Listed Investment Companies (LICs) have long been favoured by Australian investors for their ability to provide diversified exposure to a portfolio of quality assets. Managed by expert teams, LICs typically offer fully franked dividends, which can be a significant benefit to shareholders. Additionally, finding a quality LIC trading at a discount to its underlying asset backing can present a compelling opportunity.
For many investors, LICs are held alongside direct shares in some of the top Australian companies, such as the large banks, Wesfarmers, Telstra, Woolworths, and BHP. Some also hold managed funds or ETFs that track indices like the ASX 20, 50, or 200.
Diversification and Portfolio Overlap
While diversification is generally regarded as beneficial, it’s essential for investors to assess whether they may be unintentionally duplicating holdings across various investment vehicles. Overlapping positions between LICs, ETFs, and individual shares could lead to unnecessary cost duplication and increased exposure to specific stock or sector risks, potentially impacting overall performance.
Key Consideration: Multiple investment vehicles alone do not guarantee a fully differentiated portfolio. Even with strong performance, investors should review the underlying holdings to ensure they are not inadvertently duplicating their investments.
Examining Correlation and Portfolio Overlap
At Flagship Investments (FSI), we understand the importance of delivering value through a diversified portfolio. FSI has consistently outperformed over the long term, but shareholders may still question whether their investment in FSI replicates other holdings in their portfolio. To address this, investors can examine FSI’s underlying holdings and compare them to their other investments.
A helpful tool in this analysis is a correlation table, which measures how closely the returns of different LICs move in relation to each other. As Bell Potter Securities’ LIC specialist Kion Sapountzis notes, “Diversification is key in reducing portfolio volatility, and assessing the correlation between assets can provide insights into whether holdings are too similar.” Correlation values range from -1 to 1, with a higher correlation indicating more similar performance between two investments.
How FSI Stands Out
According to the June Quarter 2024 report from Bell Potter Securities, FSI demonstrates low correlation to other large-cap Australian equity LICs. This suggests that FSI could complement a portfolio without duplicating performance or increasing exposure risk. The report highlights that while some large-cap LICs exhibit strong positive correlations due to overlapping holdings, FSI’s portfolio composition is notably distinct.
Active and Conviction Management
FSI’s focus on quality growth companies, often beyond the top stocks in the index, positions it as an active manager. Unlike LICs that closely track the ASX index (a practice sometimes referred to as “index hugging”), FSI takes a conviction-based approach. This means the team selects a smaller number of high-conviction stocks, backing companies they believe can outperform over the long term. Transparency is a cornerstone of FSI’s strategy, and shareholders can review the portfolio’s full holdings in the company’s annual report and see top 10 holdings each quarter.
Investigating Sector Weightings
For those looking to dive deeper, sector allocations can also provide valuable insights. Some funds claim to be active on a stock-picking basis but hesitate to deviate from benchmark sector weightings. In contrast, FSI’s investment team is prepared to back their convictions, investing in companies across sectors that they believe offer the best potential for growth, regardless of sector weightings.
A Valuable Addition to a Diversified Portfolio
With over 25 years of proven outperformance, FSI offers an active, transparent, and differentiated investment strategy. For investors seeking to diversify their portfolios with uncorrelated holdings, Flagship Investments may be worth consideration as it focuses on finding the standout performers of today and tomorrow.
This article is for informational purposes only. Investors should perform their own research and seek professional advice tailored to their individual circumstances before making any investment decisions.
