Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 219

Investors face new choices in listed vehicles

The market capitalisation of listed investment companies (LICs) and listed investment trusts (LITs) on the ASX reached almost $35 billion in July 2017, up 12% from the previous year. What is driving the interest and what are the fundamental differences between these structures?

LICs and LITs popularity boost

While LICs have traded on the ASX for nearly 100 years, it is only relatively recently that a wide range of investors have taken advantage of their benefits, spurred on by regulatory changes and market conditions.

One of the key factors driving the increased interest was the introduction of the Future of Financial Advice (FoFA) legislation in 2013. FoFA abolished the generous upfront trail and soft commission structures that had, until then, been enjoyed by advisers who recommended their clients into managed fund products. This directly resulted in an uplift in appetite from investment managers, financial advisers and investors in using LICs.

The number of LICs listed on the ASX now exceeds 100, double that of five years ago. While many people are familiar with LICs, LITs are less well known and less common in the Australian market.

So, what is the difference between LICs and LITs and what does it mean for investors?

LICs and LITs give exposure to a broad range of assets in one transaction. Both are traded on the ASX, which is appealing to a lot of self-directed and SMSF trustees.

Unlike a managed fund, however, their assets are held in a closed pool, which means they usually don’t issue new shares or cancel existing shares as investors join or leave. If investors want to exit, they have to sell their shares (or units) on the stock exchange. They can’t be redeemed.

Differences between LITs and LICs

The biggest difference between LICs and LITs lies in the way they are structured. A LIC is a company, which pays dividends to investors, whereas LITs are incorporated as trusts and must pay out any surplus income to investors in the form of distributions.

Some of the fundamental differences include:

Tax transparency

A LIC treats the dividends from underlying investments and capital gains as income on its profit and loss statement. The LIC then deducts operating costs to derive a profit before tax figure. This is then taxed at the company rate before dividends are paid.

By contrast, a LIT more closely represents an unlisted managed fund in that all net income and realised capital gains must be distributed on a pre-tax basis, and the end investor pays any taxation.

Capital gains tax treatment

A major advantage of the way LITs are taxed is most individual investors will be eligible for discounted capital gains tax concessions applicable to investments held for more than 12 months.

Corporate entities are generally not eligible for this discount, although some LICs may qualify for a concession from the Australian Tax Office to pass on this benefit to shareholders.

Ability to pass through income can lead to predictable returns

A LIT may also provide the manager with more flexibility in paying distributions, allowing them to pay out more than the underlying income levels, through a return of capital. This can be useful when the manager wants to pay out a set portion of the fund each year, to give investors a predictable income stream.

By comparison, a LIC is limited by its ability to pay dividends, requiring the accumulation of retained profits before a dividend can be paid.

With an ageing demographic of investors who will be increasingly focused on income, it is likely that more LITs will come to the market as more investors grow to understand the structure of these products and realise their advantages.

Whether investors choose to invest in a LIC or a LIT, or both, it is highly likely the growth of the market is set to continue.

 

Andrew Lockhart is a Managing Partner at Metrics Credit Partners (MCP), an Australian debt-specialist fund manager. MCP is offering investors exposure to the corporate loan market through the MCP Master Income Trust, which will list on the ASX soon. This article is general information and does not consider the circumstances of any investor.

 

RELATED ARTICLES

ETFs are the Marvel of listed galaxies, even with star WAR

How long can your LICs continue to pay dividends?

Four simple strategies deliver long-term investing comfort

banner

Most viewed in recent weeks

Super changes, the Budget and 2021 versus 2022

Josh Frydenberg's third budget contained changes to superannuation and other rules but their effective date is expected to be 1 July 2022. Take care not to confuse them with changes due on 1 July 2021.

Noel's share winners and loser plus budget reality check

Among the share success stories is a poor personal experience as Telstra's service needs improving. Plus why the new budget announcements on downsizing and buying a home don't deserve the super hype.

Grantham interview on the coming day of reckoning

Jeremy Grantham has seen it all before, with bubbles every 15 years or so. The higher you go, the longer and greater the fall. You can have a high-priced asset or a high-yielding asset, but not both at the same time.

Whoyagonnacall? 10 unspoken risks buying off-the-plan

All new apartment buildings have defects, and inexperienced owners assume someone else will fix them. But developers and builders will not volunteer to spend time and money unless someone fights them. Part 1

Buffett says stock picking is too hard for most investors

Warren Buffett explained why he believes most investors should not pick stocks but simply own an S&P 500 index fund. "There's a lot more to picking stocks than figuring out what’s going to be a wonderful industry."

Should investors brace for uncomfortably high inflation?

The global recession came quickly and deeply but it has given way to a strong rebound. What are the lessons for investors, how should a portfolio change and what role will inflation play?

Latest Updates

Exchange traded products

ETFs are the Marvel of listed galaxies, even with star WAR

Until 2018, LICs and LITs dominated ETFs, much like the Star Wars franchise was the most lucrative in the world until Marvel came along. Now ETFs are double their rivals, just as Marvel conquered Star Wars.

Shares

Four leading tech stocks now look cheap

There are few opportunities to buy tech heavyweights at attractive prices. In Morningstar’s view, four global leaders are trading at decent discounts to their fair values, indicating potential for upside.

Shares

Why copper prices are at all-time highs

Known as Dr Copper for the uncanny way its price anticipates future economic activity, copper has hit all-time highs. What are the forces at play and strategies to benefit from the electric metal’s strength?

Economy

Baby bust: will infertility shape Australia's future?

In 1961, Australian women had 3.5 children on average but by 2018, this figure stood at just 1.7. Falling fertility creates a shift in demographics and the ratio of retirees to working-age people.

SMSF strategies

The Ultimate SMSF EOFY Checklist 2021

The end of FY2021 means rules and regulations to check for members of public super funds and SMSFs. Take advantage of opportunities but also avoid a knock on the door. Here are 25 items to check.

Economy

How long will the bad inflation news last?

The answer to whether the US inflation increase will prove temporary or permanent depends on the rates of growth of the quantity of money. It needs to be brought down to about 0.3% a month, and that's a problem.

Economy

The ‘cosmic’ forces leading the US to Modern Monetary Theory

If the world’s largest economy adopted a true MMT framework, the investment implications would be enormous. Economic growth would be materially greater but inflation and interest rates would also be much higher.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.