Buying opportunities in LIC upheaval

The evolution of the listed funds market, dating back nearly 100 years in Australia, turned into a revolution over the past two years. The current discounts represent a buying opportunity.

Felicity Thomas, senior private wealth adviser at Shaw and Partners, told an investor webinar last week (August 5) that the discount opportunity for “good-quality” listed investment companies (LICs) and trusts (LITs) would not always be available.

“This is a great opportunity,” she said at the Pinnacle Investment Management Summit, which covered a range of topics relevant to the firm’s 16 affiliate managers.

The sessions on listed vehicles covered LICs and LITs, ETFs and managed ETFs and quoted funds, including “dual-access” funds which retain the original unlisted unit trust structure.

Of the Pinnacle managers with listed vehicles, Plato Investment Management (which has the distinction of running an LIC which has only once traded at a discount), Spheria Asset Management, Metrics Credit Partners, Antipodes Partners and Coolabah Capital Investments were represented.

While the discount to net asset value (NAV) is an old issue for the listed investment vehicle market, it was exacerbated during the market volatility of the past 18 months.

While apologising for what she was about to point out, Thomas said: “A lot of LICs went off a cliff in 2020… MXT (Metrics Master Income Trust) dropped from $2.00 to $1.26 last year, but the NTA was still $2.00. That was a concern for some clients.”

Andrew Lockhart, Metrics Credit founding partner, said the biggest driver of risk for the investor was the credit risk and the issue around secondary trading activity was important for liquidity.

“But the investors need to look at the NAV,” he said. “A good manager should try to protect the NAV discount … It’s pleasing for us to see the discount narrow. It’s also important to keep investors fully informed.”

Some sponsoring managers have introduced some new actions, such as conditional tender offers, to provide an underpinning of the NAV price on the market, however, there was still considerable market consolidation last year.

Thomas said that Antipodes Partners’ introduction of a conditional tender offer was “a great thing – bridging the gap and showing confidence.” There should be continuing innovation along those lines, such as off-market buybacks.

“It’s all coming out in the wash,” she said. “There are a lot of smaller LICs converting to unlisted [funds] and that’s a good thing. We should also be looking at the remaining IPO commissions… There are some really, really good LICs and we have made a lot of money from them for our clients.”

Marcus Burns, a portfolio manager at Spheria, said that his firm had a buy-back last year (for its emerging companies fund), coupled with better underlying performance and an aim to underwrite the dividend yield for the next two years, which gave the stock better visibility.

Don Hamson, Plato’s founding managing director, said the only time the manager’s listed company traded at a discount was during the political threat from the Labor Opposition to change the franking system, which possibly cost Labor the last election. He said there was a good appetite for capital raising at the moment.

“Well managed well-priced LICs will continue to be well supported,” he said, “as long as they continue to deliver on their objectives.”

To be fair to the managers, the discount issue is really an issue about the efficiency of the equities market. Once IPO commissions and marketing cost reimbursements are taken out of consideration, all that theoretically should remain is, perhaps, a discount for liquidity, compared to the unlisted market.

Emma Rapaport, the editorial manager at Morningstar Australia, said according to Morningstar’s readership there were four “thematics” in the top 10 ETFs for fund flows this year: ESG-related, commodities, oil and gold. “Bond ETFs have fallen off the map,” she said.

“We [in Australia] don’t really have a fund like ARK [the US phenomenon focused on thematics], so we have had different types of funds attracting all the interest.”

While the vast majority of flows to ETFs go to passive strategies, actively managed ETFs are gaining ground. Net assets in active ETFs have grown to about $27 billion compared with $9 billion in 2020 Rapaport said.

Australia’s oldest LIC is Whitefield Ltd, incorporated in 1923. The largest is Australian Foundation Investment Company, which started life in 1928 as Were’s Investment Trust Ltd.

In the UK, however, the first listed investment vehicle, according to Wilson Asset Management, which is a main driver of LIC consolidation in Australia, was incorporated in 1868 with the aim to provide: “investor(s) of moderate means the same advantages as the large capitalist in diminishing the risk of investing in foreign and colonial government stocks, [by] spreading the investment over a number of different stocks”.

Greg Bright

Greg Bright is a busy former full-time journalist who refuses to use the word 'retiree'. He is still trying to think of a new one.