This article is part of the LIC Review series which covers all the conservatively managed Listed Investment Companies (LICs) on the ASX. Other LICs covered in the series include:
- Australian Foundation Investment Company Limited (ASX: AFI)
- Argo Investments Limited (ASX: ARG)
- Milton Corporation Limited (ASX: MLT)
- BKI Investment Company Limited (ASX: BKI)
- Australian United Investment Company Limited (ASX: AUI)
- Diversified United Investment Limited (ASX: DUI)
- Whitefield Limited (ASX: WHF)
I will, in time, write a review on all of these companies.
To those in the outside world DUI usually stands for Driving Under the Influence. To LIC investors though, DUI stands for Diversified United Investment and their impressive performance indicates they have been doing anything but Diversifying Under the Influence!
Diversified United Investment Company (DUI) was listed on the ASX in 1991. DUI provides investors with low-cost access to a diversified portfolio of primarily large cap ASX stocks with up to 20% of the portfolio consisting of international equities. DUI is the sister company of Australian United Investment Company (AUI).
In my opinion, DUI is a hidden gem of the ASX and has one of the best dividend payment histories on the market. It is unknown to most people due to the fact that management puts no effort whatsoever into marketing the company and its achievements. Its lack of liquidity and how boring the company is also contributes to this obscurity. As a result, DUI regularly trades at a discount to Net Tangible Assets.
DUI is affiliated with the Ian Potter Foundation. The Foundation is DUI’s major shareholder with approximately 14.67% of DUI’s shares on issue. DUI’s sister company, AUI, holds 6.86% of DUI’s shares. The Ian Potter Foundation is one of the largest philanthropic organisations in Australia. Ian Potter, a financier and businessman founded the organisation in 1964. He passed away in 1994 leaving most of his considerable estate to the Ian Potter Foundation, including his shares in DUI and AUI. DUI’s current Chairman, Charles Goode, worked at Ian Potter’s securities firm, Potter Partners. Goode was Senior Partner from 1980. Goode became Chairman and Chief Executive of Potter Partners Group Ltd in 1986 after Potter Partners became a corporation.
The Management Expense Ratio (MER) of the company was 0.15% for 2018. This MER takes into account the fees charged by the ETFs and managed funds the company invests in. According to the latest 2019 Half Yearly Report to Shareholders operating expenses (excluding interest) as a percentage of the average market value of the portfolio including fees charged by ETFs and Managed Funds was 0.07%.
Like AUI, DUI uses leverage to enhance returns. This is highly unusual for a conservative LIC but the overall leverage is kept very low. Currently, the company has available bank facilities of $115 million drawn to $95 million. Finance costs paid in FY18 amounted to $2 million, compared to $26 million received in dividends and distributions.
DUI’s portfolio is heavily weighted towards the large cap end of the market. This is likely a result of the company’s bias towards investing in good dividend paying companies which are suitable for holding for the long term. DUI’s investment philosophy is best described by DUI themselves:
“The principal activity of the Company is to take a medium to long term view and to invest in Australian equities, listed property trusts, international equities mainly through exchange traded index funds, and unlisted managed funds investing in Small Cap Australian equities. The target range for allocation to international equities is 10-20% of the portfolio (last year
10-15%). Investments may also be made from time to time in interest bearing securities or convertible notes. The directors have sought to invest in a diversified portfolio of investments with the objective of obtaining current income and longer term capital gain within an acceptable level of risk (DUI Annual Report 2018, pg. 10).”
The Board of directors take on the role of investment management and stock selection.
The company rarely buys and sells its investments, resulting in portfolio churn being low. They only sell investments if the Board believes there has been a deterioration in the prospects of the industry and/or the company’s management. Board members and their contacts as well as company visits are used by management to form opinions about investment prospects.
The top 25 companies in the portfolio account for 81% of the total portfolio which is much more concentrated than some of the other conservative LICs.
Despite the top 25 investments accounting for 81% of the portfolio, the company is still very diversified. DUI has significantly overweight positions in CSL Ltd and Transurban Group.
DUI outsources its international investments through investing in ETFs and its investments in small cap companies through investing in managed funds. This is likely because DUI only has four people who make the company’s investment decisions. Historically, DUI has changed its international exposure whenever it sees fit. For example, in 2001 DUI’s international investments accounted for just 3% of the portfolio compared 12.9% in 2019. As you can see, they also had exposure to fixed interest securities and short term deposits which DUI does not currently hold in their portfolio.
DUI has a relatively similar exposure to the Big Four Banks as the other conservative LICs, although they have an underweight position in NAB. BHP and Rio Tinto make up 8.1% of the portfolio which is approximately in line with similar LICs.
DUI has just four directors: Charles Goode (Chairman), Anthony Burgess, Stephen Hiscock and Andrew Larke. All four of these directors have extensive investment and business experience. The company has one employee – their Company Secretary Andrew Hancock.
