David Stevens, managing director of Contango Asset Management, says if you “look at the Argos and AFICs [Australian Foundation Investment Company] and so on, the market always loves those and they sell consistently at a premium”.
Stevens’ business offers LICs and traditional funds to investors, and he says it’s horses for courses.
“We wanted to launch a micro-cap fund because we thought it was a terrific investment space,” Stevens says.
“After that, we reviewed which was the best [structural] option.
“The closed-end nature [of an LIC] was vital: I would not offer a micro-cap fund in an ETF because it’s not closed-end, it’s open-ended. The next [financial] crisis is going to shoot a whole lot of bullet holes through the ETF industry. It will be just like the property trusts sector. In the back of the product disclosure statements there’s [a clause] that they can freeze these funds … and that’s not in the best interests of investors.”
Stevens says the LIC option was also attractive “because micro-cap is a small asset space”.
“If I were going to have a $1 billion fund, I would offer an ETF or [an unlisted] managed fund,” he says. “But in the micro-cap space, you have limited FUM capacity.”
Stevens says there’s growing interest in LICs from financial planners.
“Some years back it was the private wealth planners from the private banks or broking houses, and individuals, but since then we’ve seen a number of financial planning groups come on to the register,” he says.
Zenith’s Wright says there are good reasons why planners may have been wary of some LICs in the past, and it’s mainly to do with management costs and agreements.
An LIC generally has an agreement with a management company to manage the LIC’s investment portfolio. Even though the LIC and the management company are, theoretically, separate entities, the agreements can sometimes be quite favourable to the management company: high fees, and long-term management contracts often give the impression that the management company might not work as hard for investors as it should.
On the other hand, because an LIC is owned by shareholders, those shareholders can band together to replace the management company, if enough of them agree to do so. That’s what happened last year, when Dixon Advisory successfully replaced van Eyk as the manager of the Three Pillars LIC. Dixon is an unusual planning business, in that it not only actively recommends LICs to its clients, but has now itself become the manager of an LIC.
Wright says LICs are an effective way for financial planners to manage their clients’ equity exposures.
“One of the things you see time and time again with advisers managing, or attempting to manage, direct equity exposure for clients is that often they are doing it with an arrangement they have with a broker,” Wright says.
The broker produces stock recommendations, and the planning firm “cobbles that together into a portfolio”.
“Each portfolio is different for each client, and it becomes impossible to manage that,” he says.
“That’s why we’ve started to see some of the SMA [separately managed account] structures becoming more popular.
“With an LIC, clients’ [equity exposures] can be managed in one place in a professional manner, where clients are buying into a portfolio, rather than having individual direct equity portfolios.”
