# LICs & ETFs that can't beat the index: Any point?



## Frankieplus (16 January 2020)

Hi again,

Sorry for all the posts..

I've been reading the barefoot investor and the author seems to like LICs.. He mentioned AFIC as one of his suggestions.

So I looked up AFIC and compared it to the Index and saw how the Index is beating this LIC,

So I have a question. Is there any logic in someone investing in AFI if it can't beat the index? I do understand that this fund doesn't track the index and is not an index fund and that just because its not beating the index it doesn't mean its not making a profit.

However, one had to choose to invest in AFI or say an index fund like VAS in comparison, then what would be a logical reason to pay a higher fee and choose AFI over VAS?

I have been under the impression that its all about trying to beat the index and that if a non index fund /LIC /ETF can't do this then there is no point in paying a premium for it, is this right?





-Frank


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## So_Cynical (16 January 2020)

Owning both means that if something crazy happens to one of them you only lose half your money, as for indexes and ETF's the equal weight ASX200 ETF has out performed the standard ASX200/300 ETF's by 50% over the last 5 years, so why would you buy an index fund at all, the Palladium ETF has beaten the index as well..


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## Frankieplus (16 January 2020)

So_Cynical said:


> as for indexes and ETF's the equal weight ASX200 ETF has out performed the standard ASX200/300 ETF's by 50% over the last 5 years




Sorry for me being confused here, I'm a bit of a newbie. . Which 'Equal weight ASX 200 ETF' and 'Standard ASX200/300 ETF' are you referring to? Which ASX product?

Not sure what you mean by equal weight and standards ETF's.. I thought when buying an Index fund you are buying an ETF. eg iOZ and VAS

Could you elaborate I'm very interested  


-Frank


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## So_Cynical (17 January 2020)

Frankieplus said:


> Sorry for me being confused here, I'm a bit of a newbie. . Which 'Equal weight ASX 200 ETF' and 'Standard ASX200/300 ETF' are you referring to? Which ASX product?
> 
> Not sure what you mean by equal weight and standards ETF's.. I thought when buying an Index fund you are buying an ETF. eg iOZ and VAS
> 
> ...




The Australian ETF universe has grown and now offers many different ways to get market exposure, the ASX200 equal weight ETF tracks the same stocks as a standard 200 ETF but at equal weightings, thus providing greater exposure to the small and mid caps components, less the big banks BHP, RIO and woolies.

MVW - VanEck Vectors Australian Equal Weight ETF
https://www.vaneck.com.au/funds/mvw/snapshot/

STW - SPDR S&P/ASX 200 Fund ETF
https://www.ssga.com/au/en_gb/individual/etfs/funds/spdr-sp-asx-200-fund-stw
~


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## Ferret (17 January 2020)

Frankieplus said:


> However, one had to choose to invest in AFI or say an index fund like VAS in comparison, then what would be a logical reason to pay a higher fee and choose AFI over VAS?
> 
> I have been under the impression that its all about trying to beat the index and that if a non index fund /LIC /ETF can't do this then there is no point in paying a premium for it, is this right?




Your understanding is right.  If AFI or any other LIC can't beat the index, you may as well invest in VAS and match the index.

I hold AFI long term and the reason I do is because I hope it will outperform the index over the long term.  It hasn't recently, but it has had a good run up in share price in the last six months so this might change when the annual figures are next updated.


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## Dona Ferentes (17 January 2020)

I don't necessarily accept the premise







> that its all about trying to beat the index and that if a non index fund /LIC /ETF can't do this then there is no point..



First up, a true ETF was designed as an index fund. Cheap, code driven, replicating. Ride the highs and sink with the lows. Yes, they have morphed to an absolute plenitude of possibilities, as mentioned in this and other current threads. Too many possibilities, one might say; confusing and transferring another set of decisions on the investor.

