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 2021 named Fictional Unity Corporation. ASX code approval still pending..
(Note some may realise this is a post republished again, that I first made in 2018. Yes I fear we may need a reminder because of the “spin” I am seeing from all the new LIC share issuance via rights, SPPs, bonus etc in 2021! That seems to be the spin area that has replaced the ASX LIC IPO boom circa 2017).
Here is some of the marketing spin that you may need to be careful of with a new LIC like this.
Spin
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.
Spin
Quarterly dividends
Reality
We are not confident in our future shareholder returns so will go for any extra gimmick that sells.
Spin
Proven track record
Reality
We have been outperforming as a team as shown from our “long term” performance dating all the way back to 2020 in the bull market! (Please don’t look at our record before that at different fund managers or with different products that failed).
Spin
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”.
Spin
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!
Spin
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. Or better yet, charge “performance” fees on any positive return!
Spin
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.
Spin
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.
Spin
Experienced independent directors
Reality
Insert a celebrity from the financial media if possible.
Spin
We can short to protect the downside
Reality
We can therefore charge higher fees.
Spin
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.
Spin
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.
Spin
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.
Spin
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.
Spin
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.
Spin
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
Maybe don’t get too easily sucked into the slick marketing campaigns on ASX LIC IPOs. Once they get the AUMs locked into a 10 year IMA deal the marketing might dry up.
Are ASX LICs a good investment?
When looking at some of the ASX LIC IPOs initial performance, perhaps we should just avoid all the LIC IPOs?
Really funny article – you must be a cynic / realist like me 🙂 I have often thought just like this for a range of companies!
Unfortunately I think you have to be a cynic as an investor. We just need to remember not to carry over too much of that attitude to life in general.
Some will read it and think of their own similar thoughts like yourself. For others who are new to LICs it could be an eye opener.
Glad it gave you a laugh anyway!
Haha, I really enjoyed this!
The worst for me is the ‘portfolio performance’ which the end investor never comes close to (with the high fee funds). And benchmarking against the cash rate is just plain slimy I think.
Fantastic! Had a good chuckle …. but then some of it is so true hey!?
Loved it! For those who are interested in reading something similar, there’s a book called The Devil’s Financial Dictionary by Jason Zweig.