Is there value in Magellan and should I buy more? Is this a good time to buy bonds, and how do I go about it? For listed investment companies (LICs) trading at a discount, do I consider the ‘pre-tax’ or ‘after-tax’ NTA? When do the major banks report their earnings next month?
Question 1: Do you see value in the Magellan Financial Group (MFG) at the current price? I’d like to know if I should add more or not.
Answer: I think the key to Magellan is its investment performance. This is the only thing that will stop funds outflow and potentially lead to funds inflow. It has started to improve, with small outperformance over the last 3 months and 6 months. However, on a 12-month basis, it has marginally underperformed.
In my book, that means it is close to a buy.
On the numbers, the analysts are still bearish. According to FN Arena, there is 1 ‘buy’ recommendation, 2 ‘neutral’ recommendations and 2 ‘sell’ recommendations. The consensus target price is $9.01, 1.9% higher than the last ASX price of $8.84.
Looking ahead to FY24, the brokers have Magellan trading on a PE of 12.2 times. Earnings per share of 73.7c is about one third of that achieved in FY22. The markets is still somewhat negative on Magellan, so time is probably on your side, but if investment performance continues to improve, I would look to add more.
Question 2: There are a few commentators who suggest it is a great time to invest in bonds with the prospect of declining interest rates, and therefore, rising bond prices. It is a great time to invest in bonds, and if so, how best to buy these bonds?
Answer: I think that it is a reasonable time to buy longer term bonds, based on the view that inflation has peaked and coming down, and that we are nearing the end of the interest rate tightening cycle. The next major move in interest rates (in my view) is down.
The contrary view is that inflation will prove stickier than we all imagine and that the Central Banks won’t get it back down to their target range, meaning that interest rates stay higher for longer and potentially, go even higher. In this scenario, bond yields will rise.
How to buy? Not easy for the retail investor. Two basic choices, through a managed fund (there are both “actively” managed and “passively” managed funds available) or buying direct. The passively managed funds include index tracking ETFs such as VAF or IAF. Actively managed funds include BNDS and some of the credit funds such as NBI and KKC.
Buying direct is “difficult” because unless you have sufficient funds to invest, it is not easy to build a diversified portfolio. You will also need a custodian to hold the bonds for you. Fixed interest brokers such as FIIG Securities can help.
Question 3: I have read about a number of listed investment companies (LIC) trading at big discounts to their net tangible assets values (NTA). They seem to quote two discounts – one a ‘pre-tax’ discount to NTA and the other ‘after tax’. Which one is the best guide?
Answer: Just look at the discount to the ‘pre-tax’ NTA. This is the best guide to what the LIC is trading at on the ASX compared to what the underlying assets are worth.
The ‘after tax’ NTA factors in the payment of capital gains tax if all the assets were sold. This is unlikely to happen.
Question 4: We are coming into bank reporting season. Do all the major banks report, and if so, when?
Answer: Commonwealth Bank, Suncorp and Bendigo, which have a 30 June balance date, report full year earnings. CBA and Suncorp on Wednesday 9 August, Bendigo on Monday 14 August.
ANZ, NAB and Westpac have a 30 September balance date. NAB will present a third quarter trading update on Tuesday 15 August. ANZ and Westpac have ceased providing quarterly trading updates, although we will get some sense of how they are travelling when they provide an update on capital on 17 August and 21 August respectively.
Macquarie, which has a 31 March balance date, holds its AGM today (Thursday 27) and will probably provide some commentary as to how the first quarter has gone.