Second, an index fund is, by definition, *passive *but other investing is *active*. Not only in terms of beating indexes but also, and this is important, *having engagement*, using investing as a way to create wealth, become financially independent, set some aside for dotage, etc. LICs are an easy way to engage.

I have invested widely in LICs for 20+ years. Overall, it has been satisfactory and then some. I'm engaged, it's allowed me a way to not stress too much as the diversification and dividend streams have allowed me to 'sleep at night'. As alluded to elsewhere, I take a barbell approach to investing; at one end in LICs, there for the long term (read their mission statements and we have alignment) and at the other, looking at macro, speccies, thematic plays, short term trades, identifying sectors that will grow (avoiding those that won't).

Attributes of LICs (that I like, that align with my thinking) as opposed to managed funds or ETFs. Direct holdings are a different story.
1. I don't find them to expensive, compared to managed funds. Long term large Aussie ones such as AFI, ARG and MLT are < 0.15%pa, MIR as a small cap small FUM is about 0.6%. International LICs are newer, with less FUM, higher costs, can be 1.0-1.5%pa, generally still cheaper than managed funds
2. As Australian companies, LICs pay tax here. This allows two wonderful things; the generation of franking credits and the ability to reserve profits, smooth dividends. Trusts are bound to pass all earnings after costs.
3. Closed end. This means several things, mostly positive. Raise capital, invest, pay dividends. Trade on the ASX is determined by confidence of investors in the product. A monthly NTA gives a fix on underlying value; easy to guess approximately during the 4 week cycle.
4. Raise capital. Can have rights issues and SPP action, plus DRPs. Again easy to see if its worth it, ie. buying $1 of assets for 95c - happens frequently. If it costs you $1.05, don't participate.
5. Ditto with Share price under or over NTA, Buy if under, sell if over.


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## Frankieplus (17 January 2020)

Dona Ferentes said:


> Second, an index fund is, by definition, *passive *but other investing is *active*




Does an LIC actively trade their holdings? I mean in such a way as a managed fund might. Will the LIC 'Manager' sit there and decide to sell and buy a lot of the time or do they tend to hold their holdings for a long term?

Same question regarding ETF's as well.. Do they trade their holdings a lot?


-Frank


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## Dona Ferentes (17 January 2020)

Returning to the other assertion expressed somewhere (this thread or elsewhere), that returns are paltry. Here are some numbers, for both Aust focused and International LICs. By way of explanation, the Internal Rates of Return include Franking Credits, and that is fine, as these are from my SMSF.

I used to hold a few LICs in my own name, set up a Super Fund in 2006 and started transferring in straight away (OMTs) because it was a much more generous regime then and my personal CGT liabilities could be managed. Returns (pa), incl Franking, are below:

LIC : ... 12 mths  ... 5 yrs .... 10 yrs.... Since inception (incl GFC)
AFI :  ..... 27.2% ..... 9.5% ..... 9.2% .... 8.4%pa
ARG : ..... 23.4% ..... 9.3% ..... 9.3% .... 7.9%pa
MLT : ..... 20.6% ..... 8.6% ..... 9.7% ..... 9.5%pa
MIR : ..... 12.8% ..... 11.9% .... 12.1% .... 10.9%pa

Used to hold DJW but sold, used to hold WAM but sold. I also own SOL which is an Investment House, has higher management costs, is less diverse; I have been trimming my exposure as I think core assets are problematic (TPG, NHC)
SOL : ..... -9.5% ...... 18.3%  five yrs ...... 11.88%pa since inception (held less than 10 years).

As mentioned in previous post, these are my returns. I have been working and salary sacrificing, hence could transact (usually Buy in SPP/ Rights Issues or when below NTA) but occasionally Selling a few. In each of these holdings, I have between $120-200K invested.

What does it tell me about Australian domestically focused LICs? If markets revert to the mean ( I think they do) then the last year has been atypical. Also, over the years, its true, for Australian equities you get about 4% growth a little less in dividends and 1 + a bit % in franking.

