Managed funds and Listed Investment Trusts


When is a dollar not worth 100 cents?

Financial planners can spend many hours agonising over exactly which investment is or is not suitable for an individual portfolio. Some clients want to participate in direct investment themselves and others want professional funds management to take care of the specific selection and administration work, leaving time for advisors to focus on the broader issues. However, even in managed funds there are a range of options that may potentially suit and choosing between them is not always easy.

In the case of shares, you could buy those shares directly or you could buy a managed fund that chooses which shares to buy. Another alternative is to buy the shares of a listed investment company (“LIC”) that invests the way you want to or in an area you want exposure to. How do you decide?

The issue was highlighted today when a specialist Listed Investment Company (LIC) announced that it was going to return investors’ capital and wind down the company. Why would this happen, and what can we learn from it?

The India Equities Fund (ASX code: INE) was established to provide exposure to investments in India.  By using an LIC structure, the manager is free to focus on doing their job according to their mandate. It is up to investors to decide on the daily price of the units/shares by bidding or offering their shares on the Australian Stock Exchange. As you would imagine, the price you pay for a share is not always directly aligned with the value of the underlying assets.

For example, the India Equities Fund value or Net Tangible Assets (NTA) at the end of April was between 70c and 77c (there are various “just in case” allowances in any such valuation). The actual shareprice however, was somewhere around 48c. Logic would suggest that eventually investors would sniff a bargain and start bidding up the shares until the price again reached close to the net asset value of the underlying investments. However, logic and investments are not always to be found in the same pot… In this case, logic has been altogether absent. The website for the company illustrates the ongoing “discount” that has been applied to the value of the work that has been done in setting up and running that portfolio of investments in Indian equities. In other words, the shareprice has not kept up with the underlying value.

This is very frustrating for investment managers who do their best to achieve benchmarks and results that were proposed when the LIC was first floated. There are many examples of such variance of price from underlying value. The level of discount varies considerably. The ASX website lists the various companies that you could look at to see this point demonstrated. Some LIC’s have a track record of shareprices that are close to or even above the value of the underlying investments. However, it is a fundmental aspect of the LIC that such variances are the norm.

How does this differ from a more traditional form of “managed fund”?

The traditional managed fund is “unlisted”. That is, you do not buy or sell the units on the stock exchange. Instead, a manager offers those units at a given price and that price is calculated according to the value of the underlying assets. Therefore, you do not usually see a discrepancy betwen the price and the underlying value.

Since the India Equities announcement, the shareprice has lifted substantially as investors can see that they are more likely to receive the underlying value. However, once the equities are sold and the cash returned to investors the exposure to the ups and downs of the Indian sharemarkets is gone.

There isn’t room in a short note to cover all facets of this issue. However, this has hopefully provided you with a peek into variances in structure, and just some of the considerations that need to be pondered before taking action.

Please note that this post makes absolutely no value judgement on the actual fund covered above. The India Equities Fund is only mentioned as it represents a current example of the difficulties facing investors in making decisions on structure.

As usual, the site disclaimer applies – this is broad comment only, and you must not take action on the basis of this note as it is not to be taken as personal advice. It does not account for your personal circumstances, nor your preferences and objectives.


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