LICs and their net tangible ailment
The decision by Monash Investors to convert its listed investment company to an ETF could set a trend.
Simon Shields didn’t bother hiding his exasperation this week as he announced that his firm Monash Investors had bitten the bullet and decided to convert its listed investment company to an active exchange-traded fund. As Lewis Jackson reports, it’s the first LIC to make such a move but it probably won’t be the last, Shields told investors on Tuesday.
And as Monash itself notes, 80 per cent of LICs trade at a discount to their net tangible assets or NTA, and for 45 per cent the discount is greater than 10 per cent. There are several reasons why LICs—prized for consistent dividend payouts and tax advantages—may trade at a discount to its NTA. According to Chris Stott, founder and portfolio manager for 1851 Capital, they include:
- Poor investment portfolio performance, or for newer LICs, having no established past performance.
- Lack of fully franked dividends, a poor track record of paying them, or a perceived inability by the market to pay fully franked dividends in the future.
- Ineffective marketing and communications resulting in the failure of the LIC to raise its profile among prospective investors or build an understanding relationship with existing shareholders.
A couple of days after Shields’ announcement, ETF provider BetaShares chimed in with news of the further growth of ETFs. Since the launch of the first Australian ETF in 2001, the industry has grown at about four times the rate of the LIC industry, BetaShares says. And, since the abolition of commissions paid to brokers by LIC sponsors in May 2020, Australian ETF products have grown by 21, against a net reduction in Australian LICs of 10 products.
Source: BetaShares
However, not all LICs have been snared by persistent discounts, writes Graham Hand in Firstlinks this week. Well-known names such as AFIC (ASX: AFI), Argo (ASX: ARG), and Milton (ASX: MLT) have usually traded closely around their NTAs.
Hand also hears from Staude Capital’s Emma Davidson, who backs up statements made last week by Jeremy Grantham about toxicity and declining birth rates, drawing out implications for retirees and economic growth.
Elsewhere this week, Emma Rapaport reports on iShares’ unorthodox play for the ESG ETF market. The switch to sustainable benchmarks compels investors who remain in the funds to adopt its new investment philosophy.
Wesfarmers remains expensive despite its online push. Australia's best-known conglomerate has spent more on ecommerce, but the stock market is possibly overestimating its growth potential, says Johannes Faul.
We speak to Callum Burns about how his ICE Investors fund identifies small cap companies with original products and sticky customer bases.
Morningstar has begun coverage of Pinnacle. Backing the right horses has earned the multi-affiliate investment management firm a narrow moat rating in Shaun Ler’s view.
NAB has had its turn to face AUSTRAC's wrath. Nathan Zaia weighs the ramifications.
Lewis Jackson’s chart of the week suggests why you should expect to be retired for a long time.
Low rates and high commodity prices have boosted growth and household spending, writes Nicki Bourlioufas, who explores the companies set to benefit.
Margaret Giles outlines what you need to know about the US$1.2 billion IPO of financial technology start-up Marqeta.
And finally, in Your Money Weekly, Peter Warnes argues the climate and ESG narrative is choking the life out of the oil and gas industry. “Under the weight of climate change and ESG narrative, investors are shunning the sector with increasing belief that oil and gas will not have a future beyond 2040,” Warnes writes. “Is that a realistic conclusion or could there be an opportunity?”
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