About four years ago I stopped adding to Aussie equities and thought about diversification. Has this been sensible? Probably. With interest rates dropping and the AUD in a general decline, it went into Bonds and International, plus played with shorter trades. And recently, added Gold. The barbell.

Given International LICs are newer, raised less money, have been getting bad press, usually carry a higher MER, are mostly trading under NTA, the returns are instructive. I missed Magellan MFF, even though aware of it since 2007, but own Platinum since then

LIC : ... 12 mths ...3 yrs ...... 10 yrs  ......... since inception
PMC : ... 2.6% ....... 9.1% ...... 9.8%  ........ 9.7%pa
ALI : .... 36.3% ..... 16.3% ..... (....)  ........ 9.7%pa
FGG: .... -1.9% ...... 4.5% ...... (....) ......... 3.6%pa
API : ....  12.1% ...... 5.2% ..... (....)  ........ 4.5%pa
GVF : .... 14.2% ...... 6.3% ..... (....) ......... 9.1%pa
PAI : ..... 5.9% ....... 13.2% ..... (....) ........ 6.8%pa
PE1 : ...... (....) ........................................32.1%
What does this tell me about domestically listed but Internationally focused LICs?  The markets are much deeper,  lots more investment styles on offer, and returns are more varied.  If I bought at IPO it was only a small amount, to which I have generally added later on. If options were issued, I generally sold these early. In each of these holdings , I have $40-60K


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## Dona Ferentes (17 January 2020)

Frankieplus said:


> Does an LIC actively trade their holdings?



Go to the respective websites, read everything. Read the Annual and Half Yearly Reports.

Inform yourself.


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## Belli (17 January 2020)

Dona Ferentes said:


> 5. Ditto with Share price under or over NTA, Buy if under, sell if over.




I don't sell.  If over NTA buy VAS.  If under NTA buy LIC.  Some VAS as of late but mainly more VGS so the Home/International is now creeping towards 25% of assets.  Applies to both personal holdings and those in the SMSF.



Dona Ferentes said:


> Go to the respective websites, read everything. Read the Annual and Half Yearly Reports.
> 
> Inform yourself.




Agree.

If it is possible to find this forum then it is surely possible to find the respective website of an LIC and read the annual report - or use the ASX website provided a person is prepared to explore it.  Does not take much time at all to *learn *either about LICs or how to navigate the information available on the ASX site. 

Provided a person actually wants to however.


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## Belli (17 January 2020)

Apologies for another post.  I forgot to mention if people are newly starting out they should not forget the effect of compounding investment income.

At a very young age my children were left some money (directly unfortunately) in a Will.  The funds were invested in LICs and DRPs were put in place.  No sales, no participation in SPPs, no fresh funds added.

When I arranged for the last tax return before the final portfolio was handed over to one who asked for it, they received four figure a tax refund with a number starting greater than three.  They still have the shares and told me they still participate in the DRPs.  It will be a while before they will have to pay additional tax.


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## kahuna1 (17 January 2020)

MFF ....
Top 100 out of 10,000 fund managers.
Does not publish returns .... or bother .... it however made 37% last year including dividends.
Overseas mainly focus ...
MFG .... similar but a mere 31% off the MGG or MGE fund again mainly overseas but with one or two domestic holdings.

Both benefited off the USA side rally
same for the UAD close to 10 year lows.

MFF beats MFG MGG MGE returns each year. ... founder and fund manger of MFG linked to MFG or was a co founder.

Making 6% more each year. ... and this is over a 10 year period as well ... speaks for itself.
Bit wary of USA side with such a strong rally ... such an unstable if not insane leadership and whilst market rules out anyone other than Trump 2020 ... I suspect with hope ... possibly delusion they will not elect him.

It depends if say Warren or Sanders were to be elected by some margin and control both houses ... then all hell will break loose. USA halved the tax its companies pay .... hence the rally ... a few other things.

