Dugald Higgins

Listed Investment Companies (LICs) have dodged a political bullet with a Coalition victory over the weekend according to Zenith Investment Partners.

Dugald Higgins, Zenith’s Head of Property & Listed Strategies said “For a sector that has raised $11.7 billion dollars of new investor capital over the last five years, a Labor win could have posed a significant speed-bump to those adopting company structures in listed investment vehicles”.

With the threat of a ‘retiree tax’ now off the table and investors having passed through a near-death experience on the preservation of franking credits, some interesting questions come to light.

Zenith Investment Partners 2019 Listed Investment Entities Sector Report examines some of the key issues such as how might the search for yield change? Will LICs investing in Australian equities remain attractive as an investment tool?

Higgins said “Australian equities have traditionally been a high yield market. While driven in part by favourable taxation, when removing the impact of franking credits, Australian equities are still one of the highest yielding asset classes available in a liquid, easily diversifiable format.”

Australian equities still hold a key position across the asset classes in terms of yield attractiveness. When viewed from a structural perspective, the company structure of a LIC can have advantages when compared to the structures utilised by Listed Investment Trusts (LITs) due to the difference in taxation treatment.

Higgins stated that “For Australian equities managers, particularly those with high levels of portfolio turnover, a company structure is arguably more conducive to the generation of a stable dividend stream to shareholders given the ability to retain earnings from one year to the next. For asset classes where income generation at the underlying security level is more predictable, such as fixed income, a trust structure which has to distribute all net income in the year it is received may be more attractive.”

Zenith believes that given the position of Australian equity LICs in generating stable dividend streams from an asset class with comparatively high volatility, it is logical that the company structure as a vehicle will continue to remain a core aspect of the listed investment market. However, the increased popularity of other assets classes has helping boost the usage of trust structures via LITs, which Zenith sees as a logical progression of a maturing listed investment market.

Zenith also noted that despite favourable conditions for capital raising over the past several years, most managers of LICs and LIT emerging during that time were yet to experience operating listed vehicles in a bear market. Given that investor satisfaction is a key element of managing listed products, the report cites a top ten list of issues Zenith believes managers should consider from a best practice perspective.

Higgins commented that “Too many managers are ignoring aspects that can result in increased investor dissatisfaction when conditions get tough.” Issues such as disclosure frequency, performance reporting and poison pill arrangements in management agreements were amongst the issues noted.

“All these issues can hinder investor sentiment when markets turn ugly.” Higgins said. “Those who construct and operate LICs & LITs should make use of all available tools to maximise market integrity and client satisfaction in their products. Issues which are seen as merely irritating in the good times can turn deadly for sentiment in the bad times.”

The post Liberal win a boost for LIC’S appeared first on AdviserVoice.