What does the new financial year hold for the LIC and LIT sector?

Angus Gluskie

The Listed Investment Company (LIC) and Listed Investment Trust (LIT) market has been growing steadily in Australia over many decades and increasingly closed ended listed investment vehicles play an integral role in supporting Australian investors, businesses and the overall economy, notes the Listed Investment Company and Trust Association (LICAT).

The new financial year, July 1 marked the end of the stamping fee exemption for LICs and LITs, presenting the industry with both opportunities and challenges.

In late May the Federal Treasurer announced that the Government would remove listed invested investment entities from the stamping fee exemption provided to all other ASX listed companies. This move seeks to align the treatment of listed investment entities with unlisted investment funds and ETFs, notes LICAT, yet in so doing it creates a differential treatment between listed investment companies and trusts and all other ASX listed companies, including AREITS.

Angus Gluskie, Chairman of LICAT, said: “Accordingly the LIC/LIT, stockbroking and advisory industry will be making adjustments to their processes and systems to accommodate the requirements of the new legislation.”

He said LICs and LITs want to see a defined, transparent and efficient method for customers to receive sound advice and for advisers to be fairly remunerated for that service and it is also important that arranger/managers of share issues can also be remunerated for the services they provide during an issue.

“Our industry would hope that as market conditions themselves stabilise, that a further range of LICs and LITs can be brought to market, in turn providing investors with a continued albeit gradual expansion of investment choice as well as the benefits provided by closed-ended investment vehicles.”

A solid heritage

Mr Gluskie added that the LIC and LIT sector had been popular with investors for over 95 years in Australia, providing easy access to asset classes including Australian shares, global equities, fixed income, infrastructure, and property across a range of investment strategies.

“The sector contains some of the largest and most cost-efficient actively managed investment entities that can be accessed by retail investors in Australia, it also offers investors access to trusted investment entities that have been prudently and conservatively managed over many decades and over many different (and at times difficult) investment climates.”

He said closed-ended funds provided unique advantages to investors and also to the broader economy and the financial markets system.

Strategic – LICs and LITs have the ability to invest in a contrarian manner due to the fixed capital they hold. They can be buyers of assets in fearful markets when those assets are cheapest. In contrast open-end funds and ETFs are forced to be pro-cyclical investors and must sell assets in cheap and fearful markets to fund net investor withdrawals and buy expensive assets when investors deposit funds during periods of exuberance.

Cost and tax benefits – Open-ended managed funds and ETFs must repeatedly buy and sell assets to match the continuous ebb and flow of investor deposits and withdrawals. These repeated purchases and sales incur transaction costs and crystallise tax liabilities on gains. In certain circumstances where there have been large withdrawals, ongoing investors in open ended funds may also be left with an undue proportion of hidden deferred tax liabilities. By comparison, LICs and LITs which have a fixed capital do not face this additional cost and tax burden.

Enhanced investor buying power during LIC/LIT capital raisings – LICs and LITs raise capital periodically through block capital raisings. By coordinating with other investors as part of a single block, underlying investors have collective buying power when it comes to the pricing, success or failure of share issues. History shows regular examples of share issues that have been repriced, restructured or cancelled as the result of collective investor feedback.

Transparency – By buying and selling shares and units in LICs and LITs on the ASX, investors transact at a price which takes account of all factors those investors consider relevant. This may include asset backing, structural risks, benefits and opportunities, expectations, embedded tax liabilities or benefits, investor opinions on whether the market represents good value or poor value and general supply and demand on the day of trade. By contrast investors depositing and withdrawing funds to or from an open ended managed fund or ETF transact at asset backing plus/minus the stated buy-sell spread of the fund and the buy-sell spread of the ETF market maker, a process which does not take into account of any other factors that may have relevance.

Stability – As fixed capital entities, LICs and LITs are one of the few investment vehicles types that can be a buyer in weak and fearful markets. This has the important benefit of assisting in the stabilisation of investment markets.

Understanding LIC/LIT premiums and discounts

Mr Gluskie noted the trading of LICATs at premiums or discounts to asset backing was a normal and important part of closed-end fund operation and was the mechanism by which the net demand of buyers and net supply by sellers may be matched-up.

“Closed-end funds such as LICs and LITs are bought and sold on ASX with the price determined transparently in the open market by buyers and sellers. It is this process of buyers and sellers matching-up through the free-market, that provides continuous liquidity (the ability to buy and sell) for investors while allowing the investment entity to maintain a stable, fixed capital.

“Accordingly, the price of a LIC/LIT determined in the open market on ASX may be higher, lower or the same as the underlying net asset backing. This is referred to as trading at a premium or discount to asset backing.”

“At any point of time LICs and LITs will trade across a range of premiums and discounts to asset backing and those variations to asset backing will fluctuate over time,” he said. “Investors and advisers who are active in the LIC/LIT market understand this inherent characteristic of closed-end markets and will use premiums and discounts to enhance their returns where possible.”

 In conclusion

Mr Gluskie said a vibrant closed-end investment industry was an important part of most healthy economies, providing stable, long term capital to operating businesses.

“The Australian LIC/LIT industry has supported investors and contributed to our economy for nearly 100 years and will continue to do so as 2020 progresses.”