ANGUS GLUSKIE | from Whitefield Industrials Ltd
ANGUS GLUSKIE | from Whitefield Industrials Ltd
Joining me today to celebrate 100 years of Australia's oldest LIC is the chair and managing director of Whitefield Industrials, Angus Gluskie. Listed Investment Companies have been used by Aussies to help generate income and compound returns for a century.
Angus has over 30 years’ experience in the investment management and financial services fields. He has qualifications in investment management, economics and chartered accountancy. He has worked with Whitefield and associated entities since 1987.
Here he describes the investing strategy employed at Whitefield:
The product that we're looking at is a very steady flow of income from all those businesses who are generating their own income underneath the surface there. And we certainly pass that flow of income back to our own investors as our own franked dividends to our shareholders. And at the same time as the outlook and prospect of that income grows over time, that's also reflected in the value of the underlying Asset backing of the company. And so over time we're also looking for that Asset backing to expand.
LICs differ from ETFs because of their closed-end structure which allows for a differnet approach to investing:
I think you could describe the closed-end fund structure as being one that has the capability of being contrarian to market as compared to pro market. That can be an advantage in terms of strategy. and it, a closed-end fund can be a buyer of distressed assets when everyone else is the seller. They could be the buyer at cheap prices, which is a nice characteristic. And it's interestingly, it's one of the fund structures that connect to stabilized markets because they, the fixed capital allows them to be buyers when everyone else is necessarily a s a seller.
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It's much more comfortable as an Investor to just have that focus on the underlying value of the businesses that you're in and recognize if they're good businesses, their value will be here in a year's time and in two years time and in five years time, regardless of the vagaries of the short term, bounciness of markets and financial conditions.
G'day And. welcome back to Shares for Beginners. I'm m Phil Muscatello. It's not often that we get to celebrate anything a hundred years old on this podcast. There seems to be a new ETF being launched every week, but what did Aussie investors use before ETFs? Joining me today to celebrate a hundred years in the business, is the chair and managing director of Whitefield Industrials. Angus Gluskie. Good day. Angus.
Hi Phil. Thank
You very much for coming over.
It's a pleasure.
Phil (1m 1s):
Angus has over 30 years experience in the investment management and financial services fields. He has qualifications in investment management, economics and chartered accountancy, and he's worked with Whitefield and associated entities since 1987. So does that mean your career started around the 87 crash?
Angus (1m 19s):
Yeah. It was an exciting time to come into the field of, of investment and finance. So It was the era of Alan Bond, Christopher Skase, you know, Robert Holmes a Court and John Spalvins, and people
Phil (1m 30s):
Wearing white shoes.
Angus (1m 32s):
There might've been a few of those. It was a white Super
Phil (1m 33s):
Brigade. Yeah, yeah, yeah, yeah, yeah, yeah. So when you started, how close to the 87 crash? Was it
Angus (1m 39s):
It was, well, look, I, I started working in, in the business or associated businesses probably a year or two prior to that. So It was in, in the lead up, and It was, look, It was interesting to see the, I guess the turmoil in markets also just the, the personalities involved in, in markets at that time. But it's worth, worth remembering. It was a, It was a period of incredible change. There was a boom buster cycle happening there in markets. There was initially lots of excitement underneath this economic activity was, was being driven by inflation was a period of very high interest rates. So some similarities and, but yeah, a tumultuous point to start.
Phil (2m 22s):
'cause It was a, a time as well where the economy was so changed. I mean, the Hawke Keating government changed so many policies at the time, you know, floating the dollar and things to really bring us into the 20th century economically, didn't they?
Angus (2m 34s):
It was a period of Yeah, yeah. Dramatic change. So apart from those kind of fundamental structural changes to the Australian economy, it's worth remembering that beneath the surface, It was really the introduction of computers to society. And, and when I started, the field I was in was manual. There were books with people writing down figures and sums. And I, I can remember my first job was doing the valuations of investments. And to do that, there weren't electronic linkages. You grabbed the Financial Review and you looked at those stock prices and you got out a pencil and you did a calculation. So
Phil (3m 7s):
Yeah, yeah, we've had Vic Jokovic from Cboe on the podcast. Yeah. And he was around at the same time. And he mentioned that there was a, at the the exchange, there was one monitor on a lazy Susan for three brokers. Yeah. Yeah. and it had ashtrays in the lazy Susan as well.
