Djerriwarrh Investments : LMI Quarterly Review - December 2016

Listed Managed Investments

December 2016 Quarterly Review

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Listed Managed Investments - December 2016

Djerriwarrh Investments Limited (DJW)

www.djerri.com.au

Rating

LMI Type

Investment Area

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Listed investment company Australia

Investment Assets

Listed companies and other

Investment Sectors

Diversified

Key Investment Information

Price ($) as at 9 February 2017 3.64

Market cap ($M) 796.7

Shares on issue (M) 218.6

Shares traded ($M p.a) 123.4

COMPANY OVERVIEW

DJW was established in December 1989 before being listed in June 1995. The company invests predominately in S&P/ASX 50 stocks listed on the ASX where there is an active options market available.

INVESTMENT OBJECTIVE

DJW seeks to provide shareholders with attractive investment returns through access to an enhanced level of fully franked dividends and enhancement of capital invested.

STYLE AND PROCESS

DJW invests in a portfolio of ASX-listed stocks, primarily from the S&P/ASX 50 index, given that this sector of the market offers an active options market. To increase its income, DJW writes covered call options over the stocks held in the portfolio. This generates income from the premiums paid by third parties to acquire the options. Where DJW believes the market is more likely to rise, it would likely reduce the level of the portfolio covered by options so that it could benefit from rising share prices. Conversely, in down-trending or volatile markets, DJW is likely to increase the option coverage of the portfolio. DJW also has a trading portfolio with short-term positions. The Investment Committee, which comprises five members

of the Board, plays an active role in the investment process with the task of approving all investment orders and transactions, reviewing the performance of investments and reviewing sub-underwriting offers and deals with portfolio related activities.

12-month L/H ($) 3.50/4.23

Listing date June 1995

PORTFOLIO CHARACTERISTICS

Fees:

Management Fee (%) 0.41

Performance incentives (%) na

Pre-tax NTA Performance Analytics (including dividends)

S&P/ASX 200 Acc

1 Yr 3 Yr (p.a.)

Excess Per. (%) -0.97 -3.50

TE (%) 2.18 2.44

DJW invests in a concentrated portfolio of stocks, predominantly from within the S&P/ASX 50 index. The company utilises options to generate increased income for the portfolio. Given the company writes call options, the portfolio may experience high levels of turnover if the options are exercised. While the company seeks to ward against this outcome by buying back options and writing new ones, in times of strong markets the exercise of options is inevitable. The portfolio's largest exposure is to the Financials sector with 42.1% of the portfolio allocated to the sector. 27.6% of this allocation is to the big four banks, slightly above the benchmark index. Over the past 15 months DJW has reduced its weighting to large cap (top 50) stocks, down from 86.2% to 77.5%, increasing its exposure to the small and micro cap market sectors.

Benchmark returns are purely pre-tax, whereas LIC

returns incorporate realised capital gains tax and therefore understate portfolio performance to a degree.

Dividend Yield %

FY14 5.52ff

FY15 5.54ff

FY16 6.37ff

Substantial Shareholders %

AFIC 3.4

Bruce Teele 0.9

As at 31 December 2016

INDEPENDENT INVESTMENT RESEARCH COMMENTS

DJW provides a unique investment style in the LIC universe. The company makes frequent use of options in an attempt to increase portfolio income. The company writes covered call options over 20%-50% of the portfolio and as such, investors should be comfortable with the use of, and risks associated with, options. The company currently has $150m in credit facilities, $75m of which has been drawndown (~9% of the company's market cap). The portfolio outperformed the benchmark index over the December quarter, with the portfolio (pre-tax NTA plus dividends) gaining 5.5% compared to the benchmark index which was up 4.4%. However, the portfolio has underperformed on a one, three and five-year basis. DJW's overlaying option strategy seeks to provide shareholders with an above market dividend yield. The company has achieved this by continuing to offer a greater dividend yield than the benchmark index. However, for FY2016 DJW paid a lower dividend of 24 cents per share fully franked, down two cents on the prior year. The first half 2017 interim dividend was steady

at 10 cents per share despite a 35% fall in net operating profit, but DJW has previously foreshadowed a reduction in the full year dividend to 20 cents per share. The share price premium to pre-tax NTA was relatively steady at 14.9% at 31 December but has fallen from 32% since June 2016 given the outlook for a lower dividend. At this price the shares are still overvalued and we suggest potential investors remain patient when seeking an entry point.

SECTOR BREAKDOWN (EX CASH) BOARD OF DIRECTORS

(%)	(%)	John Paterson	Chairman	Andrew Guy	Director
Energy	5.0	5.0	Ross Barker	Managing Director	Kathryn Fagg	Director
Materials	15.1	15.4	Graham Kraehe	Director	Alice Williams	Director
Industrials	9.2	9.3	Bob Edgar	Director	Graham Goldsmith	Director
Consumer Discretionary	1.7	1.5	Karen Wood	Director
Consumer Staples	7.6	7.3

Sector

30 Sep

31 Dec

Utilities 1.5 1.6

Asset Weighting (ex cash)

Ca sh 2.5%

Size Weighting

Aus t. Equities 97.5%

Healthcare	9.7	8.6	OTHER DATA
Financials (ex Property)	39.8	42.1
Property Information Technology	3.1 1.8	2.7 1.3	Options - None on issue. Dividend policy - DJW looks to distribute all	dividends and income receiv	ed such that
Telecommunication Services & Utlities	5.5	5.0	they are fully franked.

• Capital management policy - DJW has a buyback arrangement in place to buyback shares if trading at a discount to NTA.

• LIC tax concessions - Yes

• DRP available - Yes, at up to a 5% discount to the VWAP for the 5 trading days up to & including the record date. TheDRP is currently active with a 5% discount.

  Code

  Portfolio

  (%)

  S&P/ASX200 Index

  (%)

  DJW's Portfolio (Top 10) Weighting

  WBC 7.1 6.8

  CBA 8.3 8.8

  NAB 6.3 5.1

  ASX 50-

  100

  9.6%

  ASX 100-300

  4.8%

  ASX

  Mi cro 5.6%

  Ca sh 2.5%

  ANZ 5.9 5.6

  TLS 4.0 3.8

  BHP 4.6 5.0

  WES 3.3 3.0

  CSL 3.5 2.8

  RIO 2.8 1.6

  ASX Top 50

  77.5%

  KEY POSITIVE CONTRIBUTORS

  • Cover-More Group Limited

  • Incitec Pivot Limited

    BXB 2.6 1.2

    48.4 43.7

    Source all figures: DJW/Independent Investment Research/IRESS. All data as at 31 December 2016 unless otherwise specified.

    NTA & Share Price Performance

  • Newcrest Mining Limited

    KEY NEGATIVE CONTRIBUTORS

  • Healthscope Limited

  • TPG Telecom Limited

  • Amcil Limited

Note: The Key Positive and Negative Contributors are provided on an attributiom basis. This means the

contributors reflect the impact that the positions or lack of positions have on the portfolio performance compared to the benchmark index.

$6.00

$5.00

$4.00

$3.00

$2.00

$1.00

$0.00

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016

Premium/Discount Pre-tax NTA (RHS) NTA (pre tax) - LHS Share Price - LHS