Still plenty to love in LICs and LITs

An ability to bank franking credits, to capitalise on an influx of short-term trading, and to package up different risk hedges are among the key advantages of listed investment vehicles (LICs), said a handful of fund managers at the recent Pinnacle 2020 Virtual Summit.

Australia’s almost $45 billion LIC market has been buffeted in recent times, with a number of even the best-known managers’ vehicles trading below their net tangible asset (NTA) value, both before COVID-19 hit and during the worst of the pandemic downturn.

Providers of LICs and their close cousins, listed investment trusts (LITs), have also been shaken up by a ban on commissions – in this case, known as stamping fees – that had long incentivised brokers to sell the products. Stamping fees are no longer allowed after a directive from Federal Treasurer Josh Frydenberg came into effect from 1 July.

These were among a range of issues discussed during a question and answer session on the final day of the week-long virtual event.

Image: Participants in the LIC / LIT discussion at the Pinnacle Summit 2020

Dr Don Hamson, managing director, Plato Investment Management said: “A LIC is a great way of being able to bank dividends, but also importantly to bank a franking credit balance you can bring forward from one year to the next, so it’s a great way of smoothing income.”

He finds these structures particularly appealing to retirees who like their ability to pay regular monthly income – particularly at a time when stock market dividends are at long-time lows. “We banked some great dividends from the dividend bonanza last year to help tide us over this year,” said Hamson, referring to his firm’s Plato Income Maximiser (ASX: PL8) listed investment company.

The LIC structure also enables a long-term view in a market segment that is increasingly fixated on quick wins – or in many cases, losses – said Marcus Burns, portfolio manager at small- and micro-cap specialist Spheria Asset Management.

Holding companies that range in size from around $50 million to $3 billion in the Spheria Emerging Companies (ASX: SEC) LIC, the vehicle “enables us to arbitrage the short-term nature of the market right now,” said Burns.

“A good example over the last 12 months is in the big flurry to invest in stocks that don’t make cashflow earnings.

“Retail investors have pumped up some parts of the market to crazy valuations, and we’ve been able to move the fund around to take advantage of that.”

Many managers now offer both unlisted, open-ended (managed fund) and listed, closed-ended (LIC / LIT) versions of their strategies. The Antipodes Global Investment Company (ASX: APL) is one example, a LIC offering of the Antipodes Global Fund long-short portfolio.

“Being a company, the board can choose how much of a dividend to share each year, which also has franking credits attached,” said Andrew Findlay, managing director, Antipodes Partners.

“The closed-ended nature of a LIC is also appropriate for short positions and the other hedging techniques in the strategy’s absolute return-style.”

The Antipodes strategy is also offered via an exchange quoted managed fund – or active ETF – via its AGX1 product.

Findlay believes one of the key benefits of an LIC – even for liquid assets – is the company layer, whereby boards can opt to distribute dividends, or not.

“LICs offer a much smoother income profile than a managed fund, which has to distribute all realised capital gains each year, so income can be quite lumpy.”

For Andrew Lockhart, managing partner at Metrics Credit Partners – which provides corporate loan-focused credit strategies – the LIT structure makes its debt assets more readily tradable.

“You can’t buy and sell a loan over a screen,” he says.

“We’ve sought to raise capital through the closed-end LIT structure, using those proceeds to lend to Australian companies and giving investors who wouldn’t otherwise invest in that asset class a means to do so.”

Metrics offers two LITs – the MCP Master Income Trust (ASX: MXT) and the MCP Income Opportunities Trust (ASX: MOT).

“MXT was trading at a discount, but has now returned close to NAV. And if you look at the world of comparable assets and risk, it’s generating a reasonable yield for that risk,” Lockhart says.

Stamping fee ban: good or bad?

Views were slightly mixed on the removal of stamping fees. Before they were banned from 1 July, stamping fees were levied by issuers of LICS and LITs when they launched an initial public offering for a product. The brokers of these IPOs – those who drum up support among financial advisers, who in turn encourage clients to invest – received these fees.

Christopher Joye, CIO of Coolabah Capital, was one of the most vocal critics of the “conflicted remuneration” in the sale of fixed income LICs and LITs. Coolabah doesn’t currently offer its strategies via these listed vehicles, opting instead for an active ETF, BetaShares Hybrid Securities (ASX: HBRD) alongside its credit funds.

“I wouldn’t rule out an LIC or LIT in future, but there would have to be a really compelling opportunity for investors – and I do think it makes absolute sense in some areas,” Joye says.

But on some of the other global fixed income LICs and LITs: “I think that was a pure money grabbing exercise, a pure unadulterated ‘let’s raise as much funds under management as possible on the highest possible fees.’

“It was crazy…big global shops that had consistently failed to raise money from Aussie retail investors were raising vast quantities on vast fees for levered high yield bond strategies in a matter of days.”

Spheria’s Burns agrees with this view on the banning: “I think it’s a good thing…my feeling is that stamping fees helped create the inefficiency we see in the marketplace today.”

“It’s obviously getting harder to launch additional LICs, but if they can’t do stamping then there’s got to be a really compelling reason to invest in it, and I think that’s a net positive,” he says.

In a more measured response, Plato’s Hamson said “it remains to be seen how good the LIC market is after the stamping fee ban.”

“We’ve looked at it in terms of if we do another raise, and I think we’d look at an entitlements type of offer,” he says.

Overall, Coolabah’s Joye believes LICs are good for sophisticated investors who can exploit the arbitrage opportunities when they trade at discounts to their NTA.

“But I think really good LIC managers will have the ability to raise capital in the listed domain through secondary offerings, because there’s clear pent up demand for securitising a portfolio of illiquids through a listed structure.”

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