Angus (3m 23s):
Well, I, I used the word computerization describing this to someone the other day, And, they said, what does that mean? And I thought, actually that's, you know, it's a word we haven't heard for decades, but yeah, going from manual to computers, that's a strange concept. So what,
Phil (3m 37s):
What was your role when you first started with Whitefield?
Angus (3m 40s):
Look, I was, at that stage we had a very, a quite diverse business, which had tentacles across insurance, finance, investment, as well as accounting. So It was a, in fact, a great place to gain experience and a broad level of experience. So I was actually starting off as, you know, studying economics and accounting and, and handling tax matters, financial matters, and quite a lot of complexity around all of those, those issues. And of course, lots of those issues are relevant to finance and investment, but also certainly understanding the investments that we're dealing with.
Phil (4m 12s):
So what did you learn about investing at that stage when you were first starting out? What were, what a couple of good lessons.
Angus (4m 17s):
Well, I think there were some good lessons there. you know, we've, we've spoken about the, the change that was occurring at the time. And I think It was an era of not just the big structural change, but also big economic change. and it, what's remained with me from that time was how important those changes are in terms of being able to understand them and understand their influence on investments. And what's interesting, those big changes won't affect things day to day, moment to moment, or even week to week. But over the course of years and even decades, they're very important changes to understand. So I think that was one big lesson. you know, pay attention to those big moving factors. So the second's, probably the other point, we alluded to the boom bust nature of the environment at the time, there were points of, you know, in the lead up to that 87 crash of quite glamorous businesses going through extravagant increases in share price, which excited investors captivated them.
Angus (5m 11s):
And people got very caught up in that, that trend perhaps of, of greed or having to not miss out, you know, some hits of similarities to, to recent times. And of course then you got the bus that came after it. So look, I think the lesson that came out of that for me was to understand that what's on the surface isn't necessarily what's important. The fundamentals are very important. And for investors, you want things that can be resilient, And that aren't just built on illusion. So I think there was a good lesson outta that side of it. And I think the flow on from that actually is understanding what matters as an Investor. And I think at the heart of a good investment is the underlying income that's generated out of a business.
Angus (5m 55s):
And so you can imagine that, you know, stock prices, prices might come and go. They rise, they fall. And that stock prices for an Investor is really only important once, and that's at the point where you purchase the investment because that's the price you pay. But beyond that, your future fortunes from that investment are dictated by the income that the comp underlying business generates and pays out its returns. And in fact, even if you are a, an eventual seller of that investment, the ultimate value is really based on the under or the income of that business and the expectations of that income over future years. So I think the lesson that comes from that one is, you know, be focused on what businesses you are really owning and buying into.
Angus (6m 39s):
Understand that the value is outta the business. The share price is merely a byproduct. I know,
Phil (6m 44s):
It's incredible, isn't it? There's so many stories, and it, you've kind of alluded to that, that the stories that you heard in the eighties, and then of course we had.com and then we had so many other trends for investors, And, that seems to be what captivates people in the first instance. But really it is, comes down to the importance of understanding that you're owning a business And that business is working for you as a shareholder, isn't it?
Angus (7m 8s):
Absolutely. Absolutely. And I think earlier, look, we mentioned in those times of the eighties, inflation was a huge feature. you know, something that's coming back onto the radar screen today. And I think the important element that came to me at that time was how important having an Asset class or an investment Asset class that could respond to inflation and Australian Shares Asset class, which is where Whitefield invests is one of those Asset types. So if you think your costs of living as a, as an Investor are going up all the time, particularly when things inflate, and being able to have an income stream that is going to keep pace with that, or even exceed it in certain circumstances, becomes very, very important.
Angus (7m 49s):
And I think, you know, maybe in the low inflation era that we've just had the importance of that has diminished a little in people's thinking. But, you know, i, I do go back to those days in the eighties and the nineties and it It was just absolutely clear cut. That being able to hold Shares in businesses whose income would grow over time was a great way to, an important way to invest, but a great way to make money. So, which maybe then also takes you to that last point of, of great significance for long-term investors, which is just how important the compounding of investment returns are. you know, I think we often hear people, we all talk about, wow, what were the returns last year?
