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'It's the right thing to do': Monash LIC joins ETF ranks

Lewis Jackson  |  10 Jun 2021Text size  Decrease  Increase  |  
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Simon Shields was visibly frustrated. Despite solid returns, share buybacks, and a 2020 award for best listed product, his LIC, Monash Absolute Investment Company, was still trading at a discount.

It was an unpleasant inflection point in a 30-plus year career. The law/commerce graduate became a portfolio manager at Rothschilds in the late 1990s. At the age of 36, he was appointed head of Australian equities at Colonial First State, before moving on to UBS. In 2012, he co-founded Monash Investors.

Their LIC (ASX: MA1) launched in April 2016 and despite a 9.7 per cent annualised 5-year return, versus 10.1 per cent for the ASX 200, persistently traded at a discount, at times as high as 16 per cent.

The haircut imposed by the discount cuts into an investor’s returns on exit.

“Within two years of it listing, we thought, this is reflecting badly on us,” he said at a lunch on Wednesday, at which he announced the LIC would be converted to an exchange-traded managed fund.

“We felt it was besmirching us to be managing a LIC that was trading at a discount and we weren’t prepared to have this situation continue.”

The conversion of MA1 into an ETMF (ASX: MAAT) is the end of Shields’s LIC journey but may only be the beginning of a wider trend as other managers continue to battle persistent discounts.

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“I think that given what’s going on in the industry, probably yes,” he said when asked whether he expects other fund managers to also switch to the ETMF structure.

The new vehicle, Monash Absolute Active Trust listed on the ASX Thursday. It is the first LIC to convert in this way.

A long/short Australian share fund, it targets performance of 5 per cent above the RBA cash rate and aims for a 6 per cent annual yield paid quarterly.

It closed Thursday at $1.02 versus an indicative net asset value (NAV) of $1.0266, showing the change has successfully removed the discount.

Moving out of the structurally challenged LIC market is good news for investors, says Michael Malseed, Morningstar associate director of manager research.

“The structure of the LIC market makes it difficult for many managers to address the issue of discounts,” he says.

“Moving to an open-ended structure is a positive move for investors. But they still need to be wary of liquidity and bid-ask spreads with the open-ended listed structure.”

Persistent discounts hobble LICs

Shields’ decision is the latest move by the LIC industry to close the persistent discount many LICs trade at relative to their NTA value.

LICs are “closed-ended” funds, meaning they do not accept new applications and redemptions; and they trade openly on exchanges. The fixed number of shares ensures the capital is “captive”.

Investors who wish to exit must trade their shares on the secondary market. This is good news if the shares are trading at a premium. Most don’t.

Today, 80 per cent of LICs trade at a discount to their NTA and for 45 per cent the discount is greater than 10 per cent, according to data provided by Monash Investors.

Discounts are partly a liquidity problem, with not enough buyers to offset natural sellers. Demand has struggled since stamping fees—commissions paid to brokers and advisers for sales—were banned in July 2020.

LICs have been working to narrow discounts for years, with various funds using buybacks and better publicity, usually to no avail.

Monash has tried several buybacks as well as increased communication with investors and a larger dividend payout ratio.

MA1 was still trading at a 5 per cent discount to NAV last September.

The persistent discounts have begun to attract predators. This month, LIC provider Geoff Wilson announced he’s raising $225 million for a new LIC, “WAR”, to gobble up other LICs trading at a persistent discount.

Not all LICs have been snared by persistent discounts, writes Graham Hand in his Firstlinks overview of the sector. Well-known names such as AFIC (ASX: AFI), Argo (ASX: ARG), and Milton (ASX: MLT) have usually traded closely around their NTAs.

Hoping the ETF stardust rubs off

Monash Investors’ decision to convert to an ETMF comes as the ETF sector goes from strength to strength.

Since 2001, net assets under management in ETFs have grown at four times the rate of LICs, according to data from BetaShares.

The new Monash fund is open-ended with a dual registry. An internal market maker provides liquidity and ensures the fund trades near the NAV.

The dual registry will allow investors to buy units on the ASX or directly with the fund’s unit registry.

Shields says the move has been in the making for three years. Initial steps were held up by a 2019 ASIC review into the ETMF sector. Monash announced an implementation agreement last May, regulatory approval this February and shareholder approval in May 2021.

At a May meeting, 99.98 per cent of shareholders voted to approve the new structure.

Shields acknowledges the open-ended model could lead to big withdrawals. He expects up to 30 per cent of the assets might go but remains sanguine.

“That’s just the way the world works. Investors give you the money and they take it away,” he said.

The new structure will allow investors to vote with their feet, something Shields thinks fund managers need to accept.

“Time will tell whether people want it.

“That's the risk for any reputable fund manager, they hang up their shingle and say this is our strategy, come invest with us.

"We just wanted that opportunity for people to be able to, in the most reputable sort of way.”

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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