Charles Goode is Chairman of sister company Australian United Investment Company, is former chairman of ANZ (1991 – 2010) and is a former director and Chairman of Woodside Petroleum. Goode retired from Woodside in 2007 after 19 years as director and 8 years as Chairman. Goode is also a Governor and Chairman of the Ian Potter Foundation and a director of Flagstaff Partners, a corporate advisory firm. Goode has been Chairman of DUI since 1991.
Anthony Burgess is CEO of Flagstaff Partners, a corporate advisory firm. He has over 30 years experience in corporate finance and was Global Co-Head of Mergers and Acquisitions at Deutsche Bank in London. He is also a Governor of The Ian Potter Foundation. Burgess is Chairman of the Foundation of Business and Economics at the University of Melbourne and a director of the Melbourne Business School Ltd, which likely explains why Melbourne Business School Ltd holds 486,000 shares in DUI, equivalent to 0.23% of the company. Burgess has been a director of DUI since 2008.
Stephen Hiscock is Chairman and founding shareholder of SG Hiscock & Company, a fund manager specialising in Australian securities. Hiscock is former Chief Investment Officer of National Asset Management, a subsidiary of NAB and Chairman of NAB’s Asset Allocation Committee. Hiscock is the Chairman of DUI’s Nomination and Remuneration Committee. He has been a director of DUI since 2011.
Andrew Larke is non-executive director of DuluxGroup Ltd and IXOM, a chemicals business. He has held senior coporate strategy roles in Orica Ltd and North Ltd. Larke is Chairman of DUI’s Audit and Risk Management Committee. Larke has been a director of DUI since 2015.
Charles Goode is incredibly experienced to the point that it is quite frankly, ridiculous. There are only a handful of people in Australia who have the breadth, depth and length of corporate experience as Charles Goode. That short biography I wrote above barely scratches the surface of his experience. See below for a copy and pasted version of Goode’s biography from Flagstaff Partners, of which Goode is also Chairman. Click here for the original.Click here to see Charles Goode's extensive CV
Charles Goode AC
Charles Goode has a Bachelor of Commerce Honours Degree from Melbourne University, an MBA from Columbia University, New York, and an Honorary Doctor of Law from the University of Melbourne and an Honorary Doctor of Law from Monash University. He was made a Companion of the Order of Australia in June 2001. In May 2003 he was awarded the Centenary Medal. He received the Melbourne Business School Award in 2006 and at the MBS Annual Alumni Dinner there is the Charles Goode Oration.
He is a Fellow of the Australian Institute of Company Directors and received the A.I.C.D. (Victorian Division) Distinguished Fellow Award for 2010.
In August 2006 he was made a Life Member of the National Gallery of Victoria; and in April 2010 made a Life Member of Philanthropy Australia. In March 2012 he was awarded by the Faculty of Business and Economics, University of Melbourne, the 2012 Alumni of Distinction Lifetime Achievement Award.
He was engaged in the securities industry until 1989, for a period spanning 29 years. He joined Potter Partners in 1961, became a partner in 1969, Senior Partner in 1980 and on incorporation of the Firm, Chairman and Chief Executive of Potter Partners Group Ltd. in March 1986.
He was a Director of Woodside Petroleum Ltd from 1988 and Chairman from 1999 to 2007; a Director of Australia and New Zealand Banking Group Limited from 1991 and Chairman from August 1995 to February 2010; and a Director of Singapore Airlines from 1999 to 2006.
Charles is currently Chairman of Australia United Investment Company Ltd., Diversified United Investment Ltd. and Flagstaff Partners Pty Ltd
He is Chairman of The Ian Potter Foundation and has, over a number of years, been involved in a wide range of community activities.
Scotch College, Melbourne (Dux of the School 1956) University of Melbourne (Graduated in first place in the Faculty of Commerce, 1960) Columbia University, New York (Awarded Beta Gamma Sigma, 1963).
