Peter Hall

The Australian Listed Managed Investments sector has grown from just under 80 to over 90 LICs or LITs during FY16, and the group now has an aggregate market cap of over A$30 billion. With several high profile new entrants listing soon, it is set to be an ever-larger portion of the ASX. The sector covers a very broad range of products, offering investors a convenient tool for most portfolio strategies. This Exclusive report identifies eight key actions to take when evaluating a LIC. First: identify the LICs that provide what you are seeking for your portfolio; Second: Look to see if the LIC’s investment process has delivered the LICs investment objective; Thirdly: Ensure the investment objective and dividend policy align with your investment needs and objectives. Click on the report below for a full description of these, and five other, critical considerations for all LIC investors.

1. Know what you are looking for

Many Australians have a significant asset class bias in their investment portfolio. This typically is a bias towards cash, property and/or Australian equities, but often little or no exposure to fixed interest or global equities. So, are you looking at LICs as a means to diversify the ‘asset class’ exposure you have in your portfolio?

Listed investment companies (LICs) can provide you with exposure to Australian equities, as well as international equities or global equities. The different LICs are likely to have a bias of investing in large, medium, small, or micro capitalisation stocks (or a combination of the above). The LICs are likely to have distinct investment styles, such as long only, relative return, absolute return or benchmark unaware.

Action to take: Once you know what you are looking for, find at least a couple of different research reports on the Australian listed investment company sector. Then identify the LICs that potentially provide what you are seeking for your portfolio. LIC research reports are available from leading stock brokers and specialist investment research organisations.

2. Independent research

There are broadly two kinds of LIC research reports. Specialist investment research organisations provide independent analysis of the asset class, investment bias, investment style and the different performance metrics of each LIC. The LIC generally engages and pays for the research organisation to conduct the report.

Many leading stock brokers also research and provide analysis of LICs. They typically publish monthly or quarterly research reports on the LIC sector and on individual LICs.

Most LICs, if they are included in the research reports, publish these reports on their website.

Action to take: Obtain at least a couple of LIC research reports. Stockbroker reports are available from Bell Potter, Patterson’s and Baillieu Holst. An example of a specialist research organisation reports is IIR (Independent Investment Research) (VIEW LINK)

3. Investment Objective

All LICs should have an investment objective. This is what the LIC is trying to achieve from investing the company’s capital. The LICs investment style, and the investment process the LIC follows to invest the company’s capital, should be closely aligned to the company’s investment objective.

An example of an investment objective:

“To generate positive absolute returns in excess of the investment portfolio’s benchmark (after management and performance fees) over an investment horizon of five years”

The LIC’s dividend policy is related but distinct to the LIC’s investment objective. The LICs dividend policy is what the company’s shareholders can expect to be paid each year by the company.

An example of a dividend policy:

“To pay a consistent regular stream of fully franked dividends to our shareholders, provided the Company has sufficient profit reserves and franking credits and it is within prudent business practices”

LICs can be good components in investment portfolios if the LIC has the payment of dividends to shareholders as an explicit investment objective.

Action to take: Ensure that the LICs investment objective and dividend policy align with your investment needs and objectives.

4. Investment process

The investment process is how the LIC invests the company’s capital. LIC investments are either ‘internally’ or ‘externally’ managed. Externally managed LICs engage the services of an investment manager. The terms of the engagement are typically governed by an Investment Management Agreement between the LIC and the investment manager. Internally managed LIC’s directly employ their own investment management staff to invest the company’s capital.

Externally managed LICs typically pay a monthly management fee and an annual performance fee to the manager. Internally managed LICs pay the salaries and bonuses for all staff engaged to manage the LIC’s capital.

How the investment manager selects the stocks it invests in, and how those stocks are combined to create the investment portfolio, is called the investment process. The outcome or the result of the investment process is the investment performance of the portfolio.

Historical investment performance provides an insight into the likely investment performance in the future, however it is only a guide and not guaranteed and should not be solely relied upon.

Action to take: Look to see if the LIC’s investment process has delivered the LICs investment objective. Is the objective being met consistently, across different time periods: 1 year, 3 years, 5 years and 10 years periods?

