LICs haven't joined in market recovery

Interest in listed investment trusts and companies (LITs and LICs) remains in the doldrums, as the sector has failed to capitalise on the extraordinary gains made across the Australian market.

The LIT and LIC sector market cap rose 8 per cent to $43.7bn between March and the end of June, according to Morningstar data.

Yet the ASX200 has gained 34 per cent since the nadir of March 23, when the market plunged as both the severity of the COVID19 pandemic and the oil crash combined to tank sentiment.

The broadest ASX tracking exchange traded fund (ETF), Vanguard’s ASX300 (ASX:VAS), is up 33 per cent since that low five months ago.

100-year industry is ‘steady’

Listed Investment Company and Trust Association (LICAT) chairman Angus Gluskie says the industry remains “steady”.

“LICs and LITs have been assisting investors in growing their wealth for nearly 100 years,” he said.

“The efficiency and stability of their closed-end structure coupled with the corporate governance disciplines of ASX listing have proven to be far more durable than many other investment structures.”

An LIC or LIT is a listed entity that owns shares in a range of assets including equities, real estate and bonds.

The largest LIC, Australian Foundation Investment Company (ASX:AFI), in the past was a favourite pick of Barefoot Investor Scott Pape which has made it particularly popular with amateur investors, although recently he said he now prefers ETFs for cost effective, dividend yielding investments.

Discounts and (alleged) conflicts

In addition to strong competition from the rapid rise of ETFs since 2009, the LIC industry suffered a dual reputation hit from late 2019.

Wide discounts between LIC share prices and the value of the underlying assets were exposed late last year, followed by a campaign against payments made by an LIC or LIT to brokers for selling to their clients into an IPO or capital raising.

In May, Treasurer Josh Frydenberg said the federal government would ban these fees on LICs, LITs and real estate trusts (REITs) in a bid to flush out conflicted remuneration, to the consternation of the industry which claim they are actually a fee for the work of marketing deals to clients.

Hayden Nicholson, LIC specialist at broker Bell Potter Securities, says the market turbulence is a chance for LICs and LITs to work on the share price discount to underlying portfolio value by rebalancing their investments and buying “financially strong securities at a lower cost”.