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Weighing up listed investment trusts

Glenn Freeman  |  31 Aug 2017Text size  Decrease  Increase  |  
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With even Hamish Douglass kicking off an IPO, there is something of a renaissance in listed vehicles, but there are some things you need to know if you're considering buying in.


Listed investment trusts (LITs) sit alongside listed investment companies (LICs) as closed-ended, pooled investment vehicles that are traded on-exchange between willing buyers and sellers.

Though little-known in Australia, their popularity is growing considerably, the recently announced initial public offering (IPO) of the Magellan Global Trust in recent weeks among the largest.

"With less than a dozen offerings currently listed on the ASX, with a cumulative market capitalisation of around $600 million, it is not a segment that has gained much airtime to date. Magellan is likely to change this," says Michael Malseed, senior fund analyst, manager research, Morningstar.

Other recent listings in this space are Evans & Partners Global Disruption Fund and another from Metrics Credit Partners (MCP), which is part-owned by National Australia Bank.

There are various reasons for the increasing prevalence of listed vehicles, including investor demand for direct-to-consumer products and relatively high levels of underlying earnings in Australian businesses.

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"There hasn't been a lot of capital raisings in the market for the last 12 months, it's been somewhat quiet, so there is pent up demand," says Phillip Win, managing director and head of advice, Profile Financial Services.

"Companies that are trying to trigger a liquidity event for founding shareholders are seeing a change in the marketplace, where there is that direct-to-consumer trend. We're seeing that through ETFs too ... the value chain is moving, and those who are trying to raise capital are seeing that trend. So rather than selling products, they're listing the whole entity," Win says.

Loyalty rewarded ...

As Morningstar's Malseed explains, a LIT or LIC will almost invariably trade at a premium or a discount to net tangible assets--the total value of the underlying holdings--depending on the level of liquidity and demand for the asset.

Investors also need to pay a broker to transact in the securities, which adds to the cost of investment. These costs are generally higher immediately prior to the initial public offering of the listed investment trust.

But in the case of Magellan's' trust, its priority offer for investors who already hold units with the fund manager as of 1 August 2017 includes a "loyalty reward". This comprises a minimum entitlement of $30,000 or 10 per cent--whichever is higher--of eligible investors' existing holdings with the manager.

"People will receive additional loyalty units equivalent to 6.25 per cent of the value of the units allotted to them under the priority offer," says Magellan co-founder and chief investment officer, Hamish Douglass--who is also delivering a keynote presentation at the Morningstar Individual Investor Conference 2017.

With an issue price of $1.50, he says, "all of the offer costs, and the cost of the loyalty reward, is going to be paid for by Magellan. It is not going to be billed to the trust, and that means the net asset value of the units on day one is $1.50 per unit--exactly what people subscribed for."

 ... or too good to be true?

Profile Financial Services' Win believes there are two ways to view this: "One can be sceptical of why are they actually doing it. Because everyone in the financial services industry has good reason to be sceptical of how institutions launch things, because there isn't a fantastic record ... but every once in a while, some do things for the right reasons."

"I think Magellan have a good track record from a corporate governance perspective ... Hamish [Douglass] is particularly connected to the end clients, and he understands those issues."

The end-play for Magellan is likely to be more about its broader strategy to increase its retail reach within the Australian market. Its recently-announced sponsorship of the Australian men's test cricket team is part of this push towards self-directed investors.

According to Win: "It's all part of an overall strategy ... nobody does anything for free, without a benefit. Sometimes in financial transactions, some people benefit more than others, and this is something of a win-win, but it may be a longer-term win for Magellan."

He emphasises the need, as in all investment considerations, for investors to conduct due diligence--preferably via a financial planner--and to be sure they're buying into such a product for the right reasons, "not just because it's new".

More from Morningstar

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Hear more from Hamish Douglass at Morningstar Individual Investor Conference 2017


Glenn Freeman is a senior editor at Morningstar.

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