The investment landscape is currently witnessing significant consolidation within Listed Investment Companies (LICs) and Listed Investment Trusts (LITs). While the number of these entities is decreasing, the sector’s market capitalisation has stabilised around $50 billion. This consolidation highlights a shift towards merging entities rather than a decrease in value.
LICs, known for their focus on Australian equities, are also expanding their exposure to global assets and fixed income investments through LITs. Despite this diversification, there’s a notable discussion about why LICs are not growing as rapidly as Exchange Traded Funds (ETFs). The core reason lies in the structural differences between LICs and ETFs.
LICs operate as closed-end structures, meaning they have a fixed number of shares available. This contrasts with ETFs, which are open-end structures where shares are created or redeemed based on market demand. As a result, LICs offer stability by keeping capital within the company, allowing managers to invest with a long-term perspective without disruptions from fluctuating investor demand.
Research suggests that closed-end structures like LICs are advantageous for long-term performance. This is because they mitigate the impact of investors’ tendency to buy at market peaks and sell at troughs, an issue prevalent with open-end structures. Instead, LICs provide managers the ability to make strategic decisions over time, potentially benefiting from market cycles.
Interestingly, younger investors are increasingly drawn to LICs. They appreciate the long-term growth potential and income benefits, by having exposure to the underlying asset. This trend indicates a shift towards understanding and valuing the closed-end structure’s merits, especially in a market driven by short-term trends.
Looking ahead, savvy investors are recognising the value in LICs and LITs, often buying at discounted prices. This strategy allows them to leverage dividends and franking credits effectively. As younger generations become more aware of these benefits, the LIC structure’s appeal is likely to grow, emphasising its role as what Geoff Wilson describes as “the thinking person’s ETF” in making informed investment choices.
LICs and LITs are certainly potential steady, long-term investments for those willing to do the research and gain an understanding, as Ian Irvine said, “If you invest in a small number over a longer period of time you’ll do very well in the long run.”
