For many investors, Listed Investment Companies (LIC) on ASX are a convenient way to gain exposure to a diversified portfolio of Australian shares and fully franked dividends. Up to the late 1990s, most LICs invested in large-cap Australian shares on ASX.
Today, there are LICs over global equities, Asian equities, infrastructure, property, fixed income and alternative assets, such as private equity. Even within Australian shares, investors can gain access to LICs that specialise in large- or small-cap shares.
Some LICs specialise in technology stocks and emerging companies. Others focus on maximising income through stock selection and/or the use of options.
Another emerging feature is LICs providing financial returns and social returns through philanthropy (the article on LIC governance in this edition of ASX Investor Update highlights the philanthropic work of the Future Generation LICs).
The LIC sector is now so diverse that it is possible to construct and maintain a diversified portfolio entirely with LICs, although few investors would do so. Investors typically prefer to use different styles of funds or combine them with stocks.
The ASX Investment Products Report is a great starting point for data on LICs. This free monthly report is packed with useful information on LICs, Exchange Traded Funds, mFunds, Infrastructure Funds and Australian Real Estate Investment Trusts (A-REITs).
The latest ASX Investment Products Report has information on all 91 LICs and Listed Investment Trusts (LITs) on ASX. Those LICs and LITs had a combined market capitalisation of about $50 billion at end-January 2023, ASX data shows.
The ASX report categorises LICs and LITs by the asset class they invest in. That makes it easy to see what’s on offer with LICs and LITs for the asset-class exposure you seek.
The report also lists each LIC and LIT’s historical return and whether they traded at a premium or discount to the pre-tax Net Tangible Assets at the NTA date.
The article on LIC NTAs in this edition of ASX Investor Update provides an overview of LIC discounts or premiums – and how investors can use this information. If you want to invest in LICs, it’s a good idea to understand an LIC’s NTA and what that data means.
Investors new to the LIC sector should visit Investing in LICs and LITs on the ASX website. This page explains the features, benefits and risks of LICs and LITs, and has links to free information on the sector provided by broking firms and research houses.
As ASX-listed companies, LICs release company announcements via ASX. For example, a search for Australian Foundation Investment Company on the ASX website (ASX: AFI) will show AFIC’s latest announcements and other price information.
Some LICs provide market and stock commentary with their monthly announcement on their NTA – and other market-related information in their earnings results.
As with any investment, Listed Investment Companies have potential benefits and risks. Before investing, take time to understand how LICs differ from other types of funds, such as unlisted unit trusts or Exchange Traded Products.
Moreover, always understand the risks involved with LICs over different asset classes. An LIC that invests in property loans, unlisted technology companies or private equity, has a different risk profile to another that owns mostly top 100 ASX-listed companies.
Clearly, the ASX LIC and LIT market has evolved over the past two decades to offer a much broader range of tools for portfolio asset allocation. But LICs over large-cap Australian shares still dominate the LIC market, by capitalisation.
It’s also true that the main reason why the LIC market has endured for many decades – access to a potential stream of fully franked dividends – is alive and well today.
ASX Investor Update asked four LICs and LITs to comment on the outlook for their asset class in 2023.
[Editor’s Note: Do not read the commentary below as a recommendation to invest in a particular asset class or LIC or LIT. Talk to a licensed financial adviser or do further research of your own before acting on themes in this article].
This is a reversal from what we saw in financial years 2020 and 2021 when falling interest rates led to strong capital growth across the market.
Accordingly, AFIC’s focus in the near term is companies where we have a high degree of confidence in their earnings growth profile, including their ability to effectively manage cost pressures and provide attractive fully franked dividends.
In an environment where we believe that capital growth is more challenging, valuation and paying the right price is increasingly important. Overpaying in this market can lead to many years of sub-optimal performance.
In 2022, global equity markets were hit as central banks aggressively raised interest rates in response to sticky inflation. Changes in interest rates altered the valuations willing to be paid for stocks.
Over the next 12 months, the future path of interest rates and what happens to company earnings and cash flows will be key.
The future path for interest rates centres on what happens to inflation, employment and financial conditions. Although inflation is beginning to moderate, a key watch point is the labour market and we have seen job losses start to tick up. Signs of further deterioration here will be monitored carefully by central banks and will be an important consideration for possible interest rate cuts.
Catriona Burns, Lead Portfolio Manager at WAM Global
The ability to sustainably grow earnings over time is crucial to company share prices. Companies have had to operate through an extraordinary period since COVID-19 but pricing power has been high, given strong demand. Largely, they have been able to pass on inflationary pressures to protect margins.
However, it will be important to select carefully the sectors and companies that will do well in this new environment of higher rates.
WAM Global is excited by the opportunities that will be available to disciplined global investors as we look ahead. The “everything bubble” is over.
With higher rates, companies that only came into existence in a costless capital world will struggle to get further funding. Companies that are over-earning as a result of excess pricing or excess demand linked to COVID-19 could see a reset in their market values.
Key themes emerging globally that investors must consider include:
Generally, an alternative investment aims to provide a return profile that is uncorrelated to the traditional asset classes of equities and bonds.
Adding alternatives into a diversified portfolio can deliver a higher consistent return profile for the amount of risk taken within the portfolio, or a lower level of risk for a given return, in Regal’s opinion.
Institutional investors have invested in alternatives for decades, allocating upwards of 15-30%+ into the asset class. For example, as at December 2022, Australia’s Future Fund had allocated approximately 34% of its portfolio to alternatives (including private equity). [Future Fund Portfolio Update at 31 December 2022.]
Wholesale investors, such as wealthy families and high net worth individuals, have also long held significant investments in alternatives strategies.
For retail investors, however, accessing alternative investment strategies historically has been challenging. Alternatives typically have high minimum investment amounts and higher relative costs, and can require capital to be locked up for extended periods. Significant capital is therefore typically required to gain exposure to a diversified portfolio of alternative strategies.
Listed investment vehicles are one of the few structures available to retail investors that enable access to alternative investment strategies which are otherwise within the exclusive purview of institutional investors and high net worth individuals.
CRE credit can provide exposure to the growing CRE market without the risk of property ownership. Through listed and unlisted vehicles, CRE credit can also provide attractive risk-adjusted returns and, depending on the product, can provide a regular and predictable income stream through the borrower’s monthly interest repayments.
In times of rising interest rates, it is expected that returns from CRE credit investments should also increase, in Qualitas’s opinion.
As to the outlook for CRE credit, we are currently observing increased migration, low residential vacancies and housing supply shortage. These are key drivers of demand for multi-dwelling developments.
As traditional sources of finance continue to retreat from the sector with increased APRA regulation, the case for CRE credit remains positive in Qualitas’s view – providing an opportunity for alternate financiers to fill this funding gap with flexible and bespoke financing solutions to borrowers.
Two primary risks for CRE include the loss of loan principal, which is when a borrower cannot repay the loan and the security property value declines and is insufficient to meet the full loan repayment.
Second, the loss of loan income, when the cash flow from the property or other borrower sources are insufficient to pay loan interest and fees due to the lender.
Managing the above risks requires intensive asset management as this is a specialised asset class. Fund manager selection is therefore critical when investors do their product due diligence.
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