[Editor’s note: Before investing in Listed Investment Companies (LICs), take time to understand the features, benefits and risks of this form of investment. Like all investments, LICs have risks. The main risk is an LIC underperforming because its investment strategy underperforms the market. Some LICs can trade at persistent large discounts to their Net Tangible Assets (NTA), meaning the LIC is worth less than the value of its underlying assets. More information on LICs and Listed Investment Trusts is available here].
Australia’s longest-established listed investment company, Whitefield Industrials Ltd (ASX: WHF) completes its 100th year of continuous operation in March 2023.
The benefits to investors of durable, long-lasting investment funds can potentially be significant, in Whitefield’s opinion.
It is valuable to understand how these vehicles have served investors for so long, and why Whitefield believes LICs remain important for investors today.
Investment companies – pooled investment funds holding portfolios of investment securities – were first established in the United Kingdom in the 1860s and subsequently in Australia and the United States in the 1920s. Their emergence and growth mirrored the economic needs of the time.
Growing economies required committed long-term capital to develop vital infrastructure and to fund expanding businesses. Investors on the other hand needed investments that could provide a greater likelihood of an investment return.
The establishment of investment companies provided a conduit to satisfy both of these objectives.
Through a single holding in an investment company an investor could obtain:
By pooling and aggregating their funds with other investors in a substantially sized investment company, these services could be provided cost effectively.
In addition to these benefits, the signature characteristic of investment companies was their stable capital structure. The same as any other company, once capital has been raised, investors increase or decrease their investment by buying or selling shares amongst themselves, rather than depositing or withdrawing funds.
This structure preserves the company’s capital and allows its investment assets to remain intact.
Investors should both recognise and understand that market prices are always changing and may be cheap, expensive or similar to intrinsic value. These variations from intrinsic value are the key characteristic that is common to all listed shares – whether operating businesses or investment companies. We should not expect it to be otherwise.
Investors in shares will tend to adopt strategies suited to this pricing structure. Such strategies can include transacting progressively over time, so that cheap or expensive prices average out, or to transact when premiums or discounts are favourable.
On the back of their ability to provide long-term capital to economies, and their structural efficiency and durability, investment companies worldwide have grown steadily over the last 150 years.
Today, there are approximately 1,000 closed-end investment companies and trusts operating in the UK, USA and Australia, collectively holding investments worth around $1 trillion, according to Whitefield.
A large number of those companies have operated for more than 50 years while approximately 25 have been in existence for more than 100 years, Whitefield’s analysis shows.
The asset classes managed by Australian investment companies have developed in line with the requirements of Australian investors through the decades. Investment company listings and growth prior to 2000 primarily consisted of companies investing in Australian shares.
The late 1990s and early 2000s saw a proliferation of global share funds brought to market. In the low interest rate environment of the last decade, investor demand shifted to alternative asset classes and credit securities that offered consistency and strength of yield.
Investment companies seek to offer investors a durable and stable structure that is designed to last. The structure encourages management to adopt a long-term mind-set and to manage the business to best achieve outcomes over long time frames.
Thus, investment companies are eminently suited as providers of capital for the long-duration assets needed by most economies.
The longevity, durability and reliability of an investment manager and an investment fund are some of the most valuable attributes that an investor should consider when seeking to invest in a LIC. An investment that keeps on delivering for decades is far more beneficial for investor wealth creation than an investment that is briefly good, subsequently poor and must frequently be changed.
This attribute of investment longevity may be overlooked by some but it is highly valued by some investors. Indeed, it will be important for regulation to support sensible long-term investment and encourage structures that can provide that resilience.
Similar to their role over the last 100 years, the place for investment companies over upcoming decades is as a specialised investment structure that seeks to provide investors with the benefits of long-term investment.
General, Limited Commentary: The document contains generalised commentary and opinion relating to investment markets. It is limited in scope and not intended as a recommendation or advice. Before making any investment decision an individual should consider all information relevant to their decision, including information as to their specific circumstances and needs, the risks of investing, other investment alternatives and consider whether they should seek professional advice in forming their decision.