Understanding listed investment trusts

Listed Investment Trust (LITs) have become the latest income-producing craze, with income-seeking investors starting to consider a switch to the closed-ended trusts.

What are LITs and LICs?

Firstly, listed investment companies (LICs) and listed investment trusts (LITs) are both managed investments that are listed on the ASX, and have a range of unique characteristics. LICs and LITs provide exposure to a basket of underlying shares, or fixed-income securities. Investor funds are pooled in a managed fund and are professionally managed by a fund manager. The fund is then listed on the ASX, where investors can buy and sell in the same way they can with any listed company.

“When an asset manager wants to create a listed investment company, they turn to the market to raise capital via an initial product offering (IPO),” says research firm Morningstar. “When the IPO is fully subscribed, they list the company on the ASX and issue shares to the participants. The funds raised from the IPO are then invested in a portfolio of securities which are managed by a professional fund manager.”

• A LIC is a company; its assets are held in a closed pool, and traded via the ASX.
• A LIT is a trust; its assets are held in a closed pool, and traded via the ASX.
• A managed fund is a closed pool of funds raised by investors, but it is not traded on the ASX.
• An exchange-traded fund (ETF) is an open-ended fund, and traded via the ASX.

A big difference with LICs and LITs compared to ETFs is that they are closed-ended. As SMSF research firm the SMSF Investor says, “This means that they are not issuing or cancelling shares each time someone invests or redeems, like what happens with units in managed funds and ETFs. The advantage of this for the fund manager is that they have this one pool of money to invest, and are not distracted with money coming and going from the pool. Note that they can do a capital raising at certain points in time, whereby they can go to their existing investors or go to the open market and raise more money for the pool.”

The other main difference is that the price of the securities listed on the ASX can trade at either a premium or discount to their actual underlying value. The net tangible assets (NTA) of the LIC is the value of the underlying investments. The funds are considered “closed” and cannot be redeemed. The investors that missed out on the IPO can buy shares in the LIC on the ASX. In a closed-ended structure, investors cannot pull their money out, whereas in an open-ended structure, investors can usually redeem their funds every day.

“With an ETF if the underlying value of the pool of assets being held or managed equates to $1 per unit, then it will trade at (or close to) $1. With an LIC or LIT, this is not the case. As each share or unit is traded by buyers and sellers, and it is closed-ended, the price of these securities may trade higher or lower. So in our example, if it was an LIC that was performing well and became popular with investors, then it may trade at say $1.20 per share, representing a 20% premium to the underlying pool value of $1,” explains the SMSF Investor.

Andrew Lockhart, managing partner at Metrics Credit Partners, which manages two LITs (ASX: MXT and ASX: MOT), says, “While LITs have some of the typical characteristics of a trust structure, their secure capital base can be an additional benefit to investors. Because they do not have to sell assets to meet investor withdrawals, LITs can strategically invest in longer-term assets, while still providing their own unitholders with the ability to buy and sell on market as needed. In many cases, this may give retail investors the opportunity, and hopefully the added return or diversity benefit of investing in asset classes that are usually only accessible by wholesale investors.”

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.