Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 238

The reasons LICs have come-of-age

2017 was another big year for both Listed Investment Companies (LIC) and Listed Investment Trusts (LIT) with a record number of new and innovative entrants into the sector. LICs/LITs dominated capital raisings, bringing in $3.7 billion via Initial Public Offerings (IPOs) - accounting for more than half of the IPOs raisings for the year. And this was further supported by a number of secondary market raisings that saw $1.2 billion raised.

Money raised from LIC/LIT IPOs - 2003 to 2017

The largest 10 IPOs in 2017 of which 6 were LIC/LIT

Three reason for the growth

The growth rate of LICs was higher than managed funds in 2017, for three main reasons:

  • Future of Financial Advice (FoFA) reforms: Since July 2013, commissions paid to financials planners by providers of managed fund have been banned. This has removed the incentive for financial planners to use managed funds over LICs or Exchange Traded Funds (ETFs).
  • A competitive dividend yield in comparison to the ASX200: In July 2010, there was a significant change in the Corporations Act that paved the way for LICs to offer greater consistency in dividends. Previously, LICs could only pay a dividend if they had an accounting profit, which saw a number of LICs being unable to pay dividends through the GFC. However, following the introduction of the solvency test, LICs now have greater flexibility to offer sustainable dividend policies even with the absence of accounting profit. Many LICs offer a grossed-up yield higher than the Australian share market grossed up yield of 6.0%.
  • Stronger demand from the SMSF market: An increasing number of investors are looking for greater control over their superannuation. The combination of rising property prices and prolonged low interest rate environment has resulted in a level playing field for alternative investment vehicles such as LICs and ETFs. SMSFs are a valuable investor base to cater for, as they now account for 28% of all superannuation assets in Australia and are growing.

We also saw two structural changes which we view as positive developments for LICs:

  • IPO cost absorption: Historically, the cost of a LIC IPO - generally a fee of 2-3%- was transferred to the shareholder at listing. As a result, for example, a $1.10 IPO would see an opening Net Tangible Asset (NTA) of $1.06-$1.09. In late 2017, some LICs came to market with a proforma Net Tangible Assets (NTA) in line with its issue price. Managers of Magellan Global Trust (ASX:MGG), Spheria Emerging Companies (ASX:SEC) and VGI Partners Global Investments (ASX:VG1) absorbed the issue cost associated with its IPO, while MCP Master Income Trust (ASX:MXT) had its issue cost paid via a loan, which will be amortised by shareholders over the next 10 years. This enabled shareholders of MGG, MXT and VG1 to access these LICs at NTA on day one.
  • Less bonus options: Bonus options issued at IPOs have generally been offered to investors to compensate for the issue cost reflected in the NTA. Investors who seek to purchase LICs in the secondary market must be cautious of the potential dilutionary impact on the NTA of in-the-money options, as options expiry nears. What is perhaps less understood is that the person who exercises these options is not diluted as they have received the benefit of a lower exercise price. As a result, bonus options were sometimes viewed negatively. With managers choosing to absorb the vast majority of the IPO cost, LICs no longer need to offer options as an IPO sweetener. Many LICs came to market without an option attached, removing the overhang that is cast around LICs close to option expiry.

Table 2: LIC/LIT IPO’s - 2017

Click to enlarge

The focus for 2018

We anticipate these changes will drive further interest and larger capital raisings that are likely to tip through $500 million plus.

We also expect more growth in areas that are still under-represented in investment portfolios. Global equity-focussed products are likely to be a key beneficiary with an increase in both size and different styles of offering. We expect growth in products that offer high and sustainable income, as well as fixed interest products, which is a gap in the LIC sector. Although it has been a strong period of growth for the sector, we believe there are several drivers now in place to see this growth accelerate over the coming years.

 

Nathan Umapathy is Research Analyst at Bell Potter Securities. This document has been prepared without consideration of any specific investment objectives. For the latest Bell Potter Quarterly Report, click here, and for the Weekly NTA update, click here.

 

RELATED ARTICLES

Why LICs may be close to bottoming

The fascinating battle between Nick Bolton and Magellan

Why LICs are closing and more should follow

banner

Most viewed in recent weeks

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Finding the best income-yielding assets

With fixed term deposit rates declining and bank hybrids being phased out, what are the best options for investors seeking income? This goes through the choices, and the opportunities and risks involved.

What history reveals about market corrections and crashes

The S&P 500's recent correction raises concerns about a bear market. History shows corrections are driven by high rates, unemployment, or global shocks, and that there's reason for optimism for nervous investors today. 

Howard Marks: the investing game has changed

The famed investor says the rapid switch from globalisation to trade wars is the biggest upheaval in the investing environment since World War Two. And a new world requires a different investment approach.

Welcome to Firstlinks Edition 605 with weekend update

Trump's tariffs and China's retaliatory strike have sent the Nasdaq into a bear market with the S&P 500 not far behind. What are the implications for the economy and markets, and what should investors do now? 

  • 3 April 2025

Latest Updates

Investment strategies

4 ways to take advantage of the market turmoil

Every crisis throws up opportunities. Here are ideas to capitalise on this one, including ‘overbalancing’ your portfolio in stocks, buying heavily discounted LICs, and cherry picking bombed out sectors like oil and gas.

Shares

Why the ASX needs dual-class shares

The ASX is exploring the introduction of dual class share structures for listed companies. Opposition is building to the plan but the ASX should ignore the naysayers and bring Australia into line with its global peers.

The state of women's wealth in Australia

New research shows the average Australian woman has $428,000 in net wealth, 40% less than the average man. This takes a deep dive into what the gender wealth gap looks like across different life stages.

Investing

The two most dangerous words in investing

Market extremes are where the biggest investment risks and opportunities lie. While events like this are usually only obvious in hindsight, learning to watch out for these two words can alert you to them in real time.

Shares

Investing in the backbone of the digital age

Semiconductors are used to make microchips and are essential to a vast range of technology and devices. This looks at what’s driving demand for chips, how the industry is evolving, and favoured stocks to play the theme.

Gold

Why gold’s record highs in 2025 differ from prior peaks

Gold prices hit new recent highs, driven by a stronger euro, tariff concerns, and steady ETF buying – all while the precious metal’s fundamental backdrop remains solid amid a shifting global economic landscape.

Now might be the best time to switch out of bank hybrids

In this interview, Schroders' Helen Mason discusses investing in corporate and financial credit securities, market impacts of tariffs, opportunities for cash investments, and views on tier two and hybrid bonds.

Sponsors

Alliances

© 2025 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.