ASX has released the preliminary consultation documents on its Investment Product offering, which broadly comprises LICs, LITs, REITs, ETFs, ETMFs and ETSPs, with a view to streamline and enhance this suite that is currently bannered under different governing rules (e.g. Listing Rules, AQUA Rules and Warrant Rules).
The consultation process and findings will have a number of stages, beginning with submissions received on initial draft policy issues due by 24 June 2022. ASX has in fact welcomed feedback from all interested stakeholders. After proposed changes are codified it is then envisaged that the document will be re-issued in early 2023 before seeking additional feedback on the submissions. Subject to regulatory approvals, it is then anticipated that the final changes will be released in mid 2023, with a view of taking effect from 1 January 2024.
Most of the paper is highly granular and falls on anachronistic regulation, but some suggestions concerning performance reporting requirements are interesting for LICs and LITs. We expect this to be the main fulcrum point when draft proposals are made. Rules however don’t currently make an explicit requirement for issuers to publish any (or relevant) performance metrics against indices, benchmarks or hurdles. Absolute return mandates, for example, could display the historical drawdown, beta and capture ratio. This should be meaningful and relevant to the Fund and its mandate. Most investment entities voluntarily opt to provide some form of performance metrics, however we believe that this could, and should, be standardised and regulated in such a way. Doing so would allow investors to assess the delivery of investment objectives and make informed decisions when selecting the most appropriate Manager or Fund.
This also feeds into asset backing releases. For both investors and researchers, the disclosure of an asset backing should function as an estimate of fair value and act as the basis for measuring and contrasting investment performance. Issuers are required to publish this information on a monthly basis, at least, and no more than 14 days after the end of each month, with a number also publishing more routinely on a weekly or daily basis. However this depends on whether asset portfolios are readily valued.
For the sake of consistency and interpretation, entities could look to disclose a singular asset backing and at the same time. The landscape has changed with a number of LITs now being introduced alongside LICs, where these structural differences hamper the ability of an apples-to-apples comparison. However there could be a series of commonly accepted assumptions and adjustments made across the heterogeneous products to arrive at a homogenous asset backing.
Assuming that an LIC subscribes to the tax office’s Business-Activity-Statement (BAS) method, where an amount of tax is paid each month with a final reconciliation at the end of financial year, substantial reductions in the monthly NTA can create a sizeable tax drag that compounds over time when assessing performance. Additionally stating the underlying investment portfolio performance or adding back the effects of tax to the current model of assessment would be more equitable. LITs by comparison pass income straight through to investors.
Add to this the fact that imputation credits are not included or valued in NTA calculations, can make for a more unfair and biased juxtaposition of LICs, LITs, ETFs, ETMFs and indices. There may be timing differences in provision of tax, paying for tax and distributing the associated credits, however this should net out in the end. Assuming that an LIC pays tax of $0.03 p/s and then distributes a dividend of $0.07 with an associated franking credit of $0.03, an investor who sells at the post distribution asset backing of $0.90 would in fact receive the full $1.00 consisting of the $0.90 sale proceeds, the cash distribution of $0.07 and a tax refund/tax credit of $0.03.
LICs could look to provide footnotes on profit reserves and franking credit balances, with franking credit balances in particular telegraphing the company’s ability to pay a sustainable stream of fully franked dividends. Investors would no doubt appreciate this transparency, with dividends remaining one of the main points of appeal.
It’s also interesting to note the erroneous assumptions entering the sector from this requirement to explicitly and regularly disclosure an asset backing, especially where other entities may not have to. This creates an unhealthy fixation on the asset backing itself and the price dislocation, while simultaneously undermining the company’s ability to generate cash. Many other businesses will cyclically trade at a premium or discount to their asset backing. As we have alluded to in previous weekly reports, other viable financial models, such as those considering the time value and growth in dividends paid for more mature businesses, can be used to place a price target on companies that does not give consideration to the magnitude or direction of a premium/discount.
Bell Potter’s Indicative NTA tracks the ‘indicative’ movement of a LIC’s underlying NTA each month by monitoring the percentage movements of the disclosed holdings and using an index to track the movement of the remaining positions. The Indicative NTA works best with LICs that have a high percentage of investments concentrated in its Top 20, regular disclosure of its Top 20, lower turnover of investments, regular disclosure of its cash position and the absence of a performance fee. We have also included an adjusted indicative NTA and adjusted discount that removes the LIC distribution from the ex-dividend date until the receipt of the new NTA post the payment date. This report is published each Monday prior to the market open and is available on a daily basis. Intraday indicative NTAs will be available on request through your adviser.
For full details refer to the detailed report below or click here to download your copy.
