Over recent years there has been strong growth in the number and value of LICs and LITs offering investors access to global equities, Asian markets, infrastructure, and alternative assets such as private equity and private debt as well as fixed income, reports the Listed Investment Companies and Trusts Association (LICAT).

“Since the end of 2017, the total LIC and LIT sector has grown from $39.6 billion to $55.8 billion to be up 40.9% at the conclusion of October 2021,” said Ian Irvine, CEO of LICAT.

While there has been an uplift in Australian equities in terms of value over the past four years to $34 billion, the overall proportion of the sector they hold has shifted from 77% to 61%.

“Over the same period the proportion of LICs and LITs holding global equities has almost doubled from $8.5 billion in total to $16.1 billion, to account for 29% of the sector,” Mr. Irvine said.

There has also been extremely strong growth in fixed income LITs, from $650 million to a current value of $5.5 billion at the end of October; accounting for 10% of the sector total.

“This changing dynamic provides investors and their advisers 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.

“The closed-end LIC or LIT structure can be suited to the holding of longer duration assets or longer-term investment strategies, while still providing underlying investors with the ability to increase or decrease their investment at any time, by buying or selling shares/units on ASX,” said Mr. Irvine.

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.

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Commenting on the sector’s increase over the past year, Ian Irvine, CEO of the Listed Investment Companies and Trusts Association (LICAT) noted that the sector had benefited from two IPO capital raisings in June (ASX: WAR) and (ASX: SB2), amounting to some $300 million in new capital.

In addition, the sector performed strongly at an underlying level, up 31.4% excluding IPO capital. “This was driven by both the increasing value of investment portfolios and the share price of the LICs and LITs themselves,” said Mr Irvine.

“There is continuing interest from investors who understand the benefits of the LIC and LIT closed-end fund structure, including its cost efficiency, management stability and focus on the long term.”

In the case of LICs, Mr Irvine said the ability for profits from previous periods to be returned to investors in future periods, had assisted in the delivery of income stability to investors.

”Investors who bought LICs/LITs when they were trading cheaply relative to asset backing in 2020 have been able to generate particularly high returns. Not only have they benefited from the upswing in the market value of shares generally, but they have also received a supplementary return as the LIC/LIT shares themselves returned to a more normal trading level relative to asset backing,” he said.

Mr Irvine said LICAT was also pleased to see the income/yield segment of the LIC/LIT sector performing well, with fixed income LITs continuing to pay unitholders regular monthly income.

“In an economic environment where income and yield are hard to find, these LITs have continued to generate returns and income for their underlying investors,” he said.

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

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Angus Gluskie

At the end of March, a year on from the commencement of the market recovery, the Listed Investment Companies (LICs) and Listed Investment Trusts (LITs) sector had re-gained ~$13 billion in market capitalisation – an improvement of 32% over a year ago.

Angus Gluskie, Chairman of the Listed Investment Companies and Trusts Association (LICAT) and Managing Director of the longest running LIC Whitefield Limited noted that within the sector, Australian equities (up 35.3%) had kept pace with the broader All Ordinaries index, which advanced 35.8%.

“There is continuing interest from investors in the many benefits that the closed-ended structure of an LIC or LIT offers,” he said. “In the case of LICs, these include the ability for profits retained from previous periods to be returned to investors in future periods, providing a consistent and stable income over the medium to long term.”

“Investors who bought LICs/LITs when they were trading cheaply relative to asset backing in 2020 have been able to generate particularly high returns. Not only have they benefited from the upswing in the market value of shares generally, but they have also received a supplementary return as the LIC/LIT shares themselves returned to a more normal trading level relative to asset backing.”

Mr Gluskie noted that the income and yield sector of the LIC/LIT market were also performing well.

“In an economic environment where income and yield are hard to find, these LICs/LITs have continued to generate return and income for their underlying investors,” he said.

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 efficiency and stability of their closed-ended structure, coupled with the corporate governance disciplines of ASX listing have proven to be far more durable than many other investment structures.

“The combination of efficiency and stability of the closed-ended structure of both LICs and LITs are attractive to many investors in managing their portfolios,” Mr Gluskie concluded.

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“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.

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As the sector enters its 98^th year of continuous operation in Australia, it continues to provide retail investors and SMSF trustees with access to some of the largest and most cost-efficient actively managed investment entities in Australia. The significant longevity of the sector reflects the benefits of prudent and conservative management over many decades and over many different and at times difficult investment climates.

LICs and LITs also provide investors with benefits from their closed end structure and active management style allowing managers to choose where and when to invest capital.

This closed end structural trait can be of particular benefit in times of volatility, such as those seen over the pandemic affected months of 2020 where LIC/LIT managers have been free to make investment decisions purely on their merit rather than running with the momentum of the market.

