Investments

Recent Buy: Cadence Capital Ltd (CDM.AX)

Those of you who come here often will know I have a soft spot for well-managed Listed Investment Companies or Trusts. One in particular I’ve owned before is Cadence Capital (CDM.AX), an LIC managed by Karl Siegling.

Cadence was established 2003 with a focus on combining fundamental research and the wizardry (witchcraft?) of technical analysis. The LIC was listed in 2005.

Over the past 12.3 years, the fund has returned 12.7% p.a. after fees. Add in franking credits and the return jumps to 14.8% p.a. after fees. CDM compares well to the All Ords Accumulation index which returned 8.2% p.a. over the same period.

What I like about Cadence Capital’s LIC.

Discipline

Karl and his team follow a disciplined approach to investing. Their approach is to buy a stock when it’s fundamentally cheap only if it is also technically strong. I’m not a technical investor and I’ve never understood this approach – I’ve tried, in fact it’s how I got interested in stocks – but it works well for some investors and speculators.

Cadence don’t buy falling stocks and they enter stocks in increments, a percent of the portfolio at a time to a maximum of 5% at cost. They’ll exit a position, in thirds when the stock starts to fall. The reverse is true for short positions.

This kind of discipline has served the company well for over a decade.

International Diversification

Another point goes to CDM for having international exposure. They currently own shares in Samsung, Softbank Group, Facebook and in the past, profited from other names like Glaxo Smith Kline and Luxotica. LIC’s are a good way of getting international exposure without having to set up an international brokerage account. At the moment, about 20% of the fund was invested in international stocks.

Long and Short Positions

I don’t take short positions directly. The possibility of infinite downside terrifies me and I want to sleep well at night. But I like that CDM takes short positions for me. One of their current shorts is Dominos Pizza (the Australian listed company).

Yummy Fully Franked Dividends

Cadence has a historical fully franked dividend yield of 6-8% p.a. This is pretty damn attractive when factoring in the good possibility of capital appreciation.

Cadence Capital Fees

The fees on CDM are slightly above average for an Australian LIC – although any of you overseas will probably find the fee exorbitant (we like to pay more for things in Oz, I don’t know why). There is a flat management fee of 1% p.a. and a performance fee of 20% of the excess return above the All Ords Index. This fee is only if the portfolio has a positive return. If the market declines and CDM is profitable, then the performance fee applies to the profit only, not the outperformance between the All Ords and CDM.

As I posted previously, buying an LIC is best done at a share price in or around the NTA – the ‘value’ of the underlying holdings. If an LIC with a good track record can be had at a discount – even better.

Risks

The main risks investing in Cadence are that the manager underperforms or suffers large capital loss. Because the fund can use leverage and shorts positions, there are additional risks involved. It might also trade at a persistent premium/discount to NTA, which might be problematic should I want to buy/sell the position.

I entered Cadence at an average price of $1.325 which was roughly its NTA at the time. I plan to hold this one for the long term, and let the dividends help fuel my portfolio growth for years to come.

Made any investments recently? Do you own CDM? Let me know in the comments below!

Disclosure: Long CDM. This post is for entertainment only. Do your own research. Seek personal and professional financial advice when making your investment decisions. I am not an investment professional or financial advisor.

4 thoughts on “Recent Buy: Cadence Capital Ltd (CDM.AX)

  1. Hi WFT, have you seen CAM (Clime Capital) as well? What do you think the main differences are between CAM and CDM? I was thinking of investing a little bit in (hopefully) the next month. I have narrowed it down to these two. Why the preference of Cadence over Clime?

    1. Hi BHL – I like Clime Capital’s investment approach – I actually use their DCF approach for one of my valuation estimations. Their LIC has done reasonably, but not wonderfully. Similar fees to CDM but it currently trades at a discount to NTA. Unlike CDM, CAM invests long only, without leverage. Small/Mid/Large Cap blend and some international equities, so similar on that count. Their approach is Fundamental Value though, with no regard for technical indicators. I’ve looked at buying CAM on and off but never have. That could change one day though. The discount to NTA has slowly been eroding since 2008.

      What do you like about CAM?

      CDM 10year return 9.43% p.a. (2.93% p.a. cap gain + 7.84% p.a. divs)
      CAM 10year return 5.73% p.a. (0.72% p.a. cap gain + 5.27% p.a. divs)

  2. These LICs are certainly piquing my interest, having not really looked at them before – first Strong Money Australia, and now you here with Cadence. I’ll certainly put this on my watchlist. Always good to find an investment you can comfortably hold on to for many years to come, rather than worrying about how the industry might ‘disrupt’ your business…

    1. LIC’s can absolutely have a place in a portfolio – I particularly like them for diversification in a small portfolio. It’s a shame they’re so expensive in Australia though, we pay some of the highest management fees in the world.

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