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LIC listings growth unsustainable
The number of listed investment company (LIC) listings has increased by 10 per cent within the last 12 months to March 31, however the current rate of growth in the sector will not be sustained over the medium to long-term period, according to Zenith.
Zenith’s ‘2017 Listed investment Companies Sector Review’, which examined the increase of LIC listings between June 2013 and March 2017, found that the growth and contraction in LIC listings were cyclical in nature and there were certain investor and market sentiment drivers that impacted whether LICs traded at a discount or premium to their net tangible assets (NTA).
The research also found that regardless of the sentiment towards the sector, LICs had traded, on average, at a discount to NTA until April, 2013.
According to the Zenith’s senior investment analyst, Justin Tay, that could be the result of several specific drivers.
“These include the rapid increase of SMSFs and amendments to the Corporations Act in 2010 that allowed dividends to be paid out based on a solvency test rather than profitability,” he explained.
On the other hand, Zenith also found that fully franked sustainable dividends and high levels of shareholder engagement were, followed by the underlying portfolio’s performance, were one of the most important factors that supported a LIC to trade at a premium to its NTA.
“Although these factors are highly subjective, particularly with regards to fully franked sustainable dividends and high levels of shareholder engagement, we believe these factors are the key drivers to ensure that a LIC does not trade below its NTA,” Tay said.
The study also found that the dividend ratio could be also an indicator of a LIC’s dividend profitability.
Tay stressed that a LIC should ideally have at least two years’ worth of profit reserves to maintain current dividend payments in the event there was a downturn in the its profitability.
From an initial universe of 76 products, Zenith rated two as “highly recommended”, 11 as “recommended”, three as “approved”, followed by 59 which were “not rated”, while one was “redeem”.
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