Over the last few weeks there has been a heightened level of debate concerning Listed Investment Companies (LICs) and Listed Investment Trusts (LITs). As always, industry experts have presented thoughtful, considered positions following ASIC’s analysis provided to Treasury on LIC performance.
Clime has managed a Listed Investment Company, Clime Capital Limited (ASX: CAM), since 2004. You might think this makes us a biased commentator. Perhaps, however I think it means CAM is better placed than most to comment on the current debate.
The core arguments in the current debate seem to be related to conflicted remuneration, what clients are investing in and discounts to NTA.
The debate here seems to have quickly devolved to ‘if the conflict exists, it will be exploited’. There are various conclusions being drawn that point to the conflict being the sole reason capital has been raised. I do not believe this conclusion is accurate, or fair on financial advisers.
For perspective, per some of the recent articles on the LIC/LIT industry, the total capitalisation of listed investment structures (the majority of which were in place prior to 2015) is estimated to be around $41 billion. Yes, there have been a number of recent listings, but this needs to be placed in context with the Australian Bureau of Statistics reporting on the managed funds industry, which as at 30 September 2019 had $3.9 trillion of funds under management.
This is also a point of regulation, specifically related to advisers’ obligation to act in their clients’ best interests. Consistency in application of regulation is of course is preferable, but additional regulation is not the answer.
In the Royal Commission final report, Commissions Kenneth Hayne clearly stated: “It should be considered recognising that there is every chance that adding a new layer of law and regulation would serve only to distract attention from the very simple ideas that must inform the conduct of financial services entities:
- Obey the law
- Do not mislead or deceive
- Be fair
- Provide services that are fit for purpose
- Deliver services with reasonable care and skill
- When acting for another, act in the best interests of that other.”
Hayne said: “These ideas are very simple. Their simplicity points firmly towards a need to simplify the existing law rather than add some new layer of regulation.”
What clients are investing in
Once again, the debate seems to be that capital can only be raised driven by the conflict around ‘stamping fees’. This point should not be conflated with the requirement for accurate disclosure and matching products to a clients’ risk profile. The law is there for a reason and it needs to be complied with.
This (again) relates to the advisers’ obligation to act in the clients’ best interests. A structured credit fund investing in corporate debt of varying qualities will undoubtedly have a very different risk profile to an Australian income fund investing across the entire capital structure of companies listed on the ASX. This point must be made clear to investors at the point of providing the financial advice.
Discounts to NTA
The statistics say that most LICs/LITs trade at discounts to NTA post listing. Part of this is undoubtedly related to the costs associated with listing being borne by the manager at the expense of the investor: an undesirable structure. This has been addressed in recent listings such as those completed by Magellan and VGI Capital Partners.
Part of this is also the requirement for secondary market support to ensure new investors are made aware of the product and its benefits. Similar to newly listed entities of any sort, there is a requirement for the listed entity to hold requisite capability in managing a diverse shareholder base and keeping that base adequately informed to ensure the market in its securities is efficient.
This should not be underestimated in terms of the expertise and costs required, ultimately having an impact on the LIC/LIT trading close to or above NTA.
To ensure we are comparing ‘apples with apples’, it would also be useful to consider the performance of unlisted managed funds during the same time period (those launched post 2015) to compare how these have performed against their objectives and LIC’s issued during the same period. While of course the unlisted structures will be trading at NAV, the performance figures could be instructive.
The key question is, so what? Taking all this into account, what do Clime think makes up a good LIC?
I may be accused of talking our own book, but let’s look at the characteristics of Clime Capital Limited (ASX: CAM). CAM is managed by Clime Asset Management Pty Ltd, a wholly-owned subsidiary of ASX-listed Clime Investment Management Limited (ASX: CIW).
CAM currently has a market value of its securities (shares and convertible notes) of about $145 million and is trading at a discount to pre-tax NTA of 2 per cent (as at 21/1/20). CAM invests across sub-portfolios of large, mid and small-cap Australian equities and income through a range of listed and unlisted property and income securities. CAM’s convertible notes on issue (ASX: CAMG) pay a yield of 6 cents per annum and are trading at a 5 per cent premium to face value.
Since the GFC, the historical dividend yield of CAM has been 5.5 per cent fully franked: well above the historical ASX dividend yield of 4.4 per cent. This has been steadily rising over time, giving investors exposure to a growing income stream.
The current level of scrutiny on this part of the industry will lead to improved outcomes for all stakeholders over time, as Government consults with industry and regulators to come up with a model that meets the objectives of investors.
In listing any new investment, the following must be non-negotiable for investors:
- Receive a dollar of value for a dollar of investment on day 1;
- Ensure appropriate compensation for risk; and
- Ensure any new issues are in compliance with current regulatory requirements.
Investors should certainly consider other issues such as the expertise of the manager in not only managing the portfolio, but keeping investors adequately informed to ensure market efficiency. Regular and rising dividend yields/income returns and sensible capital management are also ‘must-haves’.
Rod Bristow is the chief executive of Clime Investment Management.