It is well known that LICs, as a company structure in contrast to a trust structure (LITs, ETFs, Unlisted Unit Trusts), have a structural advantage in the ability to manage / smooth income as well attach a higher and more consistent level of franking to that income.
In short, as the analysis in this article illustrates on the basis of a comparative analysis, LICs:
- Pay higher and more consistent income;
- That income is less corelated to market cycles, both in up-markets but more importantly in down-markets;
- On a market cap weighted basis and which represents the volume weighted dollar of investor experience (versus a median calculation – the average across all LICs), the average level of income in the LIC sector increases but it actually marginally declines in comparable ETF sectors;
- Due to dividend and franking reserves, past is actually precedent to a degree with LIC income (predictability of income) whereas past provides very little guide to future trust income; and,
- Not forgetting Debt LITs, all eight ASX-listed debt LITs have materially outperformed their ETF cousins on an income basis.
Taking all the above into consideration, it is little wonder that particular LICs are popular amongst investors in the retirement stage in their investment lifecycle. The importance of stability of income in down-markets should not be under-estimated. It reduces the need to realise capital to make up any income shortfall, and realising capital in a significant down market creates significant sequencing risk, as any issuer of retirement products knows very well.
While the S&P/ASX 200 just had a bumper dividend reporting period, the question is how sustainable that is? Some analysts believe not very, believing it was driven by a confluence of events: slashed Capex (20-year low); record iron ore prices (since materially retraced), and; 3) catch-up from slashed FY20 dividends. Whatever the case may be, the key point: uncertainty in future dividends. Which gets us back to the stability of LIC income.
But what about the discount to NTA risk? Well, again on a market cap weighted basis (exactly how all major global market indices are calculated) and representing the volume weighted of investor dollar experience, the key LIC sector have generally and continue to trade at a premium to NTA (see analysis on page 3). It appears an investor can have both the income and capital cake.
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