Here we discuss our views on Listed Investment Companies (LICs)...
At the end of November, I wrote an article about the recent de-rating of the LIC and LIT sector in the wake of the Royal Commission, with the overall view that the conflicts within the sector were being exposed and were steering investors away. A sector that has seen incredible growth – $25bn has poured into LICs and LITs since 2014 – and has traditionally seen strong ratings from the market relative to net tangible asset backing (NTA), we have started to see new listings slow down and existing names start to trade at lower levels relative to NTA. Our argument was that these vehicles were highly conflicted and hence the recent change was a structural rather than cyclical one, and that existing investors needed to take this into account when determining whether to maintain their investments going forward.
I was very interested to see that at the beginning of the month documents released by the government revealed that the Australian Securities and Investments Commission (ASIC) warned Treasurer Josh Frydenberg about the consumer “detriment” caused by LICs and LITs paying financial advisers and stockbrokers to boost inflows in poorly performing products. As a director of a company with an AFSL and with a client base investing on our guidance, I am directly aware of LICs offering these ‘stamping fees’ to advisers – fees not offered for unlisted open-ended funds that come without conflicts – and undoubtedly have played a role in the staggering growth of the sector.
The arguments from within the sector are the usual ones and suggest that advisors need to do their best to ensure that their clients’ best interest come first, but how could an advisor ever steer an investor towards an LIC when the same product is offered, conflict-free, through an unlisted trust?! The short answer is that the ‘stamping’ fee plays a huge role in this advice and is just one more conflict in a structure that in my view has far more benefits for the fund manager than the investor.
This bombshell report also calls on legislative changes that would likely impinge further on the growth of the sector, and certainly won’t help sentiment around the existing names on the ASX. I remain of the view that all LICs trading near or above their NTAs offer a higher level of risk than they have typically represented, and investors should consider whether there are better alternatives for their capital.
If you would like to review the original article written in November please click here.