Angus (8m 30s):
But what really matters is what are the returns over 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, and what happens when you chain link those returns together? And the power of compounding, particularly when you've got very high levels of economic growth or high levels of inflation, it's particularly significant. And we often point to that where for Whitefield, if you'd invested $10,000 in 1970, that investment, including the compounding of dividends over that time, would today be worth over $3 million. And that's even after allowing for the payment of tax on the way. So, and a big driver of that is just the repeat compounding of sound investment returns over time.
Angus (9m 13s):
But you can imagine if you didn't invest over the long term, you'd be, you might be stuck with your $10,000 that you had in 1970. Yeah,
Phil (9m 21s):
That's right. So we've, this is not the first time we've met. We've met in the Whitefield offices, and we started talking about the history of Whitefield. So in 1923, when Whitefield started, it wasn't what's known as a listed investment company, then what were the activities that were being undertaken?
Angus (9m 37s):
So when Whitefield was founded, it, It was certainly, It was created as, as a vehicle to provide public investors with a convenient method of investing where they would know that their investment was professionally managed. So it, it had the basic characteristics of an investment fund, but the initial investments at that time were, were in, in fact, in mortgages. And the rationale behind that was that the opportunities for return and growth in the Sydney market, It was the Sydney company originally were spinning out of the, opening up of the property market around Sydney. And this had in fact come from proliferation of automobiles. you know, in the earlier days prior to motorized art transport, the far sides of Sydney were inaccessible, or they were difficult to access.
Angus (10m 22s):
So suddenly the car had opened up Sydney And, that opened up an absolute raft of development around the city, And that meant people wanted to buy houses, they needed finance to do it. And this was a method of creating a linkage between the people who needed capital and finance and investors who could earn a return from it. So It was an interesting byproduct of the times. I think
Phil (10m 44s):
That's just a really great lesson. 'cause I was thinking about that after we spoke And, that people think about investment trends, but really you're not necessarily going to access those investment trends in the way that you would on, on face value. Like, you know, there's a new technological development, whether, whether it's the internet or the car in that case. And it's not necessarily that you're going to be profiting from the car itself, but then the byproduct is that Sydney real estate suddenly opened up. I think that's a, that's a great lesson as well. Anyway, that's just a byproduct. So tell us a bit more about Whitefield after that, and when did it finally become the listed investment company vehicle? Yeah,
Angus (11m 22s):
So look, the founder was quite a dynamo at the time, and he was, he was also had created similar companies offering, interestingly, off offering finance for motor vehicles as well as gram phones were in demand at the time. There was a, there was another business financing those as well as, and things you put in house houses, radios, radios as well, furniture, the, the things people needed. But look, as we all know, 1929 was the stock market crash as well as the depression that followed it. And the lesson that actually a single line of investment exposure does expose you to the particular risks related to that particular economic dynamic. And they then thought in line with their objective of being able to provide people with a, an investment that was able to transcend decades and cope with changes in economic conditions that in fact a more broadly based investment portfolio was going to be appropriate.
Angus (12m 14s):
So as that was happening, of course the opportunities for growth in Australia were coming out of technological and industrial developments going over into manufacturing and growth in goods and services production around the country. So with that in mind, they could, they felt that they were better served or were better able to serve investors by broadening the portfolio out of mortgages and across into Australian Shares. So by the mid 1940s, they were investing increasingly and ultimately exclusively in running a di a diversified Australian share portfolio. Mm. So again, you know, an interesting byproduct of changing opportunities in economic conditions. And
Phil (12m 53s):
In those days, there wasn't one single stock exchange, were they? There was a number of them. There
Angus (12m 57s):
Were, were all over the country. So yeah, Whitefield was first listed on the Sydney stock exchange just a few years after it's listing, like, just like now, it takes a few years to complete negotiations with the exchange. And so the company listed in 1928, but that was still a quite formative time for stock exchanges. So they were, the disparate stock exchanges were state-based or city-based at the time. And in those years they were agreeing upon uniform listing rules to apply in each state, which was a first move towards eventual consolidation. but that consolidation ultimately only occurred, you know, decades later.
