My stable-mate's view on the LIC/LIT debate

I received this email from Andrew Lockhart, the founder of Metrics, Australia's leading non-bank and direct loan investors and I asked if I could run it in full with some small edits. I agree with Andrew 100% that this is not a debate about the merits of LICs/LITs, which we all agree are products that have a purpose and can play a role if investors understand all the risks. The debate is only about whether fund managers should be able to pay conflicted sales commissions to financial advisers to promote their products to the advisers' clients, which was previously banned by both the Future of Financial Advice Laws and slammed by the Royal Commission, which recommended eliminating all these conflicts of interest. Anywhere, here is Andrew from Metrics, who runs some of the biggest LITs out there...

Chris,

We don’t really see the issue of the payment of selling fees and potential conflicted remuneration as our debate. Our position is that we have attempted to create investment choice for clients and a listed vehicle has been a means of creating investment liquidity in a less liquid private markets asset class. I note that Jonathan Rochford made this exact point ‘LICs / LITs are an appropriate structure for illiquid investments’ in his article published on 22/1.

However, we have a range of concerns with the way this debate has unfolded and the lack of objective analysis. Unfortunately the debate is not nuanced and the unfortunate outcome of this is to potentially tarnish the reputations of others, both reputable fund managers and also professional, hard working and ethical Financial Advisers.

I have obviously read much of the commentary which is unfortunately inflammatory. Articles that make comments such as ‘fund managers push complex listed investment products to retail clients,’ or ‘financial advisers accepting kick backs’ or ‘fund managers that are exploiting loopholes’ or there has been ‘an explosion in LICs/LITs, and illiquid high yield, or junk bond funds containing unrated loans and sub-investment grade debt’ or even the headlines such as ‘Listed funds could be ‘toxic time bombs'...The commentary also appears to have exaggerated the issue by combining the performance of certain listed vehicles with the all in costs associated with a listed fund (which are fully disclosed in a PDS) with the issue of potential conflicted remuneration paid to distribute a fund via Selling Fees.

If the debate is to be focussed on the risk of misselling LIC and LIT investment products to investors then surely the same argument can be made for the potential misselling of other investment products such as direct equities, bonds, hybrids or the potential misselling of unlisted funds via platforms that might attempt to deny or restrict investor access to ‘approved products’. The debate shouldn’t be one about investment vehicle structure but rather on the risk of misselling of investment products. 

From our experience in issuing listed funds we have not experienced anything other than complete professionalism. Gaining market support from brokers, researchers, financial advisers and other service providers is not a straight forward easy process. As a product issuer seeking to deliver quality investment products for investors you must have a focus on the costs and seek to minimise these costs to ensure you have a commercially viable investment product. In fact, whilst we have had broad market support for our funds we have experienced situations where others have declined to invest or distribute our funds based on determining what is in the best interests and appropriate for client portfolios.

We have no evidence that would suggest that anyone has been motivated to assist us to distribute our funds or recommended an investment in one of our funds based on the payment of a Selling Fee. In fact, the assessment is about risk, return, total costs deducted from investor returns, market liquidity, ASX liquidity risk, credit risk and the track record of Metrics in delivering for investors. That is, are our investment products appropriate for investors. We are comfortable in comparing our funds with any relevant listed or unlisted fund in terms of performance, risk, fees and costs and how the investment has performed for clients. The ASX listed nature of our funds and the required market disclosures are also a means of promoting market transparency and provides investors with a clear publicly disclosed means to compare investment products.  

We don’t profess to be experts on the performance of the entire LIC or LIT sector but we can speak about our own firm and the funds that we brought to the listed market being the MCP Master Income Trust (ASX:MXT) and the MCP Income Opportunities Trust (ASX:MOT). 

I note that in an article written by Graham Hand on 8th January 2020 he references comments by Anna Dawson a Senior Specialist Financial Advisers at ASIC. The comment states that ‘The initial carve-out was given because of an argument that companies would not be able to raise capital. The carve out was restricted to companies that ‘made things and provided services.’

As a business Metrics Credit Partners is in the business of making things and providing a service. Our business does two things (1) we have developed a range of investment products that provide investors with choice. Investors in funds managed by Metrics can determine what is their return objective, how much risk they are willing to accept and what is the best means for them to achieve this and what are the options available to them in managing the liquidity risk of their investment and (2) we provide a very important source of non-bank debt capital to assist companies to finance their business activities.

We believe we are different to all other LICs and LITs that deal in public exchange traded securities. That is, we seek to build long term relationships with Australian corporates and directly originate opportunities to lend money. We negotiate these transactions, structure the financing and manage the risk associated with lending companies money. Investors cannot access our asset class via other exchange traded investment options. That is, we are not a passive investment company dealing in exchange traded assets. I do think we offer a different investment proposition and active management in terms of both origination and risk management is more akin to the activities undertaken within banks. We are not passive buy side investment analysts and any discussion with borrowers financed by our funds would confirm the performance of our team.

As it relates to the actual performance of our two ASX listed investment trusts we make the following comments -        

The MCP Master Income Trust (ASX:MXT) was the first ASX listed fixed income / credit trust to list on the exchange back in October 2017. We have been very fortunate to have gained strong investor support.

Since listing this fund we have delivered returns exceeding the minimum target (RBA Cash Rate + 3.25% pa), paid net cash income distributions to investors monthly, lowered the total costs to investors and actively managed risk to diversify the portfolio with average counterparty exposure currently c.1%. MXT continues to see increased daily traded liquidity and units have traded above the $2- Issue price everyday since inception.

In April 2019 we completed the IPO of the MCP Income opportunities Trust (ASX:MOT) and were again very fortunate to have gained strong investor support.

Since listing this fund we have delivered returns exceeding the minimum target (7% pa), improved the distribution terms so that investors are now paid net cash income distributions each month, lowered the total costs to investors via an agreement to waive our entitlement to performance fees as a result of reductions to the RBA cash rate and we have actively managed risk to diversify the portfolio. We have negotiated private market opportunities with several borrowers to also participate in equity performance of companies that we have lent to and MOT continues to see solid traded liquidity and units have traded above the $2- Issue price everyday since inception.

All of the above has delivered an attractive investment choice for investors that were previously unable to obtain exposure to the asset class in a liquid / tradeable format.

We are committed to continually seeking to deliver for our investors and providing a very important alternative source of finance for Australian companies.

Andrew Lockhart, Metrics