A more challenging analysis is trying to determine if the LICs investment process will continue to produce similar investment performance into the future. The more you understand the LICs investment process, the better you will be able to assess its applicability to your view of future events.

5. Listed Investment Company Performance

A LIC’s performance is best viewed from the perspectives detailed below. The broker and specific research organisations reports usually provide LIC performance reporting.

(a) The Investment Manager’s performance

This measure shows how the Investment Manager has performed against their investment objective.

For this metric, the appropriate investment performance used is: before all investment management fees and all company expenses. Typically, the investment managers have some form of benchmark and the benchmark return will be before any fees, taxes or expenses. This enables you to compare ‘apples-with-apples’.

(b) NTA Performance per share (after all Management fees, taxes and other expenses) + Dividends paid to shareholders:

This performance measure shows the change in the value of the assets per share that belong to the shareholders plus any dividends received during the period.

For this metric, the appropriate performance used is after all management fees, company expenses and taxes payable to the ATO. Any dividends paid to shareholders is then added to the net tangible assets (NTA).

It should be noted that this measure does not include the potential value of franking credits attached to dividends paid to shareholders during the year.

(c) The Total Shareholder Return

This measure shows the return to shareholders, being the change in the share price together with the dividends paid during the period.

Action to take: Form a view of the LICs performance across the three performance metrics discussed.

6. Discount and premium

Often the share price of a LIC does not always move in tandem with its change in NTA per share. When this occurs, the share price is said to be trading at a discount or premium to its NTA per share.

The reasons why a LIC’s share price trades at a discount or premium to its share price are varied. Typically LICs will trade close to their NTA per share if they have a consistent record of meeting their investment objective AND have a) effective communication with their shareholders; b) deployed value creative capital management strategies; c) have demonstrated disciplined expense management.

When LICs share price is at a discount to their NTA per share this is a potential opportunity for an LIC investor. Example; you can buy $1.00 worth of assets for 90 cents. If you are a medium/long term investor and you believe the LIC has the above characteristics this is potentially a very attractive investment.

Action to take: The broker and specific research organisation reports will provide analysis of LICs that are trading at a discount or premium to their NTA per share. Additional research will be required to establish if this is an attractive investment opportunity for you.

7. Reputable Board, Manager & Longevity

The performance of a LIC is a combination of the performance of the company’s Board and that of the Investment Manager. The LIC’s investment performance is driven solely by the performance of the Investment Manager.

However, the Board of Directors has control over the LICs capital management strategies (E.g.: for the issuance and buyback of shares), and the controllable expenses of the LIC. The effective management of both expenses and capital management initiatives can add or subtract to the value of the LIC.

It is highly desirable for the LIC Board to have experienced Directors, who have a sound knowledge of the LIC environment and/or have a strong investment track record.

Action to take: Ensure the LIC has an experienced Board, and an experienced Investment Management team that has consistently met its investment objective.

8. Market Liquidity – Size of LIC

The volume of the LIC’s shares traded on the ASX is likely to be highly co-related to the capital of the LIC and/or the number of shares on issue. Generally, the larger the LIC/shareholder capital, the higher the daily turnover of shares on the ASX.

A reasonable daily turnover of shares on the ASX provides investors with the opportunity to purchase and sell shares with ease when they choose to do so. What is ‘reasonable’ is likely to depend on how many shares an individual investor is seeking to buy or sell, and/or their likely investment horizon.

LICs with a record of consistent and regular volume trading of their shares provide investors the flexibility to buy and sell their shares with ease.

Action to take: If having liquidity for your LIC investment is important, individual LIC turnover can be provided from your Stockbroker, or from the ASX.

Disclaimer: This presentation is for information purposes only and is not intended as an offer or solicitation with respect to the dealing of any security. The purpose of this presentation is to provide information only and the contents of the presentation do not purport to provide investment advice or recommendations. This presentation does not take into account the investment objectives, financial situation or particular needs of any particular person. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision on the basis of this presentation.


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