Phil (13m 34s):
So It was listed in the, the concept of a listed investment company. Is that an Australian concept or, because I think they don't have them in the US do they? But they have them in the uk.
Angus (13m 44s):
They do have them in the us but yeah, look, they emerged first and very early versions came out of Holland and England in the late 17 hundreds, early 18 hundreds. Again, driven by economic need. There was a big need for capital to go into the development of economic infrastructure in a period of big industrialization. But at the same time, investors were discovering that they didn't want to invest just in one particular project or one line of business. It was really important for them to get diversity of investments. So they wanted to be able to invest in a, a fund structure that could provide them with a portfolio of investments spread across different things.
Angus (14m 25s):
So those very early English and Dutch investment companies or funds were actually investing in bonds initially, which then financed the economic development. Ultimately it then moved to property and then broader investment in businesses, portfolios of businesses. So
Phil (14m 41s):
I guess the dynamic is diversification, isn't it? Yeah. What it comes down to,
Angus (14m 44s):
Yeah, It was, vehicle for It was about, It was about risk control. Yeah. Mm. Yeah. For investors. So the first Australia was Whitefield in 1923 that they really weren't there prior to that time. And then that was followed in America in 1924 by the establishment of the first pooled mutual funds in the us And there were a raft of issues in the US and, and a few in Australia in that 1924 to 1929 period. Both open-ended funds, but also closed-end funds, which in particular is the listed version of those structures. But the open-ended funds, as well as the closed end to a certain extent were blamed in part for the stock market runup.
Angus (15m 24s):
And then the crash, you know, people realized that in particular, for the open-ended funds, the money flows in, were pumping up the market, perhaps a little extravagantly, but then when the fear struck everyone's withdrawal of money from funds and investment, of course exacerbated the crash.
Phil (15m 40s):
So there were open-ended funds in the twenties? Yeah,
Angus (15m 43s):
The first ones were shortly after the closed-end funds came on. Wow. So yeah,
Phil (15m 47s):
There's nothing new under the sun is there?
Angus (15m 49s):
No, there's not. No.
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Phil (16m 9s):
So Warren Buffet is famously someone who invests in companies. So Berkshire Hathaway, his company, would that be considered a kind of listed investment company?
Angus (16m 19s):
I think that's a, a good description. It's a is exactly a, a kind of listed investment company. So it does hold a diversified portfolio of investments, which means it is inherently a portfolio Investor, it's closed end. So investors buy and sell their Shares in that
Phil (16m 34s):
Fund. It's so closed end, isn't it,
Angus (16m 35s):
On the stock exchange? Yeah, yeah,
Phil (16m 37s):
Yeah. No, d not even dividends. You sit with me and then I'll reinvest for you. you know,
Angus (16m 41s):
And, and then the look, the little twist There Is that they are also, they do have actively managed businesses in there, in particular their insurance operations. And then they have some very large stakes in other businesses where it's a little bit more like private equity. They're exerting a certain amount of management control on those investments.
Phil (16m 60s):
So what's the difference between an LIC and an ETF? And I'll just preface this by saying we've had Ian Irvine on the podcast a number of times, and we've talked about closed-ended and open-ended structures. And the balloon analogy, like an ETF is like a balloon that blows up and then reduces in size, shrinks down, and an LICis more like Lego blocks. So
Angus (17m 21s):
It is, I'm, I'm gonna go for the similarity first. Yeah. In that they both, so for people to buy or sell or Shares in either the ETF or the, or the listed investment company, they do so via the stock exchange, admittedly via slightly different parts of the stock exchange, but it's the same process. People put in orders to buy and orders to sell. Where the difference occurs is in the background. So with the ETF, which is an open-ended structure, if there's a net volume of buyers in a day, then that's money that has to flow into the fund and then be invested. And so the fund size itself grows, and equally, if there's an excess of sellers on a day, that's money that needs to be withdrawn from the fund.
