Demand for LICs and LITs holds steady

Angus Gluskie

The market capitalisation of the almost 100-year-old Listed Investment Company (LIC) and Listed Investment Trust (LIT) sector remained steady at the end of October when compared with a year ago.

Angus Gluskie, Chairman of the industry association LICAT, said: “While much attention has focused on the re-bound in the stock market as measured by the All Ordinaries index since it crashed in February this year, this index is still down 9% over the 12 months to the end of October.

“In contrast, LICs and LIT market capitalisation is down just 2% for the year to end October 2020,” (as shown below).

Mr Gluskie said: “The reflects a combination of underlying LIC/LIT performance, movements in trading ranges relative to asset backing and net issuance of LIC/LIT securities during this period. In difficult conditions, it is pleasing to see the sector both growing and performing favourably relative to the broad market.”

How LICs help investors

Due to their closed-end structure and active management, Mr Gluskie said LIC/LIT managers could choose where and when to invest capital. This structural trait may be of particular benefit in times of volatility, such as those seen over the pandemic affected months of 2020.

LIC/LIT managers have been free to make investment decisions based purely on their merit.

In contrast open ended funds such as managed funds or ETFs have also had to be buyers/sellers during this period to accommodate investor withdrawals and deposits, actions which may exacerbate the market volatility of the underlying investments should material withdrawals occur during periods of market weakness or should large deposits be made into rapidly rising markets.

Additionally, Mr Gluskie said the closed-end company structure of a LIC can allow it to retain profits after tax and where desirable to smooth the flow of dividends to shareholders. This has enabled some LICs to maintain a far steadier payment of income to their investors over a period when dividend income from the broad market has fallen very significantly.

“The benefits of the LIC structure for shareholders have been clearly displayed in this period. LICs themselves have in many cases absorbed the volatility of both market prices and income fluctuation – something a corporation can do – while continuing to provide investors with relative consistency of income flow. That consistency of income flow can be vitally important for people such as retirees who must live off their investment income.”

LICs and social returns – Future Generation investment companies

Globally, investors are increasingly directing capital towards investments that are focused on creating a positive social impact in addition to wealth. This rise in investing for social returns was introduced in Australia in 2014 with Future Generation Australia (ASX: FGX), the first listed philanthropic investment vehicle of its kind here. The Future Generation model is based on the ideology that impact investing does not mean having to give up capital growth.

Since listing in 2014 Future Generation Australia and its sister Future Generation Global (ASX: FGG), which listed in 2015, have invested a staggering $41.2 Million to a range of Australian charities focused on youth at risk (FGX) and youth mental health (FGG).

This annual investment is enabled by a range of leading Australian and global fund managers who specialise in domestic and global equities and offer their services pro-bono. The listed investment companies provide fund managers with a unique opportunity to make a positive difference to Australia’s future generations, and shareholders are provided with exposure to prominent fund managers without paying management or performance fees. The companies seek to deliver a stream of fully franked dividends and capital growth, while providing charities with a stream of annual investments.

“Selecting high quality fund managers, who each hold a range of underlying investments, adds to diversification in the investment portfolios,” said Future Generation companies’ CEO Louise Walsh.

Combining investment and social returns has drawn demand from a young investor audience that have a keen interest in philanthropy and giving back to the community through impact investing. ”Future Generation’s longer-term goal is to invest $100 million in charities focused on children at risk and youth mental health by 2044”

FGX and FGG both announced increased fully franked dividends in their 2020 half year results.

Summary

Overall, Mr Gluskie said the LIC and LIT sectors had weathered the recent difficult times well.

“The sector contains some of the largest and most cost-efficient actively managed investment entities that may be accessed by retail investors in Australia. There are numerous examples of LICs and LITs that have been prudently and conservatively managed over many decades and over many different (and at times difficult) investment climates.”

He said closed-end funds provided unique advantages to investors, the broader economy and the financial markets system. “LICs and LITs have been assisting investors in growing their wealth for nearly 100 years. Today, over 700,000 Australians invest in the LIC and LIT sector. The efficiency and stability of their closed-end structure coupled with the corporate governance disciplines of ASX listing have proven to be far more durable than many other investment structures.”