Mathias Cormann’s LIT crash guts punters

In 2014, the Coalition spearheaded by Mathias Cormann opened a loophole in FOFA legislation that allowed listed investment vehicles called LICs and LITs to exclusively pay financial advisor commissions. Via the AFR earlier this year:

The federal Labor Opposition has slammed a loophole created by the Coalition government that allows financial advisers to sell listed fund investments to clients and be paid lucrative commissions in return.

Labor shadow minister for financial services Stephen Jones has deep concerns about conflicted remuneration for selling LICs. Lisa Maree Williams

Shadow financial services minister Stephen Jones hit out at the “conflicted remuneration” after AFR Weekend revealed some independent advisers blew the whistle on peers for aggressively pushing listed investment funds, such as listed investment companies (LICs) and listed investment trusts (LITs).

The share price collapses of Dixon Advisory’s US property fund and Melbourne hedge fund L1 Capital’s LIC, both listed on the Australian Securities Exchange, have triggered calls for regulators to crack down on advisers and brokers selling listed funds.

The rest is history, also at the AFR:

The LIC market has rapidly doubled to $45 billion since 2014, when the Coalition government watered down Labor’s Future of Financial Advice (FOFA) laws to allow advisers and brokers to resume receiving commissions for selling listed securities.

FOFA was intended to end conflicted remuneration for financial advisers, but some advisers are receiving commissions of up to 3 per cent to sell LICs and listed investment trusts (LITs) to mum and dad investors.

Treasurer Josh Frydenberg was warned over and over by Chris Joye and John Kehoe to plug the planner loophole that allowed commissions. And now it’s too late. The punters were sucked into very illiquid structures and are being slaughtered:

Finance Minister Mathias Cormann opened the loophole and should lose his job over it.

Josh Frydenberg dithered for a year and should go as well.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. That change in the discount to NTA isn’t that really that surprising given the disconnect and panic in markets currently. The discount has been substantial for some time for most LICs, The bigger concern in all of this is all of the gormless Mums and Dads and miscellaneous mug punters that have been lured into the belief that the Coalition actually has the first fu*cng clue what it is doing. That particular con will cost this country dearly.

    • Tassie TomMEMBER

      +1

      Thank you H&H for screaming from the rooftops about this rotten deal, and commiserations that nobody listened until now that it’s too late.

  2. Ronin8317MEMBER

    So what happens when a fixed income LIT cannot payout? Does it have to fold? Or can they suspend payment indefinitely?

    • SoMPLSBoyMEMBER

      MO is shut the gates; nobody in or out to protect the interests of all concerned.
      Then collect ‘management’ fee from those held hostage.

    • I haven’t really followed them because I’ve seen this stuff before (discount to net asset value is such a great term!).

      But aren’t these trusts open ended in that you don’t need to do redemptions, you get out by selling your share. It’s like asking Rio Tinto can we have access to the underlying net asset value – you can’t. They operate the vehicle and either they adjust the NAV (so the discount goes smaller) or you just live with the fact that they never jive.

      • Indeed, they are close end vehicles. Closing the gates as mentioned above doesn’t apply, the fund is gate the moment it lists (technically before listing but you get the gist).

        The discount to NTA reflects the liquidity cost of wanting to exit a position where there are comparatively limited buyers. Best case for a LIC/LIT that hits significant NAV discounts (assuming the NAV is real of course) is that the manager is forced to wind up the trust (assuming the securities within it are themselves reasonably liquid) and return the NAV to investors, or convert the LIC/LIT to an open ended, unlisted managed fund, again, giving investors the ability to access the NAV value.

        If the operators don’t do they above, they will attempt “other” measures to close the gap, like buying back their own stock (and why not, if your fund trades at a 20% discount to real NAV…. what other risk adjust opportunities do you have for investor capital that is better than that??), marketing the investment more broadly and other rats and mice, basically anything to keep the vehicle open and their fee revenue intact.