Angus (18m 1s):
And the fund size shrinks. So t it hits the balloon. Yeah. Is the balloon that goes up and down. In contrast are the closed end fund structure, the, the listed investment company or trust structure has a fixed capital. So it's maybe fixed in blocks, I'd say. And I think description of that applies there a little bit like Lego blocks where you add a block at a time or subtract a block at a time. So the listed investment company gen in the normal course of trade, it's got a fixed capital. And when people buy and sell Shares between themselves, the capital of the fund doesn't change, the investment fund doesn't have to buy new investments or sell investments to fund deposits and withdrawals. And that's the important point of difference because it has some implications in terms of the costs involved of operation and how that's managed.
Phil (18m 50s):
So what do you find are the advantages of an LIC?
Angus (18m 53s):
Okay, so you, you can automatically see that one of the PO advantages here is that with the fixed capital, the fund does not have to repeatedly buy or sell investments to fund deposits and withdrawals from investors. And, that can be quite a savings. So if your fund is growing and shrinking daily, you might find you have to buy investments across the portfolio one day, And then sell 'em the next day. Now that comes at transaction costs. It also comes at taxation costs or the cost of tax realizations. And in managing those cash flows, something that investors don't realize is that either there needs to be a hedging process in place to make sure that the cash flows don't result in inadvertent leverage of the fund returns or dilution of fund returns.
Angus (19m 43s):
And if hedgings in place that comes at a cost or if there's no hedging you do get, are faced with potentially the inadvertent dilution or leverage of the, the underlying return. So the closed-end fund, the listed investment company or trust does avoid those costs. And I think that's, that's an important efficiency that sits there. It's not al always known, but it is important. Secondarily, in an ETF There, Is, a market maker that sits in there at all times, they're commercially motivated to make a market, which is a good thing. It provides people with the ability to come and go at any time, which that has a nice characteristic for it. But again, it comes at a cost.
Angus (20m 24s):
The market maker is making a margin And that comes out of the hands of buyers and sellers continuously. And in contrast, in a closed end fund, when there's a buyer and seller, the price between them is just the price between the buyer and seller. There's no net subtraction of value from the system. And so I believe that actually means that the closed end structure has this inherent structural cost efficiency just because it avoids those un perhaps unnecessary costs or maybe they're necessary, but it's the cost of providing or handling continuous inflows and outflows. So look, that's one element. There's a few other in structural benefits there that I, I think sit there for listed investment companies.
Angus (21m 8s):
One is the fact that that capital is closed can be quite important. It means that the fund can embrace longer term investment strategies or look to invest in longer duration investment assets. And it's worth thinking that what we mean by this is if you've got an open-ended fund, it can't necessarily invest in assets that might have a life of five or 10 years for fear that if investors all wanna withdraw their money at some point, well that fund mightn't be able to sell its own underlying assets and pay those investors back. Now that's in the normal course of events that may not be a concern. But when we have, periodically when you see problems in investment markets, this issue of ability to sell assets and provide liquidity to investors can become a real issue in open-ended funds.
Angus (21m 56s):
So I think the closed-end listed investment company structure avoids that particular problem. and it does mean it can be more suited to providing some of that long-term capital that economies need. So I think that's, can be important for investors, can be important for economies. One element that I like that's maybe not often appreciated, but I think it really makes a difference. This particularly applies to listed investment companies, which is the company structure. So they have a board of directors who are responsible for the management and oversight of the company. And I think a board of directors is a very nice structure sometimes in terms of the proprietary interests that they take in ensuring the viability, the longevity, and the success of the fund over the long term.
Angus (22m 41s):
And I think that's why you do have some investment companies, both in the UK and Australia, some of the longest lasting investment funds that are out there. you know, there are people who stand behind those entities who are really looking out for investors longer term interests.
Phil (22m 57s):
I think it's also presumably like when everyone's rushing for the exits, an ETF is just gonna go down in value according to the market, whereas a closed ended structure means that it forced to sell investments and respond to those Yeah. Look
Angus (23m 12s):
Short term dynamics, it, it does give the, the manager this the ability, if they want to use it to, to act in that contrarian fashion. And that's, so to put it in concise terms, I think you could describe the closed-end fund structure as being one that has the capability of being contrarian to market as compared to pro market. That can be an advantage in terms of strategy. and it, a closed-end fund can be a buyer of distressed assets when everyone else is the seller. They could be the buyer at cheap prices, which is a nice characteristic. And it's interestingly, it's one of the fund structures that connect to stabilized markets because they, the fixed capital allows them to be buyers when everyone else is necessarily a s a seller.
