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Listed Investment Companies Growth Unsustainable

Listed Investment Companies Growth Unsustainable

It has been forecasted that recent growth in listed investment companies (LICs) cannot be sustained, and will soon drop due the reduced profitability. Money Management has the full report.

According to Zenith’s study ‘2017 Listed Investment Companies Sector Review,’ the strongest period of growth was between mid 2013 and early 2017, with 95 LICs listed on the Australian Securities Exchange as of 31 March 2017.

Zenith’s senior investment analyst, Justin Tay, stressed that the growth and contraction in LIC listings were however cyclical in nature.

“Given this belief about the cyclicality of LIC listing growth, with investor and market sentiment key drivers, we expect that the current rate of growth in the sector is unlikely to be sustained over the medium to long-term,” he said.

The research also revealed LICs had, on average, traded at a discount to net tangible assets up until April 2013, due to a few key drivers including the increase of self-managed superannuation funds.

Among other factors that supported a LIC to trade at a premium to its NTA were fully franked dividends and high levels of shareholder engagement, followed by the underlying performance of the portfolio.

“Ideally, a LIC should have at least two years’ worth of profit reserves to maintain current dividend payments in the event there is a downturn in the LIC’s profitability.

“Our analysis found that most LICs on Zenith’s approved products list maintain adequate profit reserves to sustain a growing stream of dividends, and have profit reserves that ensure dividend payments are sustainable and in accordance with dividend objectives.”

From an initial 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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