Time to call BS as LIC/LIT debate ignores key complexities and conflicts
The debate on stamping fees for LICs/LITs has become increasingly heated with aggressive lobbying by some and various industry participants simply latching on to whatever has been written that supports their preconceived view that stamping fees should either be banned, or kept, with little or no attention to details and complexities of the issue.
In particular, below I discuss some of the complexities in the debate you won’t find in the simplistic, exaggerated, conflicted writings of Chris Joye, by far the most vocal lobbyist on the topic. For example see “Frydenberg integrity faces first test case” Weekend AFR, 1-2 February.
- The Treasury public consultation also covers the $150b AREIT sector, more than 3 times the size of the LIC/LIT sector. A case could be made for the public consultation to also include the stamping fee exemption relating to all listed entities that do on-market capital raisings (hybrids, infrastructure funds, holding companies, operating companies etc.) as all appear in adviser/broker portfolios and all have the same potential for “conflicted remuneration”.
- Stamping fees are generally 1 to 1.5% not the 3% plus figures some are talking about. It seems some are adding lead arranger/manager/corporate fees to distribution/stamping fees paid to advisers/brokers in coming up with these higher numbers. Yet part of the arranger/manager fees are paid to third parties to cover roadshows, marketing material, business development etc i.e. items that for unlisted managed funds are already paid on an ongoing basis, either by the manager or the fund itself, and clearly no one is asking for these to be banned.
- Many advisers who are already charging clients annual fees are rebating part, or all, of these stamping fees meaning those investors are accessing LICs/LITs at a slight discount to the initial NTA/IPO price. (Remember, managers are increasingly covering all costs at LIC/LIT IPOs, a vast improvement from several years ago where investors wore all these costs). If the stamping fee exemption goes so does the potential investor benefit of these rebates.
- Chris Joye’s business, Coolabah Capital, runs unlisted credit funds and an active ETF investing in hybrids which are in direct competition with the new credit LITs raising most of the recent money and which his articles continually criticise. Interestingly, one of his general criticisms of LICs/LITs is that they trade at a discount to NTA after IPO, yet the credit LITs he has criticised most are almost all currently trading at small premiums.
- Some articles have targeted the “high management fees” on these credit LICs/LITs. Many unlisted funds also have high fees. Over 2019 the difference between gross and net returns on the Coolabah Capital/Smarter Money High Income Fund was 1.06% with the combined management/performance fee taking almost 24% off the 4.38% gross return for a net return of 3.32%. On the Coolabah/Smarter Money Long/Short Fund the difference between gross and net return was almost 3%, taking almost 30% off the gross return of 9.7% for a net return of 6.82%.
In the interest of disclosure, starting last month, I do some consulting work for LICAT which represents LICs and LITs and, amongst other projects, is working towards solutions on the stamping fee issue.
Personally, though, I don’t have a particularly strong view for, or against, the continued existence of stamping fees on LICs/LITs in their current form. What I do know though, having properly analysed the ASIC data from the recent AFR Freedom of Information (FOI) request (something the AFR and Chris Joye seemingly forgot to do) is that the size of the “problem” and level of “LIC/LIT mis-selling” has been greatly exaggerated. See the Livewire article “The LIC/LIT ‘mis-selling crisis’ is grossly exaggerated and the key issues widely misunderstood.” 14th January 2020.
What I am against is overly simplistic, excessively narrow solutions to the stamping fee issue that ignore real world complexities and result in knee-jerk policy responses that cause worse problems in the future.
I’m also against exaggerated reporting, hypocrisy and shameless lobbying by fund managers writing for the financial media without adequately disclosing all relevant conflicts. In 35 years in financial markets I cannot think of another example of a fund manager being so ensconced within Australia’s leading financial newspaper with seemingly no editorial scrutiny over what is written.
Please note the AFR did show interest in publishing a version of this piece in their newspaper but unfortunately it could not be cut down to the 250 word maximum they required.
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Dominic has been involved in investment markets and financial services for more than three decades. He currently consults to a range of organisations in in the areas of investment research, investment strategy and listed funds.