These two fund mangers beat the index ... MFF every year ... for the last 10  and its NOT leveraged. MFG beats it most years ....


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## Belli (18 January 2020)

Some may find these informative.  I don't visit the sites much now as it is not "my thing" to concern myself with the nuts and bolts as I've settled on my holdings and investment plan.  

https://www.firstlinks.com.au/article/lic-reports-and-updates

http://www.etfwatch.com.au/


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## Belli (18 January 2020)

Random question to no one in particular. There seems to be a tendency to look at percentages and go Wow!  They are not income as such as next week all that can Pfft! so then I consider you're left only with income.

So if you are looking at income in terms of percentages which would an investor prefer?  A yield of 6.5% or 1.0%?

Because if you selected 6.5%, you have chosen NAB which paid $1.66 (before franking) in 2019 calendar year.  If you chose 1% you have selected CSL which paid $2.65 (no franking) in the same period.

Just throwing it out there as food for thought.


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## kahuna1 (18 January 2020)

Sorry got the numbers wrong ... MGG and MGC merely returned 27% and 28% which included dividend payouts ....

MFF paid out 3.5 cents and got a total of 37% return V the MFG run funds at 27% and 28% .... 

As per normal the out-performance is astounding ... MFF is low key, not after new funds and not the advertising self promoting type despite the astounding returns over 12 years well above any bloody index.


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## oilleak (18 January 2020)

Have a chook at the Betashare Funds.....

Markets been booming for a decade.......must be a slowdon coming from somewhere soon....


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## sptrawler (18 January 2020)

oilleak said:


> Have a chook at the Betashare Funds.....
> 
> Markets been booming for a decade.......must be a slowdon coming from somewhere soon....



We have been hearing that since 2011, eventually it will be correct.
I know people who have been in cash since 2008, and still are.


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## Zaxon (18 January 2020)

Belli said:


> Random question to no one in particular. There seems to be a tendency to look at percentages and go Wow!  They are not income as such as next week all that can Pfft! so then I consider you're left only with income.



Being a random no one in particular, I feel fully qualified to answer your question.  The answer is...it depends on what you do with the income.

Scenario 1:
Company Super Grower goes up by 30%.  Wow.  The next day in drops by 10%.  If only we had got that in income.

Scenario 2:
Company Super Dividend stays at the same price, but gives out a 30% dividend.  Very impressive.  You take that dividend (income), and invest it in the company Super Random.  But alas, the next day Super Random drops by 50%.

What we learn from this, is that income is only "safer" if it's taken out and kept as cash.  Once you reinvest it in the market, it's then open to the same level of risk as if you never took the dividend in the first place.



Belli said:


> So if you are looking at income in terms of percentages which would an investor prefer?  A yield of 6.5% or 1.0%?



Unless you're in or close to a pension phase, yield isn't important, since you're likely to just reinvest it in the market anyway.  Total Return: so Share Price Increase + Dividend is what matters.


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## Belli (19 January 2020)

Thanks.  In an tangential way the issue I was looking at was more about anchoring.  How some focus on one particular aspect to the exclusion of others.


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## Belli (19 January 2020)

sptrawler said:


> We have been hearing that since 2011, eventually it will be correct.
> I know people who have been *in cash since 2008, and still are*.




Ouch.  Putting aside any growth aspect missing out on the greater income from dividends compared with cash....

Oh well, if they are fearful of price fluctuations.  Of course they will place blame elsewhere is the attitude I have encountered.  I shrug it off.


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## Dona Ferentes (20 January 2020)

Belli said:


> There seems to be a tendency to look at percentages ..... So if you are looking at income in terms of percentages which would an investor prefer?  A yield of 6.5% or 1.0%?
> 
> Because if you selected 6.5%, you have chosen NAB which paid $1.66 (before franking) in 2019 calendar year.  If you chose 1% you have selected CSL which paid $2.65 (no franking) in the same period.
> 
> Just throwing it out there as food for thought.



