How to buy ASX Listed Investment Companies (LICs)

Or not to buy?

Don’t fall for the hype of conflicted advice on ASX LICs IPOs and get hit with commissions

Warning fictional post about an IPO of an ASX Listed Investment Company (LIC). There is so much cheap money around I fear that if I don’t include such a warning, some will think this is real and want me to send them the prospectus!

Ok I come across so many articles about what to look for in an investment to buy, so I figured one that covered what factors to be wary of might be interesting. 

The LIC universe has been expanding at a rapid pace. Let’s imagine say, there is talk of a new LIC in 2018 named Fictional Unity Corporation. ASX code approval still pending..

Here is some of the marketing spin that you may need to be careful of with a new LIC like this.

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Targeting a 6% yield

Reality

We know Australian retail investors have an obsession with yield. We know this will have bugger all relevance to the total shareholder return but hey, it sells. This headline figure will be large and on the front cover, maybe insert a picture of a retired older investor at the beach smiling over a cup of tea.

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Quarterly dividends

Reality

We are not confident in our future shareholder returns so will go for any extra gimmick that sells.

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Proven track record

Reality

We have been outperforming as a team as shown from our “long term” performance dating all the way back to 2014 in the bull market! (Please don’t look at our record before that at different fund managers or with different products that failed).

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Positive alpha over many years

Reality

Our performance is expressed as returns grossed up to include the benefits of franking. It is before taking into account management fees, performance fees, director’s fees, admin fees, marketing fees. It is measured against the All Ordinaries Index (not the accumulation version, so this index does not include dividends). Going forward it will be expressed without taking into account the dilution to NTA from multiple capital raisings to “pursue other opportunities”.

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Competitive fee of only 1% per annum.

Reality

Lets just ignore that we may only raise $30 million, so when we consider director’s fees, admin costs etc, the base leakage of fees may be closer to 3% each year!

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Modest performance fee to align interests

Reality 

Only 20% of outperformance over the benchmark. As we are an “absolute return” fund, let’s be cheeky and make the benchmark the RBA rate.

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Manager shareholding to align interests

Reality

The fund manager owns 19% of the shares, so that our interests are aligned with that of shareholders. Except for the fact that we also get paid management fees, and will use this voting power to ensure our clients are locked in the fund for a long time.

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Long term IMA for stability

Reality

We want to be paid for as long as possible no matter how badly we perform. If not pay us a break fee.

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Experienced independent directors

Reality

Insert a celebrity from the financial media if possible.

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We can short to protect the downside

Reality

We can therefore charge higher fees.

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Pleased to give you 1:1 bonus options

Reality

We are pleased to double our ongoing fee revenue should we fluke a good first 12 months, but also dilute the upside to your NTA at the same time.

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We invest in global disruptors

Reality

We are momentum investors. And we were not smart enough to launch this product in 2011, when the AUD was high.

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Flexible Capital Management Policy

Reality

If the shares trade at a 20% discount to NTA we won’t buyback shares as that will reduce our fee revenue.

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Slightly reduced NTA at time of listing

Reality

Will probably be circa 96 cents on day one, rather than the $1 you pay at IPO. Sorry but there are listing costs. At least you can be comforted LIC IPOs generally trade at premiums to NTA after the first year anyway. Oh hang on, they are often at big discounts.

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Cautiously optimistic initially

Reality

We haven’t got a clue how we will invest the funds, but saying this we can kind of say we were right no matter what happens at a later date.

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Expecting volatility / stock pickers market

Reality

We haven’t got a clue how we will invest the funds, but saying this we can kind of say we were right no matter what happens at a later date.

 

CONCLUSION

Don’t get sucked into the slick marketing campaigns on ASX LIC IPOs. Once they get the AUMs locked into a 10 year IMA deal the marketing will dry up.

Are LICs a good investment?

As a general rule for most investors and especially inexperienced ones is to just avoid all the LIC IPOs.

When it comes to LICs and secondary markets, my other “rules of thumb” for inexperienced investors to consider are..

Paying NTA or premiums is usually a mug’s game. Be wary of irrational premiums circa 20% plus for example that often exist on the likes of WAM Capital Limited (ASX:WAM) & WAM Research Limited (ASX:WAX).

If you really want a “hands off approach” to investing, a very large majority of the 100 plus LICs are not the way to go. Management fees are a killer.

If you are new to investing and really like the structure of the LIC model, those with low fees and a more passive approach are preferable. I am referring to the sorts of ASX LICs that the barefoot investor and Peter Thornhill usually suggest.

My take on that is if they are sometimes at discounts to NTA in that 5-10% range they are more worthy of consideration. However occasionally they can trade at 10% plus premiums. In those circumstances I often scratch my head and wonder why investors don’t opt for similar exposures via ETFs.

Anyway these “grandfather” or “old school” LICs I refer to here would be ones such as Australian Foundation Investment Company (ASX:AFI), Argo Investments (ASX:ARG), Australian United Investment Company (ASX:AUI), Diversified United Investment Company (ASX:DUI) and Milton Corporation (ASX:MLT).