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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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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