Additionally, 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 broader market has fallen very significantly. This consistency of income flow can be vitally important for people such as retirees who live off their investment income.

Commenting on the ability of LICs to manage the flow of dividends, Wilson Asset Management Chief Financial Officer Jesse Hamilton said, “all of six LICs managed by Wilson Asset Management were able to maintain or increase fully franked dividends throughout the volatility seen in 2020, due to the benefits provided by the company structure of a LIC”.

“Investors can also receive diversification benefits from the Wilson Asset Management range of LICs, which cover asset classes such as Australian equities, including large, mid and micro-cap stocks, global equities and with our recently added seventh LIC, ‘WAM Alternative Assets’ (ASX: WMA), further diversification within the LIC structure into alternative asset classes”, he said.

An interesting development within the sector over recent years is the continuing growth of LITs, which utilise a closed end trust structure. The value of LITs is now ~$10.6 billion accounting for around 20% of the ~$52.8 billion LIC/LIT sector at the end of December 2020.”

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

This steady capital base of a LIT allows it to invest in, and provide unitholders with the benefits of exposure to, longer term assets, while still providing those underlying shareholders with liquidity (the ability to buy or sell units at any time on market).

2021 clearly brings many challenges for society and for investors as the world continues to grapple with the complexities of the COVID19 pandemic, low interest rates, combative politics and an increasing urgency to address climate change. “In this environment, the supply of steady long term investment capital to businesses in return for a sound level of investment income is particularly important”, concluded Ian Irvine. “Australia’s closed end investment sector consisting of LICS and LITs continues to be one sector suited to contributing this capital to business on one hand while providing investors with both liquidity and income on the other.”

By Ian Irvine, CEO

The post Demand for LICs steady appeared first on AdviserVoice.

Andrew Lockhart

As the number of investors seeking income in today’s record low interest rate world rises, an increasing number are considering Listed Investment Trusts (LITs).

These closed-ended trusts (similar to listed investment companies or LICs) enable investors to invest in assets that require longer investment time horizons – such as corporate loans and infrastructure and property developments.

LITs accounted for around 20% of the $52.8 billion LIC/LIT sector at the end of December 2020, according to the Listed Investment Companies and Trusts Association (LICAT).

The LIC and LIT industry in Australia is entering its 98th year of operation. There are few other investment structures that have been able to support investors in building wealth over such a long period.

Ian Irvine, CEO of LICAT said: “The significant longevity of the sector reflects the strong corporate governance framework developed by the sector and the ASX, the transparency and efficiency of open and competitive capital markets and the inherent benefit of the closed-end fund structure which encourages managers and investors to both invest and focus on the long, rather than the short-term.

Trust – worthy

LITs as trusts, are not subject to company tax, and they pass income straight through to investors on an untaxed basis.

LITs are also closed-ended funds. This means that after raising capital through a unit issue, their capital remains fixed. Unlike open-ended ETFs or managed funds, LITs are therefore not forced to sell assets to meet withdrawal requests.

Mr Irvine noted: “While LITs have some of the typical characteristics of a trust structure, their secure capital base can be an additional benefit to investors. Because they do not have to sell assets to meet investor withdrawals, LITs can strategically invest in longer term assets, while still providing their own unitholders with the ability to buy and sell on market as needed. In many cases, this may give retail investors the opportunity, and hopefully the added return or diversity benefit of investing in asset classes that are usually only accessible by wholesale investors.”

“Having long term investment vehicles also supports the Australian economy. Many vital investment projects such as renewable energy and infrastructure require patient, long term investment. The closed-ended structure of LICs and LITs means they are one of the few structures suited to these long-term investment commitments.”

Andrew Lockhart, Managing Partner at Metrics Credit Partners, which manage two LITs (ASX: MXT and ASX: MOT) said, “as a non-bank lender offering Australian corporate borrowers access to an important source of non-bank finance and unique borrowing solutions, the LIT structure with its closed end secure capital base is ideal for the way we operate.

“Our LITs provide retail investors with daily access to private debt markets in an easy tradeable way via the ASX. We are subject to ASX listing rules which provides investors with comfort as to the high corporate governance standards by which we operate and coupled with our experienced investment team enables us to deliver a regular monthly income stream”, he said.

“Importantly, we have a clear focus on risk management and have a demonstrated track record of delivering for investors, we have not experienced any impairments or arrears across our portfolio’, Mr Lockhart concluded.

Mr Irvine added that 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.

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“As the sector enters its 98^th year of continuous operation in Australia, it continues to provide retail investors and SMSF trustees with access to some of the largest and most cost-efficient actively managed investment entities in Australia. The significant longevity of the sector reflects the benefits of prudent and conservative management over many decades and over many different and at times difficult investment climates,” said Ian Irvine, CEO of the Listed Investment Companies & Trusts Association (LICAT).

