Argo Investments – Barefoot Bluechips

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Sir Donald Bradman is quite rightly an Aussie hero for his exploits on the cricket field. Yet this week I found another reason to admire the great man: during the 80s The Don headed up one of Australia’s most successful investment companies.

No, I’m not talking about the Wide World of Sports ‘investments’ that Tony Greig flogs during the lunch break at the cricket (‘a once in a lifetime opportunity to secure Dean Jones’s protective box – signed, framed, and still with that unmistakeable smell. Limited to the first 63,000 customers’).

In 1946 a chartered accountant named Alf Adamson set up a company called Argo Investments (the name apparently came from Greek Mythology, translated I think it means something like ‘don’t invest in the Greek stock market’).

Alf may not have been crash hot at picking names, but he was a damned canny investor who had a reputation for profitably buying undervalued companies and holding them for the long term.

He envisioned that Argo would be a company that traded on the share market, but that its ‘business’ would be investing in other companies. In essence it was an early model of today’s managed funds.* Actually the correct term is Listed Investment Companies (LICs) – and today they are multi-billion-dollar businesses.

During the 80s Sir Donald became chairman of Argo, and he ran the place the same way he played his cricket: safe and steady, and with solid returns that have beaten the rest of the herd over the decades.

Along with its sister company, the Australian Foundation Investment Company (AFIC), I count Argo as one of my very first ‘smart’ buys. So let’s see how Argo stands up to our Barefoot Bluechip criteria.

How do they make their dough?

Argo’s $3.7 billion investment portfolio is made up of solid blue-chip Australian companies like BHP Billiton, Rio Tinto, Wesfarmers, the Big 4 banks and Woolies.

The company has continued to follow Alf’s founding principles – seeking out undervalued companies and holding them over the long term. The guys at Argo ain’t flashy. Over the years they have deliberately missed opportunities because they don’t like debt (Argo itself has none), and because they have a preference for companies that pay part of their profits as income (no dot bombs).

“Tell me the good stuff”

Maybe you don’t have the time or the coconut to manage your own investments. Don’t feel bad. Most people don’t. Yet the one expensive and painful lesson I’ve learned in my years as an investor is that whoever you get to manage your money needs to meet three criteria:

1. Absolute integrity
2. A track record that can be measured in decades
3. A conservative long-term approach, and an aversion to debt.

Argo satisfies all three– and has a number of other advantages:

If you don’t have a lot of money to invest (under $20,000), Argo is a great way to get exposure to a wide range of professionally selected companies.

And it’s the rock-bottom fees that Argo charges that make it such an attractive investment: for every $100 you invest it will cost you around 16 cents (approximately) in management fees.

Retail fund managers like AMP and BT charge more than ten times that – and in most cases they still can’t match Argo’s superior investment returns. (Over the past decade Argo has outperformed the broader investment market with an average 10.6 per cent return per year).

Along with being a safe pair of hands, the cornerstone of Argo’s investment philosophy is to give its shareholders a growing level of income via fully franked (tax-paid) dividends. The company has paid a dividend to shareholders in each and every one of its 64 years.

Currently Argo pays a dividend around 4 per cent (then there’s capital growth). Importantly, they have a regular ‘dividend reinvestment plan’ where you can top up your holdings without having to go through a share broker.

“Tell me the bad stuff”

Over the past year Argo has underperformed the market partly because of their conservative investment philosophy, and mostly because in good times investors sell boring old Argo and do the investing themselves (and return when the market crashes, licking their wounds).

Investing in a company like Argo gives you a slice in just about every major Australian company – and that’s certainly a risk in an increasingly fragile globalised economy.

There’s a great experiment going on in the US right now: Federal Reserve boss Ben Bernanke is printing hundreds of billions of dollars while keeping interest rates at (basically) zero in an effort to get consumers to borrow, buy, and bolster the US economy.

The worry is that all this money printing could awaken the genie of inflation, and cause havoc with deeply indebted consumers (and countries!).

That’s why it’s comforting to read the following statement from Argo: “Our portfolio generates an income stream for Argo shareholders, which is paid to them in dividends which over time have grown faster than inflation. It is designed to provide long-term capital growth as our investments in Australian companies grow in value.”

Toes up or toes down?

Toes down.

Huh?

Before you buy Argo, you need to check two prices. One is the share price (which is set daily on their share market), and the other is the actual value of Argo’s entire share portfolio (called their Net Tangible Assets, which is calculated and released in a statement each month by the company).

Now you may expect that the share price and the underlying portfolio should be the same – but they rarely are. And right now the Argo share price is trading at a premium (higher) than the underlying value of the portfolio.

In short it’s a great investment, but it’s an even better one when the share price drops below the value of the underlying portfolio – and when that happens (and it does on occasion), it’s a screaming Dean Jones smash for six.

Tread Your Own Path!

Disclosure: Scott Pape own’s shares in Argo and AFIC.

Photo:http://www.flickr.com/photos/podruzny/3685153017/#/

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Barefoot also recommends:

1. The Smart Money Is on Long-Term Investments and Regular Dividends
2. Commonwealth Bank – Barefoot Bluechips
3. Two Investments You Can’t Afford to Miss
4. Woolworths – Barefoot Bluechips
5. The QR Float – Barefoot Bluechips