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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“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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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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