Tying up the thread (it started with a mention of AFI) and looking at trading activity plus dividend forecasts plus positioning for the future, AFI has announced Half Year accounts today. As well as holding dividend steady, the following comments flow from the trimming banks and participating in BHP and Rio buybacks: and repositioning


> ...holdings have been disposed of where the sustainable competitive advantage of the business has come into question. Over a four-year period, the number of stocks in the portfolio has been reduced from 95 to 70. This has led to a reallocation of funds to preferred companies, generally into larger companies in the ASX 200 Index which have better growth prospects.





> The more recent effect of this repositioning when combined with a general upward move in the market has meant that the top 24 largest holdings in the portfolio (excluding the major banks and resources) have risen from 47.2% to 51.4% over the six-month period, and their value has gone from $3.5 billion to $4.1 billion.





> It is also worth making some observations on the effect of the change in profile of the portfolio on AFIC’s more immediate income streams. The dividend cuts from three of the four major banks, combined with a reduction in the proportion of our portfolio in financials, has put a short term drag on our dividend income streams as many of our new investments have lower yields. We believe the move to stocks with a better growth profile should enhance the potential for dividend growth in the medium to long term, particularly as bank dividends are expected to remain stagnant.


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## Frankieplus (20 January 2020)

So_Cynical said:


> the equal weight ASX200 ETF has out performed the standard ASX200/300 ETF's by 50% over the last 5 years




I just thought of something, how is there any difference from a profit perspective if the equal weight index out performs the standard weight index? Please excuse the terminology but I will try get my point across.

Using MVW and VAS as an example, over 3 - 10  years they seem to be tracking the same except that MVW share is higher all the way through it's not like MVW is climbing more than VAS over time because it's not. They are climbing and dropping at very similar levels. 

So what's the difference in this instance where if you were to buy VAS you would buy it cheaper and later selling cheaper.. If you buy MVW you would pay more and then when you sell you get more.

So is MVW really outperforming VAS or is it just a more expensive stock compared to it?



-Frank


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## sptrawler (20 January 2020)

Dona Ferentes said:


> Tying up the thread (it started with a mention of AFI) and looking at trading activity plus dividend forecasts plus positioning for the future, AFI has announced Half Year accounts today. As well as holding dividend steady, the following comments flow from the trimming banks and participating in BHP and Rio buybacks: and repositioning



I have noticed MLT have trimmed back on the Banks also.


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## dyna (20 January 2020)

I quite like the local LIC's,especially those that take the hassle out of overseas markets for you. However,I treat them no different to my own share portfolio.Sell a fair bit when they trade above NTA, when the buggers are more likely to hit you with a share issue.Another thing,not mentioned so far,you can rock up to their agm's and investor presentations and put your hand up to query their gun stock pickers,right there,before you, in the room.Learn a lot more from real experts,than even good forums,like this one!


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## So_Cynical (20 January 2020)

Frankieplus said:


> Using MVW and VAS as an example, over 3 - 10  years they seem to be tracking the same except that MVW share is higher all the way through it's not like MVW is climbing more than VAS over time because it's not. They are climbing and dropping at very similar levels.




The big difference and reason for recent outperformance is that an equal weight ETF buys more units of a stock entering the index than a normal index tracker, using ATP as an example, when APT entered the ASX200 it would of been priced at around $7 as the price rose the equal weight ETF will sell down to rebalance the weight, an index fund would simply hold or buy a little at higher prices, the equal weight ETF keeps selling and taking profit as individual stocks rise, buying more of the falling stocks.

MVW behaves more like a managed fund.


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## N2Seeker (23 January 2020)

Not meaning to hijack this thread, but the question seems topical. I understand what NTA is and how to calculate it. I'm currently mucking around in Commsec reading and working out the functions etc - NTA is one of the few things that doesn't show up that I can locate. If I haven't just missed it, I figure there must be a similar platform or basic piece of software that will do the NTA calcs, or are people just running spreadsheets? Any suitable things I should look at to help me streamline the process a bit?


