Discussions about innovation in investment products usually focus on the latest unit trust or Exchange Traded Fund. Rarely are Listed Investment Companies (LICs) considered innovators in investment and social returns.

That is no surprise. The LIC market is often perceived as a place for conservative investors seeking franked dividends. Some LICs have existed for almost 100 years, reinforcing the stereotype of an older sector run by mostly male fund managers.

Look through the 91 LICs on ASX and a different picture emerges. One where some LICs are providing tens of millions of dollars of support for Australia’s not-for-profit sector and innovating how the financial services industry approaches philanthropy.

Accompanying this LIC innovation is greater diversity in the sector. More women are managing the underlying funds of LICs, running LICs or serving on their Boards.  

Make no mistake: much more diversity is needed in the LIC sector, and financial services generally. Men still dominate the LIC sector. LIC Boards – like those in other sectors – would benefit from greater gender, cultural and skills diversity. 

Improving gender diversity is a focus for the funds-management industry, including for asset managers who provide exposure to their fund through an LIC, according to the 2022 Financial Services Council (FSC) Diversity Survey. 

About a quarter of investment teams comprise women and gender change is heading in the right direction, the survey found. But women remain “under-represented in asset-management roles” and “driving change will take time”, said the FSC.

The need for greater gender diversity in financial services is not just about improving decision-making, organisation culture and fairness. As more women invest in listed securities – directly or through a fund or LIC – greater diversity is needed. More women running LICs and other funds reflect a growing number of female investors.

Women comprised 45% of people who began investing in ASX-listed investments, according to the ASX Australian Investor Study 2020. Just over half of all intending investors are women and many of them are younger, the ASX study found. 

“The opportunity to lead an organisation that delivers investment returns for shareholders and social returns for the community was attractive,” says Gurney. “Future Generation was the first philanthropic model of its kind in Australia. It benefits from the support of many people in our industry who provide their services on a pro-bono basis.”

The two Future Generation LICs are a “fund of funds”. Through a single investment vehicle, shareholders gain access to a portfolio that comprises more than two dozen fund managers across the two LICs.

Many of Australia’s largest and most successful asset managers manage money for Future Generation without charging annual or performance fees. In turn, Future Generation invests 1% of its assets annually with its social-impact partners.

“Through Future Generation’s LICs, shareholders get access to some of Australia’s greatest investors,” says Gurney. “Our LICs also benefit from having very experienced external people on our investment committee and across other aspects of the business. We continue to get great support from our industry. People can see our model works.”

Future Generation was conceived by Geoff Wilson AO, Chairman and Chief Investment Officer of Wilson Asset Management. His firm is a prominent manager of LICs and Wilson is a long-time advocate of the benefits of the LIC structure.

Another LIC, Hearts and Minds Investments (ASX: HM1) was established in November 2018 to provide exposure to a concentrated portfolio of equities and support Australian medical-research institutes. HM1 expands the philanthropic vision of the Sohn Hearts and Minds Investment Leaders conference, a premier investment event each year. HM1 has so far donated almost $34 million to medical research.

Understanding LICs

LICs are ASX-listed companies that manage funds that invest in Australian or global shares, or other asset classes. Like other listed companies, LICs have a Board and are subject to ASX Listing Rules and continuous disclosure requirements.

Unlike unit trusts and exchange traded funds, LICs are closed-end funds. They have a set amount of capital to invest (which changes with capital raisings). Unlike open-end funds, LIC managers do not have to worry about fund inflows and outflows.

Gurney says the closed-end LIC structure suits philanthropy. “As a company, LICs have the capacity to smooth dividend payments and utilise franking credits from their retained earnings. It’s important that Future Generation provides consistent support for our NFP partners, so they know they have the funds they need to do their work each year.”

The LIC sector’s dividend focus was another attraction for Gurney, who spent almost 18 years at UBS, an investment bank, before becoming CEO of Future Gen. 

“For me, investing is all about capital growth and generating a steady stream of franked dividends over the long term.”

Gurney has so far loved her role at Future Generation. She spends much of her time talking to shareholders, meeting with the firm’s investment committee and external asset managers, and understanding the work of its social-impact partners.

More than 170 NFPs made an expression of interest when Future Generation announced last year that it was extending its support. The firm assessed every application, developed and met with a shortlist of 40 charities, and eventually narrowed it to 14.

“Future