Listed investment trusts – a listed growth story

Led by exchange traded funds (ETFs), listed investments have experienced significant growth over the last decade, a period which coincides with the end of the global financial crisis (GFC). In this article, GSFM examines a growing sub-sector of listed investments, the Listed Investment Trusts (LITs) and compares LITs to other investment structures.

In the 12 months ended 31 July 2018, the market cap of listed investment entities – both listed investment companies (LICs) and LITs increased 22.8% to $41.87 billion^[1]. Over a five-year period, the market cap almost doubled; it was $21,79 billion at end July 2013^[2].

At the same time, we have witnessed the extraordinary growth in ETFs, both in funds under management and the number of funds being launched. At end July 2018, the total market cap had increased by 33% over 12 months, to create a record high of $39.98 billion, which resulted from a mix of funds flow and asset growth^[3].

While there has been much discussion around the reasons driving the growth in listed investments, some of the trends that have contributed to it include:

1. The rise of managed accounts

Recent research by Investment Trends found 64 per cent of the advisers surveyed either recommend, or intend to recommend, managed accounts, an increase from 46% the previous year^[4].

Managed accounts have gained popularity among both advisers and their clients because of increased transparency, cost effectiveness and streamlined portfolio management. Although unlisted managed funds are regularly used in managed account portfolios, listed vehicles are increasingly popular.

2. Growth of self-managed super funds (SMSFs)

In June 2013 there were 501,490 established SMSFs; at end March 2018, that number had increased to 595,840^[5]. ATO asset allocation data has consistently shown a preference for listed over unlisted assets in SMSFs.

3. Time and access

Time is a commodity everyone seems increasingly short of. Many investors and advisers don’t have the time – or access – to build and manage a diversified portfolio of listed securities. Some clients may not have sufficient capital for a truly diversified portfolio, one that spans domestic and global investments, across asset classes.

As illustrated in figure one, global equities is now the largest asset class by funds under management among exchange traded products (ETPs) and second largest for listed investment entities (LICs and LITs). An asset class not as readily accessible to those investors with a preference for listed investments, the increase in number and types of ETPs and LICs/LITs provides broader choice for advisers building portfolios.

 

 

What is a Listed Investment Trust?

A listed investment trust is a listed, collective investment vehicle that provides an opportunity for investors to access a diversified portfolio and benefit from active management by an experienced investment manager.

Diversified portfolio

Like unlisted managed funds, LICs and ETFs, LITs invest in a basket of assets and, with a single purchase, provides the investor with exposure to a diversified portfolio of securities.

In other words, each unit issued by the LIT represents that basket of assets, which might span domestic and global assets and include equities, fixed income, property or infrastructure.

Closed end products

Each LIT is incorporated as a trust and is closed end. Unlike managed funds and most ETFs that issue units with each purchase, a fixed number of units is issued following an initial public offering (IPO) – once funds have been raised, they are locked in.

Those units are then bought and sold on the Australian Securities Exchange (ASX); investors can only sell when there’s a buyer or buy when there’s a seller, just like share transactions.

The closed-end structure and fixed number of units means the investment team does not have to buy and sell securities to accommodate fund inflows and outflows. This can be a particular advantage in weak market conditions as the investment manager does not need to manage withdrawals in a tough market. Equally, in a bull market, the LIT manager is not a forced buyer like those investments with a constant cash inflow.

It is possible to change the number of LIT units on issue. Firstly, the LIT investment manager can issue new units to increase the number on issue, or conversely, it can cancel or buy-back units back to reduce the number of units on issue. Like a share buy-back, this can be used as a strategy to bolster the LITs unit price.

The listed environment

Because LITs trade in the listed environment, the lengthy application forms required by unlisted managed funds are not required. Once the investor’s account is established, trading can commence. Transactions are settled via CHESS and details are registered on the investor’s HIN.

A major difference between unlisted and listed trusts is pricing – with LITs there is price transparency. Advisers and investors know the buy and sell price at the time of transaction – there’s no waiting for a unit price to be struck.

Discounts and premiums

The value of a LIT’s units is calculated with reference to its net tangible assets (NTA); the total assets of the trust minus liabilities and is calculated by taking the value of the portfolio and dividing by the number of units on issue.

While you would expect the LIT’s units to trade at a price close to its NTA, minus fees, it’s common for LITs to trade at a premium or a discount. When trading at a premium, the LIT has a unit price higher than its NTA and when trading at a discount, the unit price is lower than its NTA. In other words, the price per unit may be higher or lower than the value of the trust’s underlying assets.

Factors that may impact price include:

• Fees
• Liquidity
• Performance of underlying assets
• Overall performance of the LIT
• Investor sentiment
• Timing of dividend payments
• Realised capital gains or losses
• Market cycles.

If a LIT trades at a discount to NTA for a protracted period of time, the consequences are often negative; investors are more likely to become dissatisfied, especially if they bought their units close to or above its NTA.

LITs – the pros and cons

There are a number of advantages to investing in LITs; however, as with any investment, there are downsides to consider.

 

 

LITs versus LICs

Listed Investment Companies (LICs) are very similar to LITs. Each LIC is a listed, diversified, professionally managed portfolio. Like LITs, LICs are closed end structures and may trade at a premium or discount to their NTA.

The primary difference lies in the entity structure – LITs have a trust structure and issue units, whereas LICs are incorporated as a company and issue shares. The primary difference for investors lies in the payment of income:

• Because LICs are companies, dividends paid include franking credits from company tax paid by the LIC, as well as franking credits received from underlying investments. LICs can elect to retain earnings and reinvest them or pay them as dividends.
• Because of the trust structure, LITs must pay out all earnings, both income and realised capital gains.
• Most LIT investors will be eligible for discounted capital gains tax concessions applicable to investments held for more than 12 months; companies, and therefore investors in LICs, are generally not eligible for this discount.

Listed versus unlisted trusts

With the trust structure in common, there are several important differences between listed and unlisted trusts, summarised in figure two.

 

 

LITs can provide your clients with many of the advantages of direct share ownership, without the time and effort that managing a share portfolio generally demands. Whether it’s within a managed account, an SMSF or an investment portfolio, there are a range of LITs that can provide your clients with exposure to markets, themes or specific securities as part of their diversified portfolio.

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[1] ASX Investment Products Monthly Update – July 2018
[2] ASX Investment Products Monthly Update – July 2013
[3] BetaShares Australian ETF Review – July 2018
[4] NAB/Investment Trends Managed Accounts Report 2018
[5] Self-managed super fund quarterly statistical report – March 2018

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The information included in this article is provided for informational purposes only. The information contained in this article reflects, as of the date of publication, the current opinion of Grant Samuel Funds Management and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Grant Samuel Funds Management, its related bodies and associates do not give any warranty nor make any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article. © 2018 Grant Samuel Funds Management.