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LICs in fashion as investors seek diversified investments

Nicki Bourlioufas  |  10 Apr 2017Text size  Decrease  Increase  |  

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There has been a jump in the number of listed investment companies (LICs) and listed investment trusts (LITs) coming to market recently in Australia, with 95 listed on the ASX with a combined market capitalisation of more $31 billion as at 28 February 2017, up 11.3 per cent over the last 12 months.

LICs are essentially professionally managed funds, which are listed--investors can simply buy or sell existing shares in the fund on the ASX. The increase in market capitalisation of the LIC sector is a function of a number of factors, says Michael Malseed, senior analyst, manager research, at Morningstar.

"Strong market returns have driven up the asset values of existing LICs. A number of existing LICs have been active in raising new capital through share placements. And finally, there have been a number of new initial public offerings of LICs coming to market," says Malseed.

The chart below (from the ASX) indicates the market capitalisation of LICs has risen by around 300 per cent since mid-2013.

 

LIC market growth


chart


 

A new trend has been that some of the newly listed LICs have more sophisticated "absolute return" investment strategies, with the ability to go short as well as long. That means they can make money when markets fall by shorting assets, as well as deliver a return when markets are rising.

"There are a range of strategies available, from lower-fee, passive-style strategies, to higher-fee aggressive strategies. Some of the older passive-style LICs such as Argo Investments (ASX: ARG) and Australian Foundation Investment Company (ASX: AFI) charge very low fees, similar to an ETF, as they adopt a very long-term buy and hold strategy," Malseed says.

"The newer breed of LICs coming to the market tend to be more active in their trading, and typically charge higher fees, including performance fees."

A key feature reflecting their popularity is that while some LICs spent a long time in recent years trading at a discount to their pre-tax net tangible asset (NTA) value, some are now trading at significant premiums (or reduced discounts). This reflects a number of factors including the increased popularity of LICs.

"A LIC trading at a premium to NTA is a sign that there is excess investor demand for that fund, and there is an expectation it will perform well in the future. Conversely, a LIC trading at a discount is a sign of a lack of investor demand, and/or the expectation of underperformance going forward."

The Mirrabooka Investments (ASX: MIR) LIC, Silver-rated by Morningstar, is trading at one of the largest pre-tax premiums, at 25.6 per cent as at the end of February 2017, according to Morningstar's monthly LIC report.

That's followed by WAM Research (ASX: WAX) and WAM Capital (ASX: WAM), which traded at premiums of 25.4 per cent and 25.4 per cent, respectively.

These LICs have delivered strong returns to shareholders. WAM Capital has delivered a total return of 21.9 per cent over the year to 28 February, while WAM Research has returned around 23.3 per cent over the same period.

Mirrabooka has returned 15 per cent, according to the ASX February Funds Update.

From a shareholder perspective, a standout performer has been Westoz Investment Company (ASX: WIC), which delivered a total return of 47.5 per cent over the year to 28 February 2017. Notably, Westoz's shares are trading at a pre-tax discount of 9.5 per cent, compared to a sector average discount of 4.3 per cent.

"Westoz has benefited from a solid underlying performance of the fund in the past year, as well as a reduction in the discount it trades to NTA. This has resulted in a double-benefit for the share price," says Malseed.

Silver-rated AFIC, the Australian Foundation Investment Company, is one of the oldest and biggest LICs, with assets totaling almost $7 billion, and almost $5 billion invested in mostly blue-chip shares.

AFIC's pre-tax discount to NTA as at 28 February 2017 was a modest 0.4 per cent after trading at a premium in recent years. Its total return over one year has been 9.8 per cent.

"Generally, the larger and more liquid a LIC, the more efficiently it will be priced by the market," says Malseed.

"Outsized returns can certainly be made when discounts to NTA reduce, or move to a premium over time, coupled with strong underlying fund performance.

"But it's difficult to predict when this will occur. Discounts can also widen over time, particularly during times of market stress, and reduced market liquidity, which can amplify downside performance."

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.