Should I invest in a Listed Investment Trust?
There has been a great deal of press recently about placement fees being paid to brokers for distributing listed investment trusts.
The fervour has been prompted by Magellan Financial Group launching a new funds, the Magellan High Conviction Fund.
This article does not deal with that issue. You can read about that here.
This article answers some questions about listed investment vehicles and whether or not they are a good investment.
What is a listed investment vehicle?
They are similar to managed funds but may be in the form of a company (in which you buy shares) or a trust (in which you buy units). They are listed on the stock exchange and units in them may be bought and sold via a broking account.
The vehicle invests funds in a pool of assets according to a published strategy.
The vehicle may have external management or internal management. External management means the vehicle appoints a manager or managers and pays them a fee. Internal management means the portfolio is managed by a team employed by the vehicle.
How are they valued?
There are two values for a listed investment vehicle. There is the net asset value and the market value.
The net asset value (NAV) is the value of the entire portfolio divided by the number of units on issues. For example, is the portfolio is worth $100 and there are 100 units on issue, the NAV is $1 per unit.
The market value is what investors are prepared to buy and sell the investment for on market. This may differ from the NAV.
What are the fees?
The variation of fees is wide. You should read the offer document for a new offer or ask the manager for an existing vehicle.
An internally managed vehicle ostensibly has no fee because the management is in-sourced, but it will have an operating cost. An externally managed vehicle appoints a manager who will have a published fee schedule which may include a performance fee.
Be wary of performance fees – they are generally a good thing, but they should have, amongst other things, a relevant hurdle rate, a high water mark and the base fee should be modest.
Argo Investments (ARG) is an example of an internally managed listed investment company. The operating cost was 0.15% for the 2018 financial year. There is no performance fee. Magellan Global Trust (MGG) is an example of a listed investment trust that appoints Magellan to manage the strategy. The base fee is 1.35%pa plus a performance fee of 10% of the performance in excess of the hurdle return.
What are the risks?
There are a number of risks. There is the risk of the underlying strategy and the manager, as there is for any managed investment.
Other risks include:
Illiquidity – the ability to buy or sell the investment may be compromised if there are insufficient buyers and/or sellers;
Trading at a discount – this may arise from illiquidity and/or the market pricing in uncertainty. It is the tendency to trade below the net asset value. That is, where the unit price trades below the asset value of the fund. Units may also trade at a premium, but this is uncommon.
Higher buy/sell spread – depending on liquidity, the buy/sell spread may be higher than an equivalent unlisted equivalent
Brokerage – listed investments attract brokerage when buying or selling
Transparency – the underlying holdings may or may not be published by the vehicle. The investor is trusting the manager remains consistent with the strategy.
At the time this article was written, Argo had a published NAV of $8.59 per share as at 31st July 2019. At that time the share price of Argo was trading at around $8.33, a 3% discount to NAV. Magellan Global Trust has a published intra-day NAV of $1.83 (26th August 2019) and the unit price was trading at $1.77, a 3.2% discount to NAV.
What are the benefits?
Buying at a discount – If you buy on market, you might pick up the investment trading at a discount to the net asset value. Whilst it may continue to trade at a discount, you have still bought an investment with more dollars than you invested working for you;
Quicker settlement – settlement is T+2 rather as opposed to a managed funds which is typically around 5 days to redeem funds
Accessibility – for self-directed investors and/or investors who do not wish to trade on an investment platform, buying and selling on market is easier
Minimum investments – there is no investment minimum when buying and selling on market (although it may be ill advised to buy too many small parcels). By contrast, wholesale unlisted managed investments typically have a minimum which may be out of reach for some investors.
Less paperwork – investing is conducted through a broking account. If you were to apply directly to each fund manager for each managed fund, you would be completing repetitive application work (and redemption work for withdrawals).
If you truly want a strategy in your portfolio, and it is only available in a listed vehicle, you simply must accept the pros and cons of that structure.
You might consider other investment formats for a strategy including unlisted managed funds, exchange traded funds and MFunds.
Where you are considering which investment format is right for you, consider also the minimum investment requirements as well as the differences in tax outcomes. A listed investment company, for example, pays a dividend which may or not be franked. By contrast, a listed investment trust will pay an unfranked distribution but pass through franking credits earned by the portfolio.
Is it right for you?
Perhaps. In working out what the right investment vehicle is for you, you should understand your own investment objectives and risk tolerance. You should also understand how the investment works so you can evaluate whether or not it is consistent with your investment requirements.
Sovereign Wealth Partners advises clients on their financial strategies and investment portfolios.
If you would like to discuss your needs, please contact us;
Phone: (02) 8216 1777
Disclosure Statement: This communication has been approved and issued by Sovereign Wealth Partners Pty Ltd ABN 18 607 071 367 Corporate Authorised Representative (No. 001233909) of Sovereign Capital Pty Ltd ABN 44 164 127 833, AFSL 456235.
General Advice Warning: Any advice included in this article and associated links is general in nature and does not take into account your objectives, financial situation or needs. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. We do not endorse any information from research providers that we provide to you, unless we specifically say so.