The first listed investment company (LIC) in Australia joined the board of the Melbourne Stock Exchange in the 1920s, well before the state exchanges merged to form the Australian Stock Exchange, and before that entity changed its name to the Australian Securities Exchange (ASX).
LICs are an established part of the investment landscape. But this long track record, and the perceived mundanity of the company structure, have led them to be overlooked in recent times in favour of the more glamorous exchange-traded funds (ETFs), or – in the words of Zenith Investment Partners senior analyst Dug Higgins – to be perceived as the “poor cousins to managed funds by many advisers who often struggle with their propensity to trade away from underlying value”.
But Higgins says these attitudes are “overblown”.
Too staid?
In a sector report published by Zenith in May, the research group says that the LIC sector has often been seen as “too staid compared to fast moving changes in broader managed funds and often driven by the financial advisory sector at the time due to the structure of advice payments”.
“Now, wide sweeping changes to the financial landscape in terms of regulatory changes around advice payments, changes to how LICs can pay dividends and increased direct investor participation is driving renewed interest in the structure,” it says.
Chris Morcom, a director and private client adviser at Hewison Private Wealth says LICs provide advisers with a powerful tool for diversifying client portfolios, and managing cashflow.
“We’re predominantly direct investors,” Morcom says.
“We prefer to invest directly rather than through a managed fund. It gives our clients a couple of benefits. The cashflow from the investments is fairly predictable; they know they are going to get a dividend, and we can be fairly sure what the dividend is going to be; and we know what the tax treatment is going to be.
“And it’s a company structure, so the actions of [other] investors are not going to impact on the management of the assets in the structure.”
Born of the ’87 crash
Morcom says a lot of the firm’s attitudes on direct investing were born of the 1987 sharemarket crash when there were issues around the timing of investments into and redemptions from managed funds.
Morcom says the firm has considered other listed investment options, such as exchange-traded funds (ETFs) and has tn the past used these for exposure to international large-cap stocks and emerging market equities. But it is on the process of winding back its ETF holdings and will look for other LIC opportunities to replace them.
New LIC offering continue to come to market, and newer offerings specifically seek to address some of the perceived shortcomings in the structure and reputation of the sector.
Andrew Martin managing director of Moelis Australia Asset Management (MAAM) – the manager of the Global Wealth Partners Fund – says an LIC isn’t necessarily the best structure for all investment ideas and manager styles.
“I am little bit perplexed as to why it may be attractive in all cases,” Martin says.
“Candidly, there are some LICs that have come to market that are quite opportunistic. I don’t see the rationale for that.”
Ideal structure
Martin says four underlying asset managers will manage funds raised by GWP. The closed-end, listed company structure is ideal to facilitate access to otherwise inaccessible managers, liquidity, and relatively straightforward taxation arrangements.
“We’ve partnered with four managers [that have] very high minimum investment thresholds,” Martin says.
“Typically, if you give you money to these guys there’s long-term lock-ups. If you want to redeem in the meantime, there are quite onerous redemption requirements.”
However, the closed-end nature of the LIC means the underlying managers have relaxed their minimum investment requirements, because investors in GWP cannot withdraw capital from the managers – “it’s permanent capital for them,” Martin says – and liquidity for GWP shareholders is achieved by selling GWP shares on the ASX.
Being an Australian listed company, the taxation situation is simplified considerably compared with investing directly into shares overseas, Martin says.
LICs are a new addition to the categories in the Professional Planner|Zenith Fund Awards. The finalists in this category are managed Platinum Asset Management, Watermark Funds Management and Wilson Asset Management. The winner – and the winners in 18 other categories, including Fund Manager of the Year – will be announced in Sydney next month.
