A LIC provides investors with a diversified portfolio of assets and trades at either a premium or discount to the underlying value of investments held in the portfolio. Most aim to distribute fully franked dividends to shareholders, in addition to an increase in the value of the holdings. LICs are now being recognised as a good vehicle for long-term performance, particularly as managed funds have come under fire of late for continuing to charge high management expense ratio (MER) fees, the average around the 1 per cent mark, for poor performance returns.
According to the April 2012 Morgan Stanley Smith Listed Investment Companies report, Australian equity LICs have outperformed the broader equity market since 1979 and have also exhibited stronger performance than their unlisted managed fund peers over three, five and 10-year time horizons.
Features and benefits
LICs are essentially a subset of managed fund investment arrangements and listed on the stock market. The majority are set up as trusts, but in this case they are incorporated as quoted companies and investors buy shares in the company, as opposed to buying units in a fund. Their
closed-end structure means they hold a fixed amount or closed pool of capital whereby investors can only buy shares in a LIC when another is willing to sell. The share price moves according to supply and demand rather than being based on the underlying assets, hence LICs trade at either a premium or a discount to their net tangible assets.
The benefit of not being influenced by redemptions or applications is the ability to use setbacks in the market as opportunities to buy stocks, rather than being forced to sell and vice versa. This has appeal for investors who want to manage their involvement in the market more closely.
LICs exercise tight cost control as they are not forced to grow the size of the fund, thus management fees are substantially lower than other investment vehicles, namely managed funds. Most offer an MER well below actively managed funds.
Adviser interest on the rise
Interest from financial planning groups and research houses has continued to strengthen since late last year, WAM Capital chair Geoff Wilson tells ifa.
"The momentum of interest from the financial planning segment in LICs has continued and it will continue as they look at various listed products, moving away from the managed fund sector. Still, LICs are minute as they make about $16 billion of funds under management," Wilson says.
"The last year or so has really been the first time research houses have written consistent research on LICs and they all say it's driven from their clients, being the financial planning groups."
In August, WAM Capital announced a placement offer for its listed fund on the back of adviser interest and it was effectively oversubscribed at just under $26 million. Its original expectation was $10 million, a palpable reflection of the accelerating interest.
"Planners are taking money out of managed funds and moving into LICs, ETFs (exchange-traded funds) and direct equities, and that trend is continuing," Wilson says.
"Another significant trend is the growth in self-managed superannuation funds (SMSF) - the majority of our shareholders would be SMSF investors if it's not coming through a financial planning channel. I assume SMSFs would continue to grow strongly, so that's another positive tailwind for LICs."
Forming an association
Whitefield chief executive Angus Gluskie says while a number of LICs have operated as the Australian Listed Investment Companies Association, it has not been inclusive of the entire industry. In order to tackle industry challenges and promote itself with a united voice, the LICs sector is attempting to form an official association.
"There are various issues that the whole industry needs representation on, such as tax and regulatory issues, so we need some method of coordinating and putting an industry position forward in some cases," Gluskie says.
The primary issue LICs want to address is the lack of a unified reporting standard, eager to create one equivalent to managed funds. "The more consistent investment companies can be in their reporting, the easier it is for investors and advisers to understand what they're getting. Industry coordination will assist in that process," Gluskie says.
He says the majority of benchmarks are before tax, yet investment companies report performance after a certain level of company tax. "Investment company returns are understated compared to benchmarks and we certainly want to remedy that and make sure people can appreciate the full level of return that's generated for them by an investment company," he says.
No way to measure adviser influence
Milton Corporation managing director Frank Gooch says a major disadvantage for LICs is they are unable to exactly measure what percentage of flows has come from the advice channel. "We don't know whether an adviser has [told clients] to buy Milton shares or if someone has done their own homework and bought [shares independently]. We don't see more money come into our fund as a result from
any of this; what we see is our shares being bought or sold," Gooch says.
"We have no way of measuring who's recommending us, but it's something that managed funds obviously do. That's a disadvantage for us in understanding how we promote ourselves better to advisers because whether the activity has come from an adviser is unknown to us."
He says while the removal of commissions is a positive for the sector and creates an even playing field for investment vehicles, what will ultimately compel advisers to use LICs comes down to performance.
"We can have as many advisers looking at us as we like, but if we're not delivering the improved dividends and the growth in the share price, we're not going to be recommended. We've got to make sure we perform year in and year out and continue to do what we say we do," he says.
LICs industry must educate advisers
Wilson says there's massive scope for improved education of advisers and investors, as there's more to a LIC compared to the well-understood managed fund structure.
"The complexity comes from the fact that its share price doesn't always align exactly with the value attached and it can trade at a premium or at a discount to its assets, so there needs to be education around that," he says.
"There also needs to be education around the fact that LICs pay tax and they deliver fully franked dividends, which are after-tax returns. The LICs industry is talking about all these issues and how to best educate investors. There has to be a greater level of engagement from the industry as a whole."
Gooch says the industry can effectively be broken into two groups, as investors may prefer one over the other: the older, traditional vehicle and the newer-style LIC. "Some of the younger LICs are a little more active in style and perhaps provide a different exposure for potential investors. We think the younger ones complement the older ones really well," he says.
In the new environment, advisers are less directed in where they look and are clearly considering different investment models to see which are in the best interest of clients, Australian Foundation Investment Company managing director Ross Barker says. "We've been through fairly tough years in the equity market and most of the LICs have done fairly well because they tend to be more conservative and less risky in their portfolio management. So that kind of style has actually performed quite well in recent years and that's encouraging more interest," Barker says.
Regarding whether or not investors are beginning to look into the longer term than relying on short-term investments, he says they are acting more rationally now. "They've had a near-death experience with the global financial crisis and so they've changed their approach to risk and our observation would be that many retail investors are very shy of the equities market and possibly more risk-averse than they need to be," he says.
Wilson says there's no reason why the sector can't grow from a $16-billion industry to a $50-billion industry over the remainder of this decade.
"I see the industry [gaining] more LIC listings - that would be a combination of the current ones growing and increasing their size, but also newer LICs listing on the stock market as demand comes through," he says.
"This period will be the golden decade for LICs as financial planners and the broader investment community embraces them."
Photographer Gabriel Tetrault was working on a computer network in Newport Beach, California. This rottweiler belonged to the client - who had five dogs.
One of them licked the windows for more than four hours.
Tetrault asked if he could take photos of him doing it.
A few years later, Tetrault's girlfriend suggested that as the client lived close to the ocean, the dog might not be crazy and might just be licking the salt from the glass.
