Geoff Wilson AO
Chairman, Wilson Asset Management
Ian Irvine
Chief Executive Officer, Listed Investment Companies and Trusts Association (LICAT)
Wilson Asset Management Chairman Geoff Wilson AO and Listed Investment Companies and Trusts Association (LICAT) Chief Executive Officer Ian Irvine sat down to discuss the appeal of investing in closed-end funds in Australia. They discuss why listed investment companies are the thinking person’s investment vehicle and the growing interest from younger investors.
Geoff Wilson: Today, I’m joined by Ian Irvine, the CEO of the Listed Investment Company and Trusts Association. Welcome, Ian.
Ian Irvine: Thanks, Geoff. Great to be with you.
Geoff Wilson: Could you give us an idea of what’s been happening in the Listed Investment Company space?
Ian Irvine: Certainly. There has been some consolidation going on, which seems to be getting a lot of attention in terms of commentary about LICs and LITs. However, it’s more than just that. While the numbers are coming off due to consolidation, companies are merging within the sector. The sector’s market cap remains around $50 billion, which is consistent.
We’ve also noticed that LICs, well-known for their equities component, are growing. Additionally, there’s a greater exposure to underlying assets such as global investments and fixed income through the listed investment trust structure.
Geoff Wilson: What about the open-ended structure? ETFs have the ability to grow, whereas closed-end LICs do not. Is that correct?
Ian Irvine: Exactly. The structure makes the difference. LICs have the “C” for company, similar to the other 2000 companies listed on the ASX. They operate as a closed-end structure, with a limited number of shares available. In contrast, open-end structures allow money to flow in and out as markets move, creating excitement around certain stock types like lithium, buy now pay later, or AI—the current buzz word of the moment driving the market.
Ian Irvine: If the market turns, and redemption requests outnumber new applications, money flows out of the ETF sector. With a closed-end pool, capital remains captured within the company structure, giving the manager time to invest over the long term and take that long-term view. This prevents disruption caused by money flying out of their investment.
Geoff Wilson: And that’s why research on the closed-end structure suggests it’s superior because the average ETF investor tends to unfortunately buy at the top and sell at the bottom. In contrast, the LIC structure is better for medium to long-term performance.
Ian Irvine: Yes it’s the manager making those decisions. You make a conscious decision to invest into an LIC or an LIT for the long -term and leave the short -to -medium -term perspective to the investment manager himself so they can buy and sell stocks. If the market’s running hot and they think it’s overvalued, they may not participate. In fact, they may sell and take advantage of an overheated market.
Geoff Wilson: Now, one thing that I’ve only recently become aware of is some research that shows younger investors embracing listed investment companies.
Ian Irvine: Yes what we have found is these are not just gifts that they may have received from their parents or grandparents some time ago as a kid or as a baby. They’re actually making conscious decisions to get involved with listed investment companies and trust because the closed-end structure has appeal. structure has appeal. Again, because of your point, they’re taking a long -term view to have exposure to this underlying asset for the long -term to receive the growth and all the income it throws off. And for older investors, they know a lot about income and the benefit of having frank dividends received from a listed investment company.
Geoff Wilson: Interesting you say that because I know a friend of mine, he was telling me about his daughter’s university at university and a little while ago, she was playing the crypto game. But then, when she was making money, she was taking a bit of the profit and buying listed investment companies.
Ian Irvine: She’s obviously learnt that, compounding is the eighth wonder of the world. If you invest in small numbers over a longer period of time you’ll do very well in the long run.
Geoff Wilson: Yes. And looking forward with the listed investment company sector, what are you thinking?
Ian Irvine: I think savvy investors have got their focus. Those ones that are really invested in the general sense in LICs and LITs understand how they work. They may trade at discounts from time to time and they see that as an opportunity to actually, can I quote Geoff Wilson, to buy dollars worth of assets for 80 cents. But on that 80 cents purchase price you get all your dividends and distributions and franking based on the 80 cents not the dollar, the real value of the underlying assets are.
People understand that and I think the younger generation is coming through with a similar theme. They may not need the income and they may just come back to what I mentioned about compounding interest. Reinvest your dividends starting early over the long term will give you a nice outcome, a smooth outcome over the long term. rather than getting short term sugar hits.
Geoff Wilson: And maybe if you don’t know much about the equity market buy an ETF, if you do a bit more research buy a listed investment company. If you do a lot of research, look at an individual company to buy into that.
I’ve often used the phrase that a listed investment company is a thinking person’s ETF. Do you think that makes sense?
Ian Irvine: It’ll help people focus and do exactly what you’ve just suggested. Education, research and deep dives into understanding what makes these things work. Inevitably it will lead to people making the right decisions for themselves. And quite often they say, I don’t know enough about LICs or LITs but by having gone through that process, I now know a lot more and I can see we’re superior to ETFs.
Geoff Wilson: No thank you very much, Ian. Very wise words.
Ian Irvine: Pleasure. Always good to catch up.