Australia and New Zealand Banking Group Ltd – Director 1991–2010; – Chairman 1995–2010;
Australian United Investment Co. Ltd Chairman 1990–
Diversified United Investment Ltd Chairman 1991–
Mercury Asset Management: Chairman 1987–1998
Legal & General Assurance Holdings (Australia) Ltd Director 1988–1993
Queensland Investment Corporation Director 1989–2000
Supreme Court Library: Advisor to the Investment Committee 1981–1993
Thomas Baker, Alice Baker & Eleanor Shaw Trust: Advisor to the Investment Committee 1981–1993
University of Melbourne Investment Committee: Member 1982–2001; Chairman 1998–2001
Melbourne Business School Investment Committee: Member 1986–2002
Australian Academy of Science Finance Committee: Member 1990–1993
Oil & Gas:
Woodside Petroleum Ltd: Director 1988–2007; Chairman 1999–2007
Grosvenor Australia Properties Pty Ltd: Chairman 2008–2012
Singapore Airlines Limited: Director 1999–2006
Oliver J. Nilsen (Australia) Ltd Director: 1977–1993
Hallmark Cards Australia Ltd Director 1979–1992
Pacific Dunlop Limited: Director 1987–1999
CSR Limited: Director 1993–2001
Community & Philanthropic Activities
The Ian Potter Foundation Limited: Governor 1987– ; Chairman 1994–
The George Alexander Foundation: Governor 1987–; Chairman 1994–
The Ken Myer Bequest: Trustee 1994–2004
A Life Member of Philanthropy Australia
Australian Ballet School: Member of Council 1980–1986
National Gallery of Victoria: Life Member 2006
Australian Landscape Trust: Trustee 2000–2001
Asia Pacific Council of Nature Conservancy: 2000–2006
Regional Natural Heritage Programme Taskforce: Member 2002–2006
Monash University: Member of Council 1980–1985; Member of the Board, Centre for Molecular Biology & Medicine 1983–1985; Member of Finance Committee 1980–1985; Member of Trustees of Monash Superannuation Scheme: 1980–1985; Chairman 1982–1985; Trustee of Monash University Foundation 1983–1985; Member of Monash University Investment Advisory Commitee (2013-2014)
University of Melbourne: Member of the Investment Committee 1986–2001; Chairman of the Investment Committee 1998–2001; Director, Melbourne Business School Foundation Ltd. (previously Graduate School of Management) 1992–2002; Chairman of the Melbourne Business School Investment Commitee (2013-2016)
Howard Florey Institute of Experimental Physiology & Medicine: Member of the Board 1987–2005; Honorary Treasurer 1988–1994; Vice President 1994–1996; President 1997–2004; Howard Florey Medical Research Foundation: Trustee 1994–2004;
Neurosciences Australia Ltd.: Director 2003–2004
The Royal Victorian Eye & Ear Hospital: Member of Committee of Management 1982–1986
Anti-Cancer Council of Victoria: Member of Appeals Committee 1980–1986; Member Executive Committee 1981–1984
Austin Hospital Foundation Ltd – Director 1981–1984
Ludwig Institute for Cancer Research: Member of Melbourne Committee 1981–1992
Australia-Israel Chamber of Commerce: Governor 2000–
Institute of Public Affairs: Chairman 1984–1993
The remuneration of directors is fair but not excessive when the considerable experience of the Board is taken into account.
Since DUI has only four people who make the investment decisions for the company, you are putting a lot of faith in just a handful of people. Thus, we must dig deeper in to the way the company is governed to ensure that shareholders interests are protected.
DUI is operated on a day-to-day basis as follows:
“The Board usually meets eleven times each year and consults on investment matters between meetings. The Board has responsibility for day to day management of the investment portfolio. Transaction levels are low as the portfolio is held for the long term. The Board reviews financial statements, forecasts, the investment portfolio, the net asset backing per share, and compliance reports monthly. The Company Secretary is responsible for either providing the information or co-ordinating it from outside service providers (DUI Annual Report 2018, pg. 6.”
The Annual Report also explicitly deals with Corporate Governance concerns and acknowledges that the Company departs from the ASX Corporate Governance Council’s Recommendations regarding having a majority independent Board. As stated in the Annual Report:
“Mr C B Goode and Mr Burgess are associated with The Ian Potter Foundation, a substantial shareholder. They bring significant relevant experience to the Board, but in that the Chairman of the Board is not independent and there is not a majority of independent directors, the Company departs from the Australian Securities Exchange Corporate Governance Council’s Recommendations. Both other directors are regarded as independent. A lead independent director is not considered necessary given the small size of the Board. Appointed directors must stand for election at the next Annual General Meeting. One third of directors stand for re-election at each Annual General Meeting. There is no set retirement age or term for directors. Extensive experience in the investment markets is valued. Details of the qualifications, experience and length of service of directors are set out in the Annual Report (DUI Annual Report 2018, pg. 6).”
Of course, having such a lean operation means that costs are kept to a minimum.
According to Fully Franked Finance, DUI has the fifth best dividend payment streak on the ASX. DUI’s sister company, AUI, has the third best dividend payment streak. The company’s entire dividend payment history is detailed in the below graph. The rate of dividend growth over this period is 6.6% per annum, not bad!
As you can see, they have consistently paid stable or increasing dividends through thick and thin, including during the Global Financial Crisis.
DUI’s total return has been very respectable as well, outperforming the index over 1, 3, 5 and 10 year periods to 30 June 2018. Pretty impressive for a company like DUI!
If we look even further back, DUI’s out performance over the index is even more impressive. See below for performace data taken from DUI’s 2001 annual report. As always historical performance does not necessarily indicate future performance.
DUI operates with the bare minimum resources required to run an ASX listed investment company. It has only one employee, only four directors and no money is spent on frivolous expenses. The company is the cheapest possible way a person could gain access to a diversified portfolio of shares on the ASX without investing in an index fund. The international exposure is also a real plus for me, although the variability of this exposure may not align with some investors investment philosophy. Over the coming decades I think DUI will continue to deliver stable and predictable dividends to shareholders. I also recommend checking out Strong Money Australia’s DUI review for another opinion.
What do you think of DUI? Comment below!