by James Kirby
The $40 billion Listed Investment Company sector — a favourite of conservative investors — is going to have to undertake a massive legal restructure to save itself should the ALP win power.
Geoff Wilson, one of the most powerful players in the LIC market said today he would be forced to convert the status of all the Wilson group LICs to trusts — a move that would protect both the future of the products and the returns of investors — if the ALPs goes ahead with a proposal to scrap cash rebates on franking credits to retirees.
With LICs facing serious disadvantage if the franking credit changes are made, Wilson says the costs of converting each LIC to become a trust would be borne by the manager. The majority of LICs can be expected to do the same in the months ahead unless they wish to burden existing shareholders with the costs of switching from LICs to unit trusts — many fund managers offer both options to shareholder, but LICs have been favoured due to the current tax treatment of franking credits.
LIC operators including Wilson, the Australian Foundation Investment Company and Argo face a key challenge if they don’t convert to trusts since there is already evidence investors are looking to property trusts (also known as A-REITs) as an alternative — trusts do not pay dividends rather they pay distributions consequently the franking issue is irrelevant.
At AFIC alone there are more than 100,000 investors according to the company’s submission to the franking credits inquiry. “Our shareholders feel worried, bitter and betrayed over the announced policy,” AFIC managing director Mark Freeman has suggested.
As an investment product LICs have had a remarkable revival in recent years with 16 per cent annual growth as investors turned to well-known investment leaders in the search for income — especially franked dividends.
Most LICs run a basket of shares with the investor then taking a stake in that collection of assets when they buy the product: Typically, LIC managers are long term holders who seek out shares which are trading at keen valuations.
At Argo, the storied South Australian LIC where none other than Don Bradman was once chairman, the chief operating officer Tim Binks said: “The proposal would unfairly disadvantage shareholders of LICs as compared to other vehicles such as unit trusts, this is because income received via a trust is taxed in the hands of the recipient and income received via a LIC is subject to tax before it is distributed to shareholders as dividends.”
Local investors have felt comfortable using the LIC structure to explore new areas of the market such as offshore assets or leveraged assets. Among the new players pushing the boundaries of LIC products is Morphic Ethical Equities and Antipodes Global Investment Company which offers investors exposure to long and short opportunities in global shares.
Wilson Asset Management LICs cover both local and international markets with vehicles such as WAM Capital and WAM Leaders — the company has more than $3bn under management describing LICs as the group’s “preferred structure which provides a permanent, stable pool of capital.”