Understanding the new wave of ASX-listed investment funds

Photo of Jeff Weeden, Forager Funds Management By Jeff Weeden, Forager Funds Management

min read

Know the difference between listed investment trusts and listed investment companies.

When the Forager Australian Shares Fund was being prepared for listing on ASX last year, Forager first considered doing so as a Listed Investment Company (LIC). It was the obvious choice, the conventional wisdom. But it became clear that there could be a better structure for Forager – a Listed Investment Trust (LIT).

The fund listed on ASX as a LIT in December 2016. Since then a small number of other LITs have come to market. Now with the latest Magellan listed investment vehicle being offered as an LIT, a new level of attention is being focused on these vehicles.

This article explores the background to the LIT structure and considers some of the important differences between LITs and LICs.

The benefits of being closed-ended

Forager was initially exploring closing its existing unlisted fund to new investors. It had made consistently good returns, often because of investments in smaller, less liquid stocks. Our view was that the fund remaining small provided the best chance of it continuing to perform well.

As Forager approached the strategy’s “capacity limit”, it also looked at closing the fund to redemptions also. Closed-ended is the industry term used to describe a fund that is closed to both new investments and redemptions.

The rationale is that by being closed-ended, ASX-listed LIC and LIT structures offer the investment manager a better chance of performing well in dysfunctional and falling markets.

Closed-ended structures provide a fixed amount of capital to the investment manager.  This means they can invest when markets are falling without concern about potential redemptions from investors.

With open-ended vehicles, like managed funds (and even ETFs), the amount of money available for investment can contract as investors redeem or sell their investments.  From the perspective of the investment manager and long-term investors in a fund, this can happen at the worst possible time.

It can lead to a situation where the investment manager is forced to sell parts of the portfolio into a falling market, to provide liquidity for those investors who are redeeming their investment.

Forager wanted to ensure it could be in a position to buy attractive stocks, especially when markets are dysfunctional and stocks are being sold down; not be potential forced sellers, as otherwise could be the case, if the fund had remained unlisted and open-ended.

There are risks to any listed vehicle, the most pronounced being liquidity (the ability to buy or sell units). In Forager’s case, investors were asked to choose between an established weekly redemption process verses less certain liquidity, provided by being ASX-listed.

When listed, the ability to sell only comes about by finding a willing buyer on-market. Investors in Forager’s Australian Shares Fund weighed up all the trade-offs and voted overwhelmingly to list on ASX.

Any LIT coming to ASX requires a product disclosure statement (PDS). This document clearly states the major risks to investors and should be reviewed prior to any investment in an LIT.

Why a LIT and not a LIC?

A major reason for Forager choosing the LIT path was that it presented less execution risks to investors and the manager than if the fund had been corporatised and then listed as an LIC. The other major differences relate to governance and tax.


First, governance.  A LIC has a board generally selected by the investment manager. The board has an important role to play on behalf of shareholders, and directors have important responsibilities in this regard. They are expected to manage the potential conflict that arises from time to time between the interests of the investment manager and those of LIC shareholders.

An LIT, on the other hand, is governed by a Responsible Entity (RE), as are other registered managed investment schemes. The RE has strict responsibilities and affords investors additional protection under a detailed compliance regime.

Leading up to the Forager Australian Shares Fund being listed, unitholders voted to appoint a new independent RE, which is a subsidiary of Perpetual Limited, The Trust Company (RE Services) Limited. The independent RE appoints the registry and other service providers and arranges all external audit activity.

Capital gains

The LIC market has grown in large part because of the convenience of ASX listing. The popularity of LICs is also related to the promise that many make about steady fully franked dividends. Being a company, an LIC pays company tax, which allows it to declare franked dividends. And being a company, the board can retain earnings for future years, allowing dividends to be smoothed from year to year if necessary.

But an LIT is not a company. It is a trust and as such, each year the Forager Australian Shares Fund is required to distribute its net released gains, all net income and any franking credits it has earned from its underlying investments.

Importantly, as a trust, an investment manager may be able to elect tax treatment on the capital account.  This is potentially very important to investors.

Investment managers like Forager with lower portfolio turnover are generally buying shares that are out of favour and then holding them as long-term investments.  Investors value the concessional tax treatment they may receive in this case, just as many investors do when they purchase shares directly.

LICs are also technically able to pass through discounted capital gains.  In fact, many of the older, more established LICs do just that.  It is apparent, though, that many LICs may not be able to.  Potential investors should consult each LIC as to whether this is the case or not.

This may be of limited consequence for high-turnover investment managers, who may not hold shares for long enough to attract concessional Capital Gains Tax (CGT) treatment. It may, however, be a serious disadvantage for a “buy and hold” type investment manager and their investors.

In the 2017 financial year, Forager’s LIT generated an 11.18-cent distribution per unit. This comprised 10.86 cents of concessional capital gains, 0.32 cents of income and 1.11 cents of franking.

Other managers coming to the market now with new listed investments will probably be asking themselves how important franked dividends produced by an LIC are, versus concessional CGT treatment potentially provided by a trust structure.

Table: summary of major differences
Weeden structure table

Source: Forager. RE = responsible entity

What does the future hold for LITs?

It is likely that ASX will see more LITs come to market. Taxation of investment trusts and the ability to pass through discounted CGT to investors will probably be part of the motivation.
More likely, investors may also come to appreciate the best of both worlds that LITs offer. That is, the governance afforded by an RE, just like with a managed fund, alongside the convenience and benefits of a closed-end investment like an LIC.

About the author

Jeff Weeden is CEO of Forager Funds Management, a Sydney based fund manager, which offers an Australian Fund via an ASX listed LIT and also an unlisted international shares fund.

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