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March 27, 2018

LICs: the end of the gravy train?

LICs: the end of the gravy train?

Like other listed structures, listed investment companies have experienced significant growth in recent years, with 16 IPOs in 2017 for a total new issuance of almost $4.5 bn (compared to 11 IPOs of just over $1bn in 2016), including the massive $1.5bn Magellan Global Trust.

However, Magellan has done more than just raise a significant amount of money. They did something quite different to most other LIC IPOs – and shifted the product economics to be more favourable to investors. There are four significant things Magellan did. They:

  • covered the initial costs, including those payable to brokers for helping to distribute the IPO, saving investors almost 3% of their invested capital (topic for another day: those costs are still ludicrously high and likely to come under pressure)
  • charged the same in the listed vehicle as their flagship retail fund rather than taking a higher fee from the listed version
  • paid existing shareholders and investors a loyalty reward, up to 6.75% of their investment amount
  • are also covering the cost of the 5% discount offered on the trust’s dividend reinvestment programme (costing Magellan ~$400,000 pa based on current DRP participation and target distribution levels)

All up, if the other LIC IPOs adopted the same approach this year, you could easily see close to $90m of extra money in investors’ portfolios (given $3bn of issuance and an average 3% fees)!

So, what does all this mean for future LICs?

We think this is the start of a trend that is ultimately good for consumers, but detracts from some of the commercial appeal (or abnormal profitability) of LICs. (Pleasingly, Perennial is adopting a similar approach with the initial public offering of its recently announced ETMF.) Nevertheless, the captive FUM remains a boon for asset managers – and will continue to be a significant point of attraction (notwithstanding the intensive effort required to raise the assets initially).

And there’s no reason to suspect investors would do anything other than continue to support LICs (and even more so if the chance of trading below issue price on day 1 is significantly reduced). Both SMSFs and direct investors (who are significant investors in LICs) know they need to diversify – and will continue to use LICs as a way to access alternative strategies to satisfy that latent demand.

So whilst it appears the LIC gravy train is travelling a bit lighter than it once did, Magellan has made the market more contemporary. This puts LICs on a more even footing with other structures (listed or not), and should encourage the industry to focus squarely on what is right structure for the investment strategy and investor – not just what works well for the manager.


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