Financial advisers putting clients into simple, low-cost investments since the Future of Financial Advice (FoFA) reforms are helping drive a strong increase in demand for listed investment companies (LICs), according to leading LIC managers.
Australia’s largest listed investment company, Australian Foundation Investment Company (AFIC), says both self-managed super funds (SMSFs) and advisers were boosting its shareholder numbers.
“Our shareholder numbers are still going up quite significantly,” says AFIC’s general manager of investor relations and business development, Geoff Driver. “We’re still seeing SMSFs come on the register and we suspect there’s still strong demand being driven by advisers.”
Driver says after the introduction of FoFA reforms advisers were looking for simple product, lower costs and the transparency of exchange trading. He notes that AFIC’s management fee is just 0.16 per cent.
The scrapping of trailing commissions is also said to be driving a move away from managed funds and towards LICs, with some advisers charging clients a brokerage fee on LIC transactions.
Wilson Asset Management is also experiencing strong demand from SMSFs and advisers for its three LICs, WAM Capital, WAM Research and WAM Active.
Wilson Asset Management portfolio manager, Matthew Haupt, says that SMSFs now account for more than 60 per cent of the shareholding of its LICs.
Interest from planners
“We’ve also definitely seen a pickup in interest from financial planners,” he says.
Post-FoFA, advisers are attracted to LICs’ liquidity and visibility, Haupt says, adding they are a “nice, simple product with excellent governance and transparency”.
But LICs are also attracting demand from advisers and investors seeking yield. “One of the main reasons they hold LICs is the fully franked dividend yield they receive,” Haupt says.
“The difference between a managed fund unit trust and an LIC is we can smooth out the dividend stream over different periods. Trusts have to pay out all the income in that period,” he adds. “So LICs are better vehicles for paying out dividends over the longer term.”
AFIC’s Driver agrees the popularity of LICs is helped by fully franked income. “People are certainly looking for income,” he says.
AFIC’s small and mid-cap LIC, Mirrabooka Investments, is particularly popular at the moment and trading at a substantial premium to net asset value.
Driver says the popularity is because Mirrabooka “has a history over the last few years of paying out special dividends from realised gains. That’s very relevant for SMSFs, particularly people over 60.”
Morningstar analyst Alex Prineas says there is strong appetite for listed vehicles, including LICs, but also exchange-traded funds (ETFs).
He says demand for LICs is harder to gauge because they are “closed ended” with a fixed number of shares, and high demand doesn’t necessarily translate into an increase in assets.
New LICs launched
But over the past four years, a number of new LICs have launched, and in 2014 and 2015 ten were launched that now have a total size of just under $2 billion.
Prineas says advisers would be attracted to LICs because they provide access to an active strategy at extremely low fees.
He notes AFIC’s management fee is just 0.16 per cent, but an unlisted actively managed fund might charge nearly 1 per cent with the potential for platform fees on top of that.
LICs often also have low turnover strategies that cut trading costs but also mean capital gains aren’t crystallised. Prineas says many LICs have company holdings that pre-date capital gains tax.
But Prineas expects LICs to face competition from the growing introduction of actively managed exchange-traded products.
A year ago Magellan launched a new exchange-traded fund (ETF)-style product, dubbed an EQMF (exchange-quoted managed fund), which gives access via the Australian Stock Exchange to the actively managed Magellan Global Fund.
Other asset managers are believed to be looking to cash in on the strong response to Magellan’s pioneering launch, after the product raised close to $400 million in its first year.
AFIC’s Driver says advisers are increasingly using LICs to “mix and match” portfolios as the diversity of LICs increases.
Driver says advisers use AFIC in the portfolio, but add a “whole range of other product around it”, including long-short funds, and more specialised LICs such as a small and mid-cap focus.
“Advisers are looking for different ways of providing more unique types of exposure to the market than they were a few years ago,” he says.
Premium or discount
Prineas says one problem with LICs is that because the number of shares is fixed they trade at above their net asset value when demand is strong, and below net asset value when demand is weak.
Australia’s second-largest LIC, Argo, has a pre-tax premium of more than 10 per cent, while Templeton Global Growth currently has a discount of more than 15 per cent to pre-tax net tangible assets.
“For that reason we think LICs are more suited to long-term investors,” Prineas says. “Showing patience can reduce the potential costs of entering an LIC at a premium or exiting at a discount.
“ETPs are less likely to have large or sustained deviations from net asset value,” he adds.
But Wilson’s Haupt says the strong demand for LICs is likely to continue.
“The trend has just started,” he says. “There are a lot more LICs coming to market and that will increase over the next few years.”
Wilson is launching a new LIC, WAM Leaders, which will focus on ASX200 stocks. The prospectus will be lodged on April 4 and the offer is expected to open on April 12.
“We are doing WAM Leaders because we have had demand from our shareholders wanting us to manage large caps as well as we were finding lots of opportunities in the ASX200 and we felt we needed to dedicate resources to this space,” Haupt says.
