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LICs continue to tap into investor demand

Anthony Fensom  |  08 Oct 2018Text size  Decrease  Increase  |  
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With a number of new listed investment company launches anticipated before year-end, Anthony Fensom looks at what investors can expect in fiscal 2019.

Buoyed by some major new listings, the LIC sector reached nearly $39 billion in market capitalisation as at 30 June 2018, up a healthy 19 per cent from the around $33 billion in market value recorded a year earlier.

Among the largest LICs in market value as at 31 July were Australian Foundation Investment Company (ASX:AFI) at $7.5 billion, Argo Investments (ASX:ARG) at $5.8 billion and Milton Corporation (ASX:MLT) at $3.1 billion, according to ASX/Morningstar data.

Morningstar senior analyst, manager research, Michael Malseed, says about half the market growth has been due to investment returns, with the S&P/ASX200 index touching new highs at the end of fiscal 2018.

The rest has come from new share issues, including several large initial public offerings (IPOs).

"Magellan Global Trust (ASX:MGG) remains the largest LIC (or technically LIT) issue in FY18, raising $1.57 billion in October 2017. L1 Long Short Fund (ASX: LSF) was close behind, raising $1.33 billion in April 2018," he says.

"Other large raisings over the financial year included MCP Master Income Trust (ASX:MXT) which raised $516 million in October 2017, followed up by a $303 million entitlement offer in February 2018, and WAM Global (ASX:WGB), which raised $465 million in June 2018.

"These LICs tapped into investor demand for global investments (in the case of MGG and WGB), alternative income strategies (MXT), and absolute return strategies (LSF)".

Yet more IPOs are expected, with media reports projecting up to half a dozen more LIC raisings before the end of 2018.

ASX exchange listing

Further IPOs are anticipated before the end of 2018

Among those in the pipeline are Firetrail Investments, whose Firetrail Absolute Return Fund aims to raise up to $378 million, based on a "market neutral" strategy.

Others include Tribeca Investment Partners, which is reportedly planning a $300 million resources investment fund based on its Global Natural Resources Fund, while Cadence Capital is said to be eyeing a $250 million LIC for "active trading" opportunities.

US-based Neuberger Berman is eyeing a minimum raising of $150 million for its global high-yield bond fund, while Hyperion Asset Management could also launch a global equities LIC.

Yet it has not been entirely smooth sailing. In August, PM Capital withdrew its planned $500 million LIC raising, after failing to reach the minimum offer size of $105 million.

LSF's release of "underwhelming" performance numbers shortly after its float also disappointed investors.

Nevertheless, LICs remain popular, including with self-managed super fund investors.

While such products have featured on the local bourse for more than 80 years, reductions in fees and other incentives have helped encourage greater investor interest in recent years.

LICs' predictable dividend streams, simple tax treatment and potential capital growth have made them particularly popular among SMSF trustees, according to Morningstar’s Malseed.

Top-rated LICs

Morningstar describes its qualitative manager research as assessing managers "based on how we believe they will perform in the future over an economic cycle, against both peers and accepted benchmarks. Our model rewards managers which are open and transparent, have a well-run investment process and importantly, are good fiduciaries of investors’ monies".

Among those currently favoured by Morningstar analysts are MGG, which is "highly rated given our positive view of Magellan’s team and process," Malseed says.

"We rate Platinum Capital (ASX:PMC) highly for similar reasons. We also like AFI, which is a traditional buy and hold LIC focussed on long-term investing and the generation of a growing fully franked dividend stream".

Amid speculation by fund managers such as Geoff Wilson that the bull market is "nearing the end," Malseed suggests a downturn would hit both asset values and share prices.

"In a downturn LIC investors bear the risk of both a decline in underlying asset values, and the potential for the LIC share price to trade at a discount to net tangible asset backing," he says.

“Historically the level of discount on premiums has been quite cyclical, but is less of a concern for long-term investors.”

Nevertheless, "as long as markets remain buoyant, further equity issuance and IPOs are likely," he added.

And with fund managers favouring the sector, Australian investors likely will have even more LICs to choose from in the year ahead.


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Anthony Fensom is a contributor to Morningstar Australia. 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.

© 2018 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. The article is current as at date of publication.


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