High fees and persistent discount deterring advisers from LICs

Newer-style listed investment companies are all about “extracting fees” which means there is likely to be a downturn in both advisers’ interest in the vehicle and the number of future launches.

Several listed investment companies (LICs) or trusts (LITs) had opted to move to an active structure as they had encountered problems with being closed-ended, most commonly there were trading at a persistent discount to their net tangible assets (NTA).

However, the structure had been around for over 100 years and the largest listed company, the Australian Foundation Investment Company (AFIC), launched in 1936 and was almost $10 billion in size.

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Mark Freeman, chief executive at AFIC, said this was because there were two styles of operation; the older one and the new-style one. Those that were structured in the newer way were more likely to encounter problems but it would be hard to them to be cost-effective if they opted for the traditional old-style structure.

AFIC had no external manager, performance fee or management fee. Instead, it charged 0.13% to recover its costs which was paid out of its revenue compared to many of the newer LICs which could charge more than 1%. Freeman also pointed out some charged their performance fee based on the gross return rather than the post-fee return.

“Our structure is very different to newer one which is charging high fees, we are more transparent and trade closer to our NTA,” Freeman said.

“But the newer ones are smaller, more volatile and less understood which all contributes to them trading at a discount. They are all about extracting fees.

“I don’t think you will ever see one like ours launch again, you wouldn’t be able to cover your costs if you tried to launch without a fee nowadays. If you were starting from scratch now then you wouldn’t be able to justify it.”

Other ‘old’ LICs included Australian United Investment Company (AUI) and Argo which both had similar low costs.

Newer style LICs trading at a persistent discount also dented the sector’s reputation with financial advisers, he said.

“We have seen a few LICs struggle and then financial planners use interest in them because if they put a client in one and then it starts to trade at a discount then that deters them and puts them off using one again,” Freeman said.

“Advisers should look at a company’s performance, the manager’s track record, the fees, the turnover and whether they have confidence in the structure. Newer LICs can also have high turnover which generates a lot of tax and drains returns.”

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