LIC ignorance costing returns: report

By Michael Bailey

Advisers are not sufficiently educated about listed investment companies (LICs) and are letting many obvious bargains go begging, according to the author of Australia’s only research report on the sector.

Wilson Investments Taurine Fund (WIT) and Hunter Hall Global Value (HHV) are just two LICs trading at such a discount to net tangible assets (NTA) that advisers are “crazy” to keep buying units in their managed fund equivalents, according to head of managed investments at Aegis Equities Research, Angela Ashton.

Aegis will this week release its third quarterly LIC report, which Ashton said has been designed to show financial advisers what they could be missing out on.

“We’ve rated the LICs in the same way that advisers are used to seeing information on managed funds, by including their tracking error and gross annual performance and things like that,” Ashton said.

While Ashton observes a “small band” of advisers are using LICs, which still attract a commission if the planner invests in them through a client’s wrap platform, she says most prefer traditional managed funds but often forego returns by doing so.

Aegis found the average tracking error of the 24 LICs it rated to be 4.9 per cent compared to the All Ordinaries, against 2.8 per cent for the average Australian equity managed fund.

“That means LICs have almost twice the potential to outperform, not to mention the tax benefits of investing through a company structure producing fully franked dividends, compared to a pass-through vehicle realising capital gains as unfranked income,” Ashton said.

She did admit the basket of LICs had underperformed the median Australian equities manager in the three years to December 31, beating the All Ordinaries by 1.4 per cent compared to 1.6 per cent achieved by the average unit trust.

The fact that LICs were currently out of favour and trading poorly, with the average premium over NTA of the biggest 10 falling from 15 per cent to 8 per cent in the past year, had thrown up some buying opportunities, Ashton said.

The report upgraded Djerriwarrh Investments, a LIC which writes call options on the top 50 companies, from ‘approved’ to ‘recommended’ on the basis its premium had shrunk from 25 per cent a year ago to 5 per cent currently.