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LICs offer blue chip guide

WHEN major companies like Telstra and Mayne experience a sharp fall in their share price, investors trying to build a ‘blue chip’ share portfolio can be excused for feeling exasperated.

If companies of this size and prominence can take a hammering, where should share investors be putting their money?

One way to answer this question is to look at the stock holdings of listed investment companies (LICs), such as Australian Foundation Investment Co, Argo Investments and Milton Corporation.

Australia’s major LICs have an impressive long-term record, based on ‘tried and true’ investment philos-ophies.

They have steered clear of the damaging investment fads, such as the dot.com mania, and focused instead on building diversified portfolios weighted towards quality ‘blue chip’ stocks paying franked dividends.

Investors in LICs have been rewarded with long-term capital growth and rising dividend payments.

Milton, for instance, has achieved compound annual returns over the 10 years to December 2001 of 17.2 per cent.

Over the same period, the All Ordinaries Accumulation Index return was 11.6 per cent and the All Industrials Accumulation Index was 12.8 per cent. (The accumulation indices measure growth in share prices and dividends.)

Based on this track record, investors could do a lot worse than look to the LICs for some guidance.

After studying the holdings of Australia’s six major LICs, it is clear that National Australia Bank is the standout favourite (see table).

NAB is the single largest investment for three LICs and the second largest investment for the other LICs.

Despite last year’s big losses in the US market, and doubts about its growth strategy, the LICs clearly see NAB as a strong long-term investment.

Other favoured stocks include Commonwealth Bank, Wesfarmers and Westpac, and to a lesser extent BHP Billiton, Telstra and ANZ.

News Corp, one of the biggest companies on the S&P/ASX200 Index, is a conspicuous, though not surprising, absentee from the list.

News traditionally pays low dividends and therefore it does not fit the investment policy of the LICs.

Other big stocks that are out of favour include AMP and Rio Tinto.

Beyond the top 11 stocks listed in the table, there is remarkably little uniformity in the investment portfolios of the LICs.

For instance, Argo’s single largest investment is in Macquarie Bank shares, and yet Macquarie is not listed as a major investment for any other LIC. There are several other examples of this kind.

Australian United Investment Co is the only LIC with a large holding of WMC shares, only Choiseul likes Washington H Soul Pattinson and QBE Insurance, and only Djerriwah favours Transurban.

Australian United and Choiseul also stand out for having a large stake in Mayne.

While this analysis has focused on the major holdings of the LICs, this needs to be put in context. The LICs, like all prudent investors, have diversified portfolios. AFIC holds 120 different stocks, while Argo holds 180 stocks.

And the single largest holding of each LIC is only about 10 per cent of their total investment portfolio.

This means that, even if their top holding suffers a big fall, the overall impact will be muted.

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