Following APRA’s decision last year to phase out Australian Hybrids on the ASX, we believed that there would be a resurgence in the Listed Investment Trust (LIT) sector. Our rationale was that such products meet the demands of income investors for an ASX-listed offering while complimenting the financial incentives of Advisory Groups, Broking Firms and Fund Managers. With circa $20bn in Australian Hybrids held across Retail & Wholesale investors, the LIT market appears well placed to capture this investor base. Already, there are two new LITs in the market sourcing investor capital, thereby supporting our view of their revival in the investment landscape.  

Current State of the Market
The Listed Investment Trust (LIT) market has grown to $6.4bn in size across 8 investment vehicles since the launch of the Metrics Master Income Trust (MXT) in 2017 (Chart 1). Hence it is a concentrated market with a limited number of products. LITs initially saw increasing issuances until the onset of the COVID-19 pandemic which saw these vehicles trade at material discounts to their underlying Net Tangible Assets (NTA). This led to poor investor experiences, a drought in new product launches and in some cases delisting of existing products (ASX: PGG & NBI). 2024 saw the return of two new offerings after a 5-year absence and we are aware of at least a further 8 new LITs expected to launch in 2025 (Chart 3).

From an exposure standpoint, LITs tend to provide investors with some form of Private Credit whether it be Real Estate backed or Corporate based. Some vehicles may take a hybrid approach, providing both Private Credit & Equity exposures or alternatively provide access to other parts of Credit landscape that cannot be replicated through an Exchange Traded Fund (ETF) (Chart 2).

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Source: Market Index, 2025 listings are expected and are based on known products coming to market. Data is of 24 January 2025.

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Source: Market Index and LIT Issuer Filings

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The Trade Off with Listed Investment Trusts
LITs have been marketed as being able to offer income exposure (typically through Private Credit) with the benefit of liquidity through an ASX listing. The latter entails a major trade off in the form of discount risk whereby the difference between a LIT’s unit price and its Net Tangible Assets (NTAs) can arise. These discounts can prevail for significant periods of time and often manifest during times of market stress. This was most aptly seen during the onset of the COVID-19 pandemic where discounts of nearly ~40% occurred throughout the sector. For instance, the Metrics Master Income Trust (ASX: MXT) during the COVID-19 pandemic traded as low as $1.27 per unit against a $2.00 NTA, reflecting a 37% discount and traded again at a 14% discount in June 2022 (Chart 4). That said, LITs have shown a tendency to recover back from their discounts over time, and in many cases are currently trading at a premium to their NTA (Chart 5). LITs that are currently trading at a discount generally have an exposure that is not purely Credit based and involves Equity or Equity-like investments.

Source: Morningstar Direct. Data from October 2017 to January 2025.

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Source: Market Index. Data as of 24 January 2025.


A Cynical View on their Resurgence
The reason for the resurgence in popularity of LITs for us is a rather cynical one. The phasing out of the Australian Hybrid market removes one of the few income investments that benefitted from an ASX-listing that was still attached to product placement fees for financial advisory groups and broking firms. These fees averaged 0.75% plus GST and consequently generated significant revenue for many firms. LITs will in essence fill the void on both fronts as their underlying strategy is income centric while providing placement fees on average of 1.25% plus GST. While the Liberal government in 2019 amended legislation whereby these fees must be rebated to Retail investors, no such standard applies to Wholesale investors. Hence, we see LITs as simply meeting investor demand for income while matching financial incentives previously operating in the Australian Hybrid market. Furthermore, fund managers are incentivised to launch LITs as they are in effect a permanent pool of investor capital (there is one notable exception) that is not subject to redemptions for an equivalent unlisted managed fund. Their popularity is likely to persist until there is an event or catalyst which causes the sector to trade at major discounts again, similar to what has previously occurred.

Investor Considerations
While it may seem we are deeply negative about LITs, we simply see them as involving trade-offs and depending on one’s circumstances could be beneficial. Here are some key considerations for investors:

LITs trading at Material Discounts Provide the Possibility of Outsized Returns
LITs have historically shown a propensity to recover from discounts to their NTA. As such during these times they tend to offer outsized returns provided investors can get comfort around the underlying assets that the LIT invests in and the value that they have been marked at.

Engage with Parties that Rebate Placement Fees
LITs on average provide Financial Advisory Groups and Brokers with placement fees of 1.25% plus GST on any successful capital allocation. Investors should ask for these fees to be rebated where they are already paying an investment management or advice fee. If there is an unwillingness for these fees to be rebated, engage with a practice that does (like ours).

If an LIT is at a Premium; Source the Equivalent Managed Fund
Most LITs have an equivalent or even identical strategy that is managed by the same team in the form of an unlisted managed fund. This allows investors to invest and redeem their allocation at NTA less any applicable buy/sell spreads that are applied. When an LIT is trading at a premium, consider investing in its unlisted counterpart as holding all things constant, it will provide a higher return albeit with diminished liquidity.

In Conclusion
The resurgence of LITs is simply the logical response to APRA’s decision to phase out the Australian Hybrids. With 8 product launches expected to occur throughout 2025, the LIT sector is poised for significant growth and become increasingly commonplace in investor portfolios.

Kind Regards,

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Peter Ivan Johansson, CFA, CIPM
Chief Investment Officer, JCE Advisory
Phone: +61 402 896 250
Email: peter@jceadvisory.com.au

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Disclaimer

This article is intended for wholesale investors as defined under the Corporations Act 2001 (Cth) and is not intended for retail investors. The information provided herein is for general informational purposes only and does not constitute financial, investment, or professional advice.

The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of Kings Gate Capital Partners. While every effort has been made to ensure the accuracy of the information, Kings Gate Capital Partners makes no representations or warranties, express or implied, as to the completeness, accuracy, reliability, suitability, or availability of the information contained in this article. Any reliance you place on such information is therefore strictly at your own risk.

Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Before making any investment decision, you should seek independent financial, legal, and tax advice tailored to your specific circumstances.

This article may contain forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied in such statements. Kings Gate Capital Partners disclaims any obligation to update or revise any forward-looking statements to reflect new information or future events.

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