The growing appeal of LICs

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

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...

Which funds are worth paying for?
23/03/2017  High active share funds--that is, those managers who take off-benchmark bets--outperform those which are low active share. So, ban closet trackers from your portfolio.
Bond market wobbles no cause for panic
21/03/2017  Australian bonds see only a slight tremor in response to the Fed's rate rise, says John Likos, Morningstar's senior credit analyst, who also provides insights on the new, and anticipated, hybrids from Australian banks.
ESG: Essential steps for successful long-term investing
21/03/2017  Want sustainable long-term returns? Morningstar UK reveals the essential components and the fund providers who are getting it right.
Few values left in global stock market
20/03/2017  Morningstar's directors of equity research think investors need to be cautious in the market today and offer some of their best investment ideas.
Why the time is right to invest in emerging markets
20/03/2017  Hilde Jenssen from Norwegian fund manager Skagen admits that emerging markets have disappointed investors over the past three years--but says valuations are attractive and reforms are boosting returns.
Johnson: Fed's path may not be smooth
16/03/2017  The Fed's plan for stair-step rate hikes in the coming years will likely be derailed by economic reality, says Morningstar's Bob Johnson.
First-half 2017 earnings season insights
15/03/2017  Companies produced reasonably good results overall with only a few standouts, even as a cost-out theme dominated, says Peter Warnes, head of equities research, Morningstar.
The growing appeal of LICs
06/03/2017  The popularity of listed investment companies is on the rise once again, but there are several things investors need to be aware of before buying in, explains Michael Malseed, Morningstar senior analyst, manager research.
Earnings season wrap: BHP exercises good cost control
27/02/2017  As the curtains close on the 1H17 reporting season, BHP books earnings that are slightly softer than expected, while Woolies takes market share at the expense of margins.
Possible $2.5bn tailwind to drive hybrid demand in 2017
22/02/2017  Strong supply dynamics and ongoing economic stability should create significant opportunities for hybrid investors in 2017, according to John Likos, senior credit analyst, Morningstar Australia.
Earnings season wrap: Telstra feels competitive heat
17/02/2017  As the 1H17 earnings season rolls on, Wesfarmers posts a bumper profit, Newcrest restores its interim dividend, while Telstra's profit falls as it feels the heat of intense competition.
Earnings season wrap: Rio Tinto's dividend surprises
10/02/2017  Rio Tinto delivers a surprise full-year payout of US$1.70, NAB records a soft first quarter, and CIMIC posts an annual net profit in line with Morningstar's expectations.
Leveraging the opportunity of international students
07/02/2017  Co-founder and CEO of Navitas, Rod Jones, explains the firm's business model, which is built largely around international students and university partnerships.
Xero CFO gives outlook for 2017 and beyond
02/02/2017  Sankar Narayan, chief operating and financial officer of accounting software firm Xero gives his insights on the company's business model and outlook, with Morningstar analyst Gareth James adding his views
Asia growth engine not threatened by Trump, says Barings
30/01/2017  Long-term investors in China and wider Asian equities should not worry about President Trump, says Barings head of Asian equities Hjung Jin Lee.
Shifting fortunes for ANZ, more of the same for CBA in 2017
12/01/2017  Australian banks are well-positioned as they head into 2017, with ANZ moving from least profitable in 2016 to become one of the sector's top performers and CBA remaining an investor favourite.
Is Trump a threat to emerging markets?
12/01/2017  Is President Donald Trump a threat to emerging market returns? Paul Jackson from the UK-based Source ETF considers the outlook for sector and where investors can find the best opportunities.
Platinum, Aussie banks and Peter Warnes among top interviews of 2016
22/12/2016  We look back on some of our most notable interviews of the year, as Morningstar analysts and external experts helped us delve into some of the biggest events that shaped Australian and global markets in 2016.
Oil price finds sweet spot, while mining hits rock bottom
20/12/2016  The rise in oil prices should see improved performances from Australian producers in 2017, while mining services companies will continue to struggle amid weaker Chinese demand, says Morningstar equity analyst Mark Taylor.
How Greek mythology can make you a better investor
07/12/2016  Don't be over confident or follow the herd, and like Odysseus, learn to have yourself "tied to the mast" when it comes to long-term investing.