portfolio, but really understand the companies well and meet regularly with management and support them if they do well. They don’t give much away in their monthly reports in regards to stock breakdowns probably thinking investors could just replicate the LIC themselves, or not wanting to show their cards if they need to move in or out of smaller stocks with their often large holdings. What I conclude though that possibly some haven’t yet is that August should be a very strong performance month again. If I look at the size of NCC, then three major holdings of theirs (we can see probably the size of their stakes via their substantial shareholder notices), I think I can kind of come up with a lot of their portfolio breakdown anyway. They said at the meeting they were very happy with how their companies reported. AIK, BSA & MNF would be some they refer to. Based on crude calculations above I think their portfolio is probably even more concentrated than some are aware. Since they have been strong of late that can be a positive perhaps of entering the stock where I recently did around $1.18. It therefore also means one has to have some belief in these. AIK now that I recently lightened up I have some room for some more indirect exposure here. BSA at a glance I don’t mind, given my experience with SSM and some may look at this is an alternative to ride some potential margin expansion. MNF is probably too “new age” for an oldie like me to be the kind of stock I would own. Yet I don’t mind placing some faith in the NAOS team. Despite the high costs (and I wouldn’t blame the egg muffins on offer), they are justifying them with fantastic performance figures. It can be a trap to potentially become too focused on low expense ratios. For instance, when I note the NTA growth in two expensive LICs the last year or two like NCC & TOP, versus what most advisers will prefer the likes of your AFIC & Argo, I know where I would have preferred to be lately. I also think the CIO and directors holding sizeable amounts of shares in NCC is a good thing. Sebastian Evans presented well and seems to invest with a point of difference in the market and seems youthful and keen still, yet quite savvy. Or maybe I am just seemingly feeling more old!

The July end NTA was pre-tax $1.30 & post tax $1.22. At $1.18 recent top up price for me that would only be a discount of 9% pre-tax or 3% post tax. With August I feel doing quite well for them, I suspect at time of writing I am probably buying at a greater discount, let’s say hopefully more than 15% pre-tax or 10% post tax with a bit of luck. That seems generous given their cracking performance. I also conducted an interview by chatting to a sample set of investors at the meeting (ok just one), who commented about being tired of how the blue chips had gone and classic index hugger investment managers who focus on these. Whilst I still am worried about valuations on share markets, if the market does stay strong there could be a big shift from retail investors fed up with the blue chip laggards looking for fund managers who are not sheep like NCC & TOP etc. Also assisting the short term maybe that is cum a 3.5 cent dividend in October. It sounds silly but I still notice strength with these LICs in the lead up to a lumpy fully franked dividend.

One other negative could be with their current high concentrations I believe they will want to lighten up soon on these 3 winners mentioned above, even placing downward pressure potentially on their future performance. The offset for this is that the taxable capital gains will further underwrite a lot of large fully franked dividend in the future. They already have reasonable franking credits for a while yet, but further underpinning large fully franked dividends in the future should help the NTA discount compress in this yield obsessed world.

Don’t take this lengthy write up as an indication this is a huge position for me, sometimes I just get in “writing mode” and go on a bit too much. Especially on a Friday, enjoy the weekend! Also please note this is NCC, they have another LIC with the code NAC. Oh and they did say these presentations are part of a shift for them to market themselves more. I believe sometimes this can help the NTA discount contract, have seen HHV doing more and it may have assisted with them. So keeping up these presentations with the nice muffins may lead to an estimated further contraction in the NTA discount of between 1 and 1.5%. 🙂

 

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