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## Belli (24 January 2020)

N2Seeker said:


> Not meaning to hijack this thread, but the question seems topical. I understand what NTA is and how to calculate it. I'm currently mucking around in Commsec reading and working out the functions etc - NTA is one of the few things that doesn't show up that I can locate. If I haven't just missed it, I figure there must be a similar platform or basic piece of software that will do the NTA calcs, or are people just running spreadsheets? Any suitable things I should look at to help me streamline the process a bit?




My only suggestions are either the NTA  published by various LICs (daily for some, weekly for others or monthly for the older LICs) or possibly the Bell Potter link I posted earlier.

I don't take a great deal of notice of NTA.  For the granddaddy ones (AFI, ARG, etc) they tend to swing around a bit - up 5%, down 2% - and anyway when I buy I'm buying at the share price.  If one sells that's what you are going to get not the NTA although if the difference is zero you do.  My last sale was swapping STW for VAS in 2010 but they are ETFs of course.

Too much effort for me trying to mess around calculating the NTA at a specific point when all I really want is the dividends.

Others have a different approach of course as is their right.

Meant to add.  I've got Buy contracts from many years ago.  What the NTA was then when I bought them is now irrelevant.


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## Dona Ferentes (24 January 2020)

I quite like these comments, that play to my preferences. Though there's an emphasis on niche investments, rather than the larger and cheaper options. And more along the LIC versus Managed Fund choice, and I think an ETF falls towards the former:







> Some of the arguments against LICs/LITs come from a viewpoint that open-ended managed funds are the best solution for retail investors as they always offer a quick exit at close to the net tangible asset (NTA) calculation. This is fair for the most liquid sectors such as large cap equities or vanilla investment grade bonds.





> However, for more illiquid assets such as sub-investment grade debt, private equity, some hedge funds and direct property, history is littered with examples of funds that ran out of cash and locked their investors in. If the assets take substantially longer to sell than the redemption period on the fund, investors and managers are playing with fire.





> Given this, unlisted closed ended funds (e.g. direct property syndicates, private equity funds), individual mandates or LICs/LITs are the most appropriate vehicles for illiquid assets. As many retail investors insist on having some form of liquidity, a listed fund is likely to be their best avenue to access these sectors.





> Critics of listed funds often point to the higher fees (from listing and governance costs) for these funds compared to their unlisted equivalents. This isn’t always true, with fees running at over 1% per annum for retail investors on some open-ended unlisted funds. It also ignores that higher fees could be more than offset by higher returns as listed funds do not have to hold large cash positions to offset the risk of a run on the fund that open-ended unlisted funds face.


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## Belli (24 January 2020)

Thread is getting a little messy.

However.

One aspect which is overlooked with some LICs is the tax status for Discounted LIC Capital Gain. The 10% rule can be restrict the disposal of shares.

Nevertheless, for my purposes they are long-term, low cost holdings which are diversified. The managers do what I pay them to do. ETFs? Meh, who cares about a particular company, its management or its prospects. I find that good too for my purposes.


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## oilleak (27 March 2020)

sptrawler said:


> We have been hearing that since 2011, eventually it will be correct.
> I know people who have been in cash since 2008, and still are.



The old CRASH came in outta left (or East ) field ......

Hope ya cashed up for some bargains ?

Getting the timing right will be the next thing ..... At this stage I'm thinking July .... but she's a bit of a fluid environment at the moment .

Lots of trades around .

Luck all.


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## sptrawler (27 March 2020)

oilleak said:


> The old CRASH came in outta left (or East ) field ......
> 
> Hope ya cashed up for some bargains ?
> 
> ...



I always keep a lot in cash, Im very conservative, it was too hard to get the nest egg together to risk losing it.
As you say luck to all, just remeber having a job in times like this, is like winning lottery it is recession proof.


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