LIC’s back on the radar

By Ben Abbott

IN EARLY January,Hunter Hall Internationalannounced it was in the advanced stages of planning a listed investment company (LIC), and that between $50 million and $200 million would be raised by June this year.

In doing so, the ethical fund manager joined a long line of investment managers that have recently made moves to launch an LIC, due to the attractiveness of the type of fund to themselves and to investors (see table below).

Hunter Hall chief executive David Buckland says his group recognised there was a community of investors in the market who only invest in shares, not managed funds, and that an LIC product would be complementary to them. He also says financial planners are continuing to advise more people into equities either directly or indirectly.

Wilson Asset Management is another player in the LIC market, with two existing LICs on the Australian Stock Exchange as well as a new fund, Wilson Leaders Limited, which will be closed off at the end of January.

Wilson’s chairman Geoff Wilson says the recent growth in LIC numbers has come as investors have realised the benefits of a closed pool of capital that can be invested at the manager’s discretion, as opposed to managed funds.

“Managed funds get their money flowing in at top of market and are forced to buy when equities are overvalued, and are also a forced seller of shares when they are undervalued,” Wilson says.

He says this more active and flexible management has been responsible for the ability of LICs to outperform managed funds during the recent downturn in equity markets.

Van Eyk Researchmanaging director Stephen van Eyk, who recently launched another LIC — the van Eyk Three Pillars — agrees that LICs have been attractive to investors because they manage a small amount of money actively.

He says the ability to take more active stock bets, rather than larger fund managers or funds that “keep close to the index all the time”, have also enabled them to perform well in recent times.

ASX business development manager of managed investments Michael Kolikias says LICs are also attractive to investors because they traditionally have a management expense ratio of between 0.2 and 1 per cent — much lower than the 2 to 3 per cent investors can expect from a managed fund.

Kolikias says other advantages include the ability for investors to choose to buy or sell at a price they see on the market, rather than getting the redemption a week or two later as with a managed fund, they have the related attraction of liquidity, and they also often receive fully franked dividends increasing after-tax returns.

Kolikias says from a fund manager’s perspective, now has been a good time to enter the LIC market as there is “a lot of money sitting on the sidelines” to be reinvested in the market, and that it is an opportunity to bring an innovative product to market.

However, Wilson says that the LIC market in Australia is “very immature,” and that it is a “cottage industry” compared to the UK, where LICs make up 10 per cent of the market by capitalisation.

Wilson says although the Australian market has seen a number of LICs list recently, the market has room for between 50 and 100 funds of this type, a large increase from the 20 or so vehicles available at present.

“It should get to the point where there should be 100 to 150 LICs, and if you want to invest in small caps and want to do so through an LIC you have 10 or so to choose from — not one or two,” Wilson says.

Van Eyk agrees the new burst of LICs is partly due to this imbalance in the market, as they occupy only 1 per cent of market capitalisation in Australia, which he says is “underdone”.