Investors increasingly recognising LICs and LITs offer more than Australian equities

For close to 100 years LICs have long been associated with actively managed portfolios, particularly of Australian shares, and while this holds true today there is a growing range of other assets being made available to investors through the tried-and-true listed investment company (LIC) or Listed Investment Trust (LIT) structure.

“There has been strong growth in the number of LICs and LITs offering investors access to global equities, Asian and emerging markets, infrastructure, alternative assets and fixed income,” said Ian Irvine, CEO of the Listed Investment Companies and Trusts Association (LICAT).

“While the value of Australian equity LICs grew from $30 billion to $32.5 billion (up 8%), the value of global equity LICs and LITs grew from $8.5 billion to $14 billion (up 65%) over the three-plus years from end 2017 to February this year. All to meet investor demand.”

“There has also been strong growth in fixed income LITs which have grown significantly, from $650 million in value to over $5 billion over the period.

At end-February 2021, the shift from December 2017 saw:

• Australian equities account for 63% of LIC/LIT sector value, share down from 77%;
• Global equities now 28%, up from 21%; and
• Fixed income now 10%, up from 2% over the same period.

“This changing dynamic provides investors with access to the closed-end structure of LIC/LITs over a broader range of asset classes, assisting with their asset-allocation and diversification strategies while delivering on the many benefits these structures offer,” said Mr Irvine.

Argo Investments Limited (ASX:ARG) is one of Australia’s oldest and largest LICs and has long provided its shareholders with a stable income stream of fully franked dividends from its Australian equity portfolio. Recognising that Australian investors are predominantly exposed to the local equity market, in July 2015 Argo established Argo Global Listed Infrastructure Limited (ASX:ALI).

Jason Beddow, Managing Director of ARG and ALI, said: “A key reason for establishing Argo Infrastructure was to provide global diversification to Australian investors who typically have most of their eggs in the Australian equities basket. The straightforward, ASX-listed LIC structure filters out the administrative complexity of investing overseas and offers the opportunity to receive franked dividends.”

Another interesting development within the sector is the growth of LITs, which utilise a closed-end trust structure. The value of LITs is now around $10 billion, accounting for 20% of the sector at end-February 2021, according to LICAT.

Brendan O’Connor, CEO at Regal Funds Management, which manages a $430 billion market cap LIT (ASX:RF1), said: “As a manager of alternative assets, our investment objective of providing our investors with attractive risk adjusted absolute returns requires significant research and the backing of secure and patient capital is critical to us achieving superior returns over the long-term for our investors”.

“As an ASX listed entity, RF1 provides investors with access to six alternative investment strategies, all managed by an experienced alternative asset manager in a manner with which they are familiar while providing those investors with liquidity; the ability to buy and sell between other investors on market.”

Like other trust structures such as ETFs and managed funds, LITs pass through income to investors untaxed. Because of their closed-end structure, unlike open-ended ETF or managed funds, LITs have a fixed capital base and are not forced to sell assets to meet withdrawal requests or to make income payments.

LICs and LITs have been assisting investors in growing their wealth for nearly 100 years. Today, over 700,000 Australians invest in the LIC/LIT sector, according to LICAT.

“The combination of efficiency and stability of the closed end structure of both LICs and LITs can enhance the overall performance and reduce volatility in their portfolios,” said Mr Irvine.