Four ways to tell if LICs are right for you

By Lucy Dean

October 23 2017
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Listed investment companies have experienced “significant growth” and are being “embraced” by SMSFs looking for “direct access” to active managers, an investment service has said.

The chairman of Wilson Asset Management, Geoff Wilson has said in a Morningstar report that listed investment companies (LICs) are an “incredibly popular asset class”. Further, in the 19 years since Mr Wilson floated Wilson Asset Management capital, SMSFs have grown from 15 per cent of the total value of the asset management service to “a little over 60 per cent”.

“That is $3 million 19 years ago [versus] $720 million now. And as a sector, the SMSF sector has embraced LICs and ETFs.”

He explained that the appeal of the asset classes lay in their respective capacities to “get direct access to asset managers through the LIC structure and passive managers through ETFs”.

Continuing, Mr Wilson highlighted four characteristics of LICs that investors should be aware of when determining if the asset class is right for them.

1. “The first thing is performance,” Mr Wilson said.

“The LIC or the manager has to perform, so you [need to] look at that over one year, two years, three years and try to guess or assume what they’ll do going forward.”

2. The second factor is yield, Mr Wilson said, calling this element “very important”.

It’s crucial that investors get a good and sustainable yield, the chairman said, noting: “The great thing about the LIC structure is you can have the ability to pay a growing stream of fully franked dividends over time and the boards have the ability to effectively smooth dividends to give them to shareholders.”

3. According to Mr Wilson, the third key is the fact that “the board and the manager have to treat shares with respect”.

He explained that with LICs, it’s not about raising capital at a discount to assets or “various things like that”.

4. The fourth and final characteristic Mr Wilson highlighted was the need of LICs to “engage” with the shareholders.

“Your shareholders own the company,” Mr Wilson said. “Really, it’s to also have a communications strategy that can find more shareholders so hopefully it can drive the share price to possibly NTA or even a premium.”

Mr Wilson added that the difference between traditional and less-orthodox LICs lies in the way they are managed. Traditional LICs “tend to be internally managed and they tend to take a very long-term view and be not as active as the other group of LICs”.

“The other group of LICs – which you’d probably classify as actively managed LICs – are externally managed and they’re a lot more active in terms of how they manage their money.”

Additionally, the actively managed LICs are the more recently listed, with most listed “over the last 20 or 30 years” in that structure, Mr Wilson said.

In recent months, the question of whether the strong rate of growth of LICs will continue has been under the spotlight. Research house Zenith’s senior investment analyst Justin Tay has expressed scepticism, arguing that the growth and contraction in LIC listings is cyclical and linked to stock market performance.

Speaking in a review of the sector, Mr Tay said earlier this year: “Given this belief about the cyclicality of LIC listing growth, with investor and market sentiment key drivers, we expect that the current rate of growth in the sector is unlikely to be sustained over the medium to long term."

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