Angus (23m 54s):
So it's a stabilizing factor for investment markets.
Phil (23m 57s):
So tell us about the main objectives and strategies of Whitefield as a LIC on the ASX.
Angus (24m 2s):
Okay. Most simply, we, we do have an objective of, of providing people with this very broadly diversified exposure across the Australian industrial economy, meaning all sectors other than mining and resources.
Phil (24m 13s):
So you're investing in Shares,
Angus (24m 15s):
Investing in Australian Shares, yeah. Just
Phil (24m 17s):
To, just to hammer on that
Angus (24m 18s):
Point. Yeah. Just to hammer home on that point. It's a good point. And look, the diversity is a real core objective. We wanna provide people with an exposure to all the things that matter in the Australian economy. And the diverse spread is quite purposeful. you know, the industries grow in the Australian economy change over time. And if we can provide people with this very diversified exposure, then as we get that ebb and flow of different sectors performing at different times, people are benefiting as that occurs in different parts of the portfolio. And it's a really good economic structure for long-term investors, both in terms of hedging out potential risks, but also capturing the areas where growth is emerging in your economy.
Angus (24m 60s):
So that's one look, one part of our background, a structure that we're looking to provide people. And a second part is we're aiming to do that with good efficiency in terms of the cost and the management approach that we utilize. And in particular the management approach we adopt is one that utilizes a very structured, disciplined and largely quantitative process investment framework that seeks to harness the very large amounts of data that are available in modern markets these days and utilize that in our investment selection in quite a, a structured and efficient manner.
Phil (25m 33s):
And dividends are an important part a, a really important goal of Whitefield as well, aren't they? Yeah,
Angus (25m 38s):
So out of that process, that's how we set up the portfolio. But the product that we're looking to get out of that is a, a very steady flow of income from all those businesses who are generating their own income underneath the, the surface there. And we certainly pass that flow of income back to our own investors as our own franked dividends to our shareholders. And at the same time as the outlook and prospect of that income grows over time, that's also reflected in the value of the underlying Asset backing of the company. And so over time we're also looking for that Asset backing to expand. This
Phil (26m 11s):
Might be a bit simplistic, but Duke maintain liquidity to smooth out dividends over time so that you're not affected by a market going up and down so much.
Angus (26m 22s):
Phil (26m 23s):
Am I looking at too simplistically
Angus (26m 25s):
There? Well, liquidity, we're almost fully invested at most times, which means we're the capital's continuously being utilized to generate investment return because in using that listed investment company structure, being a company, we are able to, we receive income based on the underlying businesses we invest in And that can have a level of economic volatility attached to it. But the fact that we can set our own dividend level to investors occasionally retaining some profits, occasionally paying out a little bit more using prior years, does allow us to smooth that dividend flow to investors. And so for example, for Whitefield, that means that since the introduction of dividend imputation in the late eighties, early nineties, we've been able to provide a dividend which has been maintained or increased in every single year across that timeframe.
Phil (27m 12s):
And franking credits are passed on as well?
Angus (27m 14s):
Yes, that's right. So as a company, we pay a level of company tax on un franked income and realized capital gains, but the 30% tax that we pay then gets passed on to investors as a franking credit, which means that they end up in the same situation as if they'd invested in the underlying Stocks themselves.
Phil (27m 32s):
Can you give us an example of how you assess performance and risk in the portfolio? Yeah,
Angus (27m 37s):
Look for investors, I'd always say the simplest way to understand how an investment company performs is to look at the return of the underlying investment portfolio on a before tax basis. And I say that because listed investment companies, at least tax paid vehicles, we pay that level of tax. So it's really important to go back and look at the before tax basis.
Phil (27m 58s):
So you're looking, doing a look through into what the underlying,
Angus (28m 0s):
Yeah, underlying investment portfolio was. And that's, most investment funds will quote that core return. And the reason I say that is you are trying to compare it against something that's like for like, and the indexes that are commonly used are before tax indexes. So you just need to use a like, for like comparison. So
Phil (28m 16s):
Just explain that again, that's an important point to understand, isn't it?
