Argo Investments (ASX:ARG) FY19 results & outlook

Interviews

by Jessica Amir

Argo Investments Limited (ASX:ARG) Managing Director, Jason Beddow talks about the Listed Investment Company’s performance, record low interest rates and finding long-term value.

Jessica Amir: Thanks for your company. My name's Jessica Amir for the Finance News Network. Joining me today from Argo Investments (ASX:ARG) is the company's Managing Director, Jason Beddow. Jason, welcome to the network.

Jason Beddow: Hi Jessica. Thanks for having us.

Jessica Amir: Thank you for coming along to FNN's Investor Event. First up, for those who aren't familiar with Argo Investments (ASX:ARG), just give us an introduction.

Jason Beddow: Sure, Argo Investments is one of the oldest and largest LICs in the Australian market, with a market cap of about $6 billion. We invest predominately in Australian equities. We're trying to I guess have a fully franked growing dividend stream for shareholders, while providing some capital return.

We're a little bit different I guess to a lot of the newer LICs. We're internally managed, so I work for Argo Investments as opposed to an external manager, and what that enables is a very low cost. We have an MER of 0.15, which is significantly below most managed products in the market. There's no conflict of interest, so I work for the company, so when shareholders invest in Argo, they also get the manager I guess, as well.

Jessica Amir: And you've also recently announced results. Just take us through some of the highlights.

Jason Beddow: Argo just reported very strong results for FY '19. We had an increased profits and earnings, and pleasingly increased fully franked dividends to shareholders. That's our seventh increase in a row. An environment of low interest rates, falling interest rates, retail investors who are looking for yield, it's been a good investment for them.

Look, this market did provide some tailwinds, a lot of special dividends from large Australian corporates, which we benefited from and passed on to shareholders, but we're pleased with the result for the year.

Jessica Amir: When you put together the portfolio, just take us through what the rationale was, and also what your largest positions are, and the key metrics.

Jason Beddow: I guess our prime goal is to grow the fully franked dividend streams. We are looking for companies that generate good cash flows and pass them on. The banks clearly are good dividend payers. I guess the composition of the market, though, is a lot of the big dividend payers are not growing their dividends. Two of the Big Four have actually cut dividends. Telstra's (ASX:TLS) cut its dividend, so we are looking for other businesses that do that.

Juggling that with growth, I mean shareholders also want capital growth. In the current environment, is a little challenging, and because of that, we've got some I guess some companies with some good solid offshore earnings, benefiting from growth plus the lower dollar. Some domestic earnings that are paying good, fully franked dividends, though they don't quite have the growth opportunities, and just putting that together to have a pretty defensive portfolio that we think can continue to grow income, despite I guess what are interesting times shall we say, economically, and geopolitically.

Jessica Amir: And Jason, are there any companies that you'd like to really call out as success stories that bolstered your growth as well?

Jason Beddow: I think the big iron ore companies, the big miners had the benefit of iron ore prices and a falling Australian dollar, so they had record profits and returned a lot of capital to shareholders. Wesfarmers (ASX:WES) with the Coles (ASX:COL) merger also returned capital to shareholders, and Macquarie Bank (ASX:MQG) and CSL (ASX:CSL) continue to grow and be very successful offshore. They're all holdings in our top 20. We have I guess a diverse portfolio, but we are in large caps and they were probably some of the highlights.

Jessica Amir: And Jason, you do have another listed investment company with a different set of exposures. Just take us through what that is and what clients are accessing if they invest in that.

Jason Beddow: A few years ago we launched another LIC structure. It's called Argo Global Listed Infrastructure (ASX:ALI), ALI's the code. We're the manager and we have a New York based fund manager who's an expert in infrastructure running that, and that provides Australian investors exposure to a much broader universe of global listed infrastructure companies. I think there's 13 listed on the ASX. There's 350 available for them to invest in, and again, across a much broader breadth of infrastructure.

Wireless towers, marine ports, things that we can't get exposure to here. We've got three very good companies, large companies also in our top 20 of Argo, Transurban (ASX:TLS), Sydney Airport (ASX:SYD), and APA (ASX:APA), but it is quite limited. This provides investors an easy access through an LIC structure into a global listed infrastructure universe, managed by we think a very good global portfolio manager.

Jessica Amir: Changing pace now Jason. We're at record low interest rates and the RBA'S expected to slash rates again to about 0.5 per cent, with some key economists expecting that. How do you as a manager, tilt the portfolio and what are you looking at when we're headed to further low interest rates?

Jason Beddow: It's challenging, I think. Generally if interest rates are falling, that's generally good for asset classes and equities generally, but it comes a point when interest rates get to a level that why are these interest rates so low? Because global growth's struggling, the domestic economy, and we're seeing that with the recent reporting season. Earnings are pretty sluggish, and I'd say overall there's been more downgrades to expectations for the next year.

There's a bit of I guess a divergence with generally asset prices increase and I think that's supporting markets, with the underlying economic fundamentals quite weak, dragging on earnings. We're relatively cautious at the moment. Generally in that environment, things like real estate, REITs, utilities, infrastructure which again will help our international infrastructure LIC, do relatively well because they're quite defensive, their cash flows are good, and in an uncertain world, I think people probably propagate to that and we have seen a bit of that in the Australian market already.

Jessica Amir: Just lastly Jason, before we let you go, why should investors consider adding your two LICs to their portfolio?

Jason Beddow: Sure. Well, we think Argo Investments provides a fairly defensive exposure to the Aussie equity market. Not that Aussie equities are not without risk, but we have I guess a very low beta, so we generally do quite well if markets are underperforming and weak, and as we focus on our dividend payments, we look forward and think we have capacity, we have a lot of franking credits that we should be able to sustain a growing income stream to shareholders.

The infrastructure exposure I guess provides some diversity to investors who typically still have a large exposure to Australian equities, and what is a pretty defensive asset class infrastructure. If rates do continue to fall in Australia and around the world, that asset class should do quite well and should maybe provide some extra growth.

Jessica Amir: Jason Beddow, thank you so much for your time.

Jason Beddow: Thanks Jessica.


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