The claims of ‘flawed’ listed investment companies and listed investment trusts is a failure of selection rather than structure, according to Zenith Investment Partners’ Zenith Sector Review.
Dugald Higgins, the head of real assets and listed strategies at Zenith, reminded that LIC/LITs was long a ‘charged topic’, with soft sentiment in the sector since fee debate in Q4 2019 which caused some LICs and LITs to increasingly trade away from their underlying value.
“Most managed investments transact at their asset value, so having vehicles which can trade at discounts of 30% or more is undoubtedly an easy target for critics who claim that LICs and LITs are a flawed investment structure,” he said.
“However, we would argue that no investment structure is flawless. Each has characteristics which may be unappealing to different investors and their requirements. Rational investors should ensure they select the structure that prioritises the features they value more highly and accept that they will have to compromise on other aspects that come with this choice.”
According to Zenith’s research, the disparities in performance between LIC/LIT portfolios and their performance on the Australian Securities Exchange (ASX) could be materially reduced by adopting longer holding periods.
Also, the difference in annual returns based on whether a vehicle traded at a discount or a premium tended to vary materially in the short term (one year). However, when the holding period was expanded out to five years, data showed that the dispersion of outcomes between the investor return and portfolio return narrowed materially.
“We do not believe that premiums and discounts are an issue that can be ‘cured’, they are more simply a function of the structure and market that investors choose,” Higgins said.
“The underlying investment strategy will continue to be the material driver of returns over the longer-term and, if investors have a five-year plus holding period, the structure they have invested via should be no reason to change that view. Such a decision in itself could be flawed.”