Mr Irvine also went on to say “LICs and LITs also provide investors with benefits from their closed end structure and active management style allowing managers to choose where and when to invest capital.”

“This closed end structural trait can be of particular benefit in times of volatility, such as those seen over the pandemic affected months of 2020 where LIC/LIT managers have been free to make investment decisions purely on their merit rather than running with the momentum of the market’ he went on to say.

Additionally, 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 broader market has fallen very significantly. This consistency of income flow can be vitally important for people such as retirees who live off their investment income.

Commenting on the ability of LICs to manage the flow of dividends, Wilson Asset Management Chief Financial Officer Jesse Hamilton said, “all of six LICs managed by Wilson Asset Management were able to maintain or increase fully franked dividends throughout the volatility seen in 2020, due to the benefits provided by the company structure of a LIC”.

“Investors can also receive diversification benefits from the Wilson Asset Management range of LICs, which cover asset classes such as Australian equities, including large, mid and micro-cap stocks, global equities and with our recently added seventh LIC, ‘WAM Alternative Assets’ (ASX: WMA), further diversification within the LIC structure into alternative asset classes”, he said.

An interesting development within the sector over recent years is the continuing growth of LITs, which utilise a closed end trust structure. The value of LITs is now ~$10.6 billion accounting for around 20% of the ~$52.8 billion LIC/LIT sector at the end of December 2020.”

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

This steady capital base of a LIT allows it to invest in, and provide unitholders with the benefits of exposure to, longer term assets, while still providing those underlying shareholders with liquidity (the ability to buy or sell units at any time on market).

2021 clearly brings many challenges for society and for investors as the world continues to grapple with the complexities of the COVID19 pandemic, low interest rates, combative politics and an increasing urgency to address climate change. “In this environment, the supply of steady long term investment capital to businesses in return for a sound level of investment income is particularly important”, concluded Ian Irvine. “Australia’s closed end investment sector consisting of LICS and LITs continues to be one sector suited to contributing this capital to business on one hand while providing investors with both liquidity and income on the other.”

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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.”

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Angus Gluskie

The Listed Investment Company (LIC) and Listed Investment Trust (LIT) sector has been growing steadily in Australia for the past 95 years – and has performed well during COVID-19.

The sector’s market capitalisation dropped just 2% to $44 billion over 2019-20, according to the Listed Investment Company and Trust Association (LICAT).

This compares to a 10.9% drop in the market capitalisation of the S&P/ASX200 while the capital value listed on ASX slipped 7.3% to $1.9 trillion.

Angus Gluskie, Chairman of LICAT, said: “There are over 700,000 investors holding one or more LICs and/or LITs today.”

He noted since March 2020, during the height of the COVID-19 pandemic, the LIC and LIT market cap had risen 9.1%. or over $3.7 billion.

“Over the latter part of the 2019-20 financial year, LIC and LIT managers have been presented with some of the most challenging times in living memory following the fallout from a global health emergency and a turbulent time on financial markets,” he said.

“However, it is pleasing to see that demand for LICs and LITs remains steady, and to see LIC & LIT managers capably navigating this environment.”

Geoff Driver, General Manager Business Development and Investor Relations at $7 billion LIC Australian Foundation Investment Company (AFIC) noted that “during the period, AFIC continued to adjust the portfolio and took advantage of the decline in share prices to increase holdings in companies in which it wanted to own more. This included participation in the recent deeply discounted capital raisings that have occurred.

“Drawing upon reserves, the final dividend was maintained despite the fall in income. We think this speaks to the strength of the LIC structure in more difficult times, particularly for AFIC which has a long history’ Mr Driver said.

Commenting on the continuing growth in the fixed income category, up 44.1% over the year, Qualitas Global Head of Strategy Kathleen Yeung, said the LIT structure had continued to provide an important source of capital stability for investors. The Qualitas Real Estate Income Fund (QRI) continued to provide a regular source of monthly income, while preserving investors’ capital. QRI does not have any loan impairments in its portfolio (which it reviews on a monthly basis) and there has not been any loan impairment since inception of the fund. The fund manager knows all of their borrowers individually,” she said.

Hayden Nicholson, LIC Specialist at broker Bell Potter Securities noted that “while the transition from 2019-20 has been turbulent for LIC and LITs, Australian equities have also faced the same set of circumstances. We see this as a unique opportunity for fund managers, as many LICs/LITs begin to rebalance their portfolios and acquire financially strong securities at a lower investment cost.”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 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.”

Mr Gluskie 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.

“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.”

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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.”

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