The growing appeal of LICs

Glenn Freeman  |  06/03/2017Text size  Decrease  Increase  |  
email_fwd

Michael Malseed: Like all investments these things are cyclicals. So, what we've seen in the last sort of three to four years is renewed liquidity in the capital markets and renewed interest in investment as a whole.

So, the listed investment market has taken advantage of that and we've seen a lot of IPOs come to market and a lot of capital raising among existing listed investment companies. So, in total, around $3 billion has been raised since 2013.

The popularity from the investors' side has come mainly from the ease of access to these investments. So, they can be traded through an online broking account or through a traditional stock broker. So, this has appeal to individual investors and also self-managed superannuation funds which are obviously a growing part of the market.

So, a listed investment company is a professionally-managed fund by an investment manager listed on the ASX. The other alternative for a professional manager of money could be to have a unit trust. They go down the listed company path because they can raise a significant amount of capital in one go through an IPO.

So, they could raise $100 million, $200 million in one go as opposed to raising money slowly through a unit trust. So, when investors have demand for this type of product it's quite appealing for investment managers to use, tap into this capital and raise that money quickly. So, that's one of the reasons why we've seen a lot coming to market because it's tapping into that investor demand.

As with any professional investment manager, the quality of the manager and their ability to generate adequate returns or superior returns for you is first and foremost important. So, that's the same as with the unit trusts or any other type of investment.

Uniquely to a listed investment company is how they trade on the ASX. Shares in a listed investment company trade on the ASX and it's the meeting of willing buyers and willing sellers to trade at a price.

Ideally, it should trade at the net tangible assets of the fund or the value of the investments in the fund. But often due to a lack of liquidity in the market the price traded on the ASX can be quite different. And that's when we talk about a share price being at a discount or a premium to NTA.

We've looked historically at the data. Typically, larger and more liquid LICs that are more established would trade closer to NTA.

Some listed investment companies can trade at a big premium if there's a lot of new investor demand into the fund and existing shareholders aren't willing to sell at a price. So, popular LICs can trade at a premium.

Investors should be aware they are paying over the net tangible assets of the fund, so there's a risk that if that premium unwinds at any time then they could bear losses associated with that or that could eat into any gains that the fund makes in NTA.

Often LICs below a market cap of $300 million with limited liquidity can trade at quite sizable discounts and those discounts can widen over time, particularly during periods of market stress.

So, that's an important consideration for investors. That information is available on Morningstar's website. We produce a monthly report. The listed investment companies publish their net tangible assets at the end of every month and we provide a report showing the share price relative to their NTA, so you can see how far out of the market some of these LICs are trading at.

Video Archive...

Did lack of transparency cause the financial crisis?
19/09/2017  Ten years after the collapse of Northern Rock, Andy Agathangelou tells Emma Wall that greater transparency in financial services could ward off a second global financial crisis.
Are we facing another Global Financial Crisis?
19/09/2017  Ten years on from the collapse of Northern Rock, Dan Kemp tells Emma Wall how there are echoes of the crisis in markets today.
Wild ride in FY17 and more to come - part 2
13/09/2017  Morningstar's Peter Warnes discusses how you may want to position your portfolio in FY18, as geopolitical storms continue to rage and safe-haven assets feel the effects.
Wild ride in FY17 and more to come - part 1
12/09/2017  Cost-out remained a dominant theme for large-cap Australian companies in FY17, and looking ahead to FY18, they should be clearer on cap-ex, says Peter Warnes, Morningstar’s head of equities research – Australasia.
Deeper demand driving these pooled investments
31/08/2017  Listed investment trusts are beginning to take off in Australia, but exactly what are they and how do they differ from listed investment companies and managed funds?
Upbeat Woolies result tempered by Big W
30/08/2017  Woolworths' category-topping FY17 result driven by surprisingly strong sales, even as sector faces tougher times ahead, explains Morningstar's Johannes Faul.
Coke Amatil 1H17 result leaves margin of safety
28/08/2017  A challenged earnings announcement from Coca-Cola's Australian-listed business was largely expected, but downside is already priced in and improvements are expected in FY18.
How slashed Telstra dividend affects our outlook
23/08/2017  Brian Han remains reasonably positive on the telco giant even after some disappointments in the FY17 earnings announcement.
Earnings season FY17 mixed bag so far
18/08/2017  Aside from a few high-profile earnings guidance misses, large-cap stocks are doing okay as FY17 reporting season passes halfway, says AMP chief economist Shane Oliver.
Rio Tinto posts mixed result for 1H17
10/08/2017  An interim result of US$3.9 billion in net profits after tax for one of the world's largest mining companies was positive but slightly weaker than expected, even alongside a record dividend, explains Morningstar's Mat Hodge.
Kerr Neilson on why global investment exposure is key
07/08/2017  There are two types of investors, regardless of market noise, imputation credits, diversification approaches and market indices, says the managing director of Platinum Asset Management.
Finding fixed income opportunities in new paradigm
02/08/2017  Slowing economic growth in the US and parts of Europe emphasises the need to carefully select credit opportunities, says Vincent Reinhart, chief economist, Standish Mellon Asset Management.
Telstra won't be blown away by headwinds
17/07/2017  While it faces what Morningstar equity analyst Brian Han describes as a whirlwind of negatives, he suggests investors shouldn’t hang up on Telstra.
The home-truths of investing
12/07/2017  Look for companies that sit outside the cycle; heed the lessons of history; and remember the power of compounding, says Bennelong's Neale Goldston-Morris.
Self-managed super is not Do-it-yourself
03/07/2017  There are a few common pitfalls in running a self-managed super fund that mean trustees shouldn't go it alone entirely, says BT Financial Group's head of financial literacy, Bryan Ashenden.
Investing to protect on the downside
30/06/2017  There are investment strategies you can adopt to mitigate volatility-linked fear and uncertainty in markets, explains Roy Maslen, chief investment officer – Australian equities, AllianceBernstein.
Don’t overdo benchmark consideration
28/06/2017  Being benchmark agnostic is the most effective approach to fixed income investing, according to Anujeet Sareen, portfolio manager, Brandywine Global.
Factor-based investing using ETFs
26/06/2017  Investors should consider style-exposures--such as value, defensive or yield-- they would like in their portfolios, explains Jonathan Shead, head of portfolio strategists – Asia Pacific, State Street Global Advisors
Volatility plays to active manager strengths
--  The climate of political volatility in the US holds important implications for investors and the funds they invest in, particularly around Donald Trump's ability to pass legislation through Congress, says Pimco's Libby Cantrill.
Is the FTSE 100 Facing Another Market Crash?
16/06/2017  Ten years on from the pre-crisis FTSE 100 high, Morningstar UK's Emma Wall examines how UK stocks have fared