Angus (28m 18s):
Very important. So LICs a are tax paid vehicles as companies. So if you are looking at things such as our, just our net Asset backing or even our share price, which tends to reflect net Asset backing, they're actually measures that come after we've paid a level of tax. So they're actually not a Very good basis to try and compare to a before tax index or what you're comparing is an after tax return against a before tax one And. that just won't give you a realistic answer. And what's,
Phil (28m 49s):
What's a before tax index?
Angus (28m 52s):
Well, all your normal indexes such as the a ASX, the s and p ASX 200 or 300, just your standard accumulation standard indexes are before tax indexes. And it's a really important consideration. There are after-tax versions, which include franking, but the after-tax are versions carry a level of complexity. So that's why all the common indices are before tax. And so you need to be careful with licks or you'll mistakenly think underestimate the returns that they're generating. Easiest way is to look at that before tax return or even before tax and expenses return because that's a direct, like, for like indexes don't have expenses taken out of them. So that just lets you know how the fund or the manager's been performing.
Angus (29m 34s):
And then separately have a look at the management expense ratio and that tells you what the expense of running the strategy is. And you can then you then have a very full but simple picture of performance and it's, it then gives you an accurate basis and you can compare that to unlisted funds, to trust to ETFs. You've got a like, for like basis, but we just, we do highlight, don't go down the confused route and try and compare after tax returns with before tax ones.
Phil (30m 1s):
So how does Whitefield balance growth and income?
Angus (30m 4s):
Okay, so with our, our, our own dividend to investors consists of two things. The vast majority of it consists of a replication or a level of dividend that's very close to our underlying dividend income that we earn from all the Shares in our portfolio. And that's, look, typically that average is out at about 3.5% per annum for the Australian share market. But on top of that, we do also pay out a small level of realized capital gains just because we pay tax on those and we want to distribute those franking credits out to investors. So collectively it means that our dividend probably ends up coming out around 4% on a average over time with the rest of our return representing growth in the net Asset value.
Phil (30m 48s):
How do you go about finding those sort of opportunities, those different opportunities,
Angus (30m 51s):
Opportunities for capital
Phil (30m 54s):
Angus (30m 54s):
Capital growth? Well, again, look, it's a byproduct of just being invested in companies themselves that are growing. So it's, that's an inherent part of investing in businesses. If those businesses are growing their underlying income over time and we've selected them, well that will be reflected in the capital growth of those companies and also then in our, in our net Asset backing. So it's, it's basically just by good careful stock selection across that diversified portfolio. And that's
Phil (31m 23s):
Just an added bonus really. Yeah. Coming out of it. Yeah. So what, why does Whitefield only invest in the industrial sector?
Angus (31m 29s):
Yes, we are invested in, in industrials and it's worth explaining just the industrial terminology. We use There, Is, the broad split of the Australian share market into the resources and mining sector, which we're not invested in,
Phil (31m 43s):
Which is such a big part of the Australian economy, isn't it, in the market
Angus (31m 46s):
And the sectors though that form general industrials, which is all other sectors of the Australian market, from technology to healthcare, to banking, to finance, to manufacturing, to goods and services, re consumer retail technology.
Phil (32m 1s):
Angus (32m 2s):
So we're invested in all those other sectors, but we call those, I like to call those the constructive industries. There are about manufacturing goods or building, providing services or building things as compared to the extractive industries of resources, which are about extracting a commodity from the ground and selling it. Now the one thing, the reason we exclude the resources is in part because it's a resources by their nature or commodities, if you think about that word, it's selling a homogeneous product that's the same as another, as another version of the same product. For example, one man's gold is identical to the next man's gold. Okay? But because the product they're selling is homogeneous and there's no distinction between those different versions of the same commodity, it does mean our resources and mining companies are heavily exposed to the cycles of supply and the cycles of demand.
