Zenith Sector Review: Claims of ’flawed’ LICs and LITs is a failure of selection, not structure
Dugald Higgins
For investors in Listed Investment Companies and Listed Investment Trusts (LICs/LITs), 2020 is shaping up as a year they would rather forget.
Despite raising a record $5.5 billion of IPO capital in 2019, positive sentiment fled at record speed as the spectre of COVID-19 left no corner of the market unturned. Across all asset classes, liquidity proved priceless and investors have been willing to pay up for it.
In its latest sector report, Zenith Investment Partners found that while market movements largely mimicked the moves experienced during the global financial crisis (GFC), the speed of capital destruction was much greater during the COVID-19 pandemic than was the case over 10 years ago. What took approximately 7 months to play out in 2008 took merely 16 trading sessions from 1 March 2020.
However, extreme discounts in March had materially reversed by 30 April as net asset data was progressively updated and risk-on appetites from investors rapidly returned.
Dugald Higgins is the Head of Real Assets and Listed Strategies at Zenith. He believes that investing in LIC/LITs has always been a charged topic in investment circles.
“Sentiment was already soft in the sector following the stamping fee debate in Q4 2019,” said Higgins, “which caused some LICs and LITs to increasingly trade away from their underlying value.
“Most managed investments transact at their asset value, so having vehicles which can trade at discounts of 30% or more is undoubtedly an easy target for critics who claim that LICs and LITs are a flawed investment structure.
“However, we would argue that no investment structure is flawless. Each has characteristics which may be unappealing to different investors and their requirements. Rational investors should ensure they select the structure that prioritises the features they value more highly and accept that they will have to compromise on other aspects that come with this choice.”
While LICs/LITs trading at a discount fundamentally impact returns, they should not be the overriding point of focus in the short-term.
Zenith’s research also shows that disparities in performance between LIC/LIT portfolios and their performance on the ASX can be materially reduced by adopting longer holding periods. The difference in annual returns based on whether a vehicle trades at a discount or a premium tends to vary materially in the short term (one year). However, when the holding period is expanded out to five years, data shows that the dispersion of outcomes between the investor return and portfolio return narrows materially.
Higgins concludes, “we do not believe that premiums and discounts are an issue that can be ‘cured’, they are more simply a function of the structure and market that investors choose. The underlying investment strategy will continue to be the material driver of returns over the longer-term and, if investors have a five-year plus holding period, the structure they have invested via should be no reason to change that view. Such a decision in itself could be flawed.“