Angus (32m 54s):
And those cycles are quite strong. Yeah. With, with the result that the commodity prices will move upwards and downwards and it means commodity producers and miners then will, their own profits will tend to rise and fall quite significantly. Now our, our objectives are to provide investors with consistency and reliability of income. And our purposes are better served by investing in the industrial space of the market, which is less volatile than that volatile resources sector. So it just serves our purposes better to exclude that. And over time it's meant that we've been able to generate the same and it, if you go back long enough, slightly higher returns than the broad market, but with a lower level of volatility.
Angus (33m 40s):
Now look, those cycles that we're talking about can be long cycles. And then look, there will be periods where resources will do particularly well when commodities are in short supply or demands particularly strong. But there'll be other periods of time where they do poorly, in which case you may not want to be invested in them. So we find it convenient and it better serve our objectives to, to be focused on the industrials market. And we like some of the other characteristics that come from that, which is because we're focused on that constructive part of the market, our investors have a bigger exposure to the Australia, all the, the different industries emerging in the Australian economy.
Angus (34m 20s):
Whereas we described the extractive market, the commodities market as one that's a little bit more globally focused. And we think there's some nice characteristics associated with the Australian economy, both now and over future decades, such as our slightly a reasonably or relatively affluent economy, a reasonably good levels of population growth. And we think these are characteristics that will serve Australia quite well relative to global economies over future years. So we like the fact that we're invested in giving people a, a focus on investment in those sectors of the market. An added benefit is people have very differential views as to whether they invest in commodities or not.
Angus (35m 2s):
And they might be ethical views or they might be views based on investment considerations. By excluding resources and commodities from our portfolio, we allow investors to form their own view as to whether they wanna invest in those things. If they do, they can do it through their other investments. But we're able to provide an investment portfolio that is just focused on the non-commodity part of the market. And in to look in today's society that has one of the benefits of that is that it has a much lower emissions intensity in terms of greenhouse gas emissions. So for example, the Whitefield portfolio has a 60% lower greenhouse gas emissions intensity than the broad ASX 200.
Angus (35m 42s):
Hmm. And you know, quite a few investors appreciate that angle in terms of where they place their investments.
Phil (35m 48s):
So how does Whitefield cope with volatility?
Angus (35m 50s):
Okay, I'll take that question in terms of how does both Whitefield and I personally as an Investor are cope with volatility and 'cause it can be a factor that disturbs the thinking of investors. you know, when they see market prices jumping around all the time. And if we go back to a a point I made earlier in our podcast Phil, where I said the most important thing to understand about investment is that you're investing in businesses that produce income and the income of the businesses you're investing in is nowhere near as volatile as the actual share prices that perhaps go with them. And so in terms of how do we cope with them, I think it's that focus back on the underlying income of a business over time.
Angus (36m 31s):
And the fact that if you are invested appropriately, hopefully that business income that's being generated is quite sustainable. And if you understand that you can sleep at night, you can be much more comfortable that your investment will have value, whatever the economic conditions are. And I think if you get too uptight about the actual market prices of investments day to day, week to week, month to month, you know, you can suddenly get caught up in the, I guess the traps of perhaps fear and greed, you know, in terms of how these things are moving. And I think it's much more comfortable as an Investor to just have that focus on the underlying value of the businesses that you're in and recognize if they're good businesses, their value will be here in a year's time and in two years time and in five years time, regardless of the vagaries of the short term, bounciness of markets and financial conditions.
Angus (37m 24s):
Phil (37m 24s):
Hopefully a hundred year history as well as a little bit of proof in the pudding as well.
Angus (37m 29s):
Phil (37m 29s):
So how can listeners find out more about Whitefield? Angus?
Angus (37m 32s):
Easiest way is websites, so whitefield.com au and on there you can find access to our annual reports, which always provide a good amount of information on the company. We also provide updates to people which are released to ASX. So if you go to the ASX website and look at announcements, you can also access those again through our website and our periodic updates to market can provide some color about what we're doing and why we're doing it. Fantastic.
Phil (37m 57s):
And what's the ASX code?
Angus (37m 59s):
Phil (38m 1s):
So that if investors find out more, they can just go to look at that in their brokerage account as well. That's great. Angus Gluskie, thank you very much for joining me today.
Angus (38m 10s):
Thank you Phil.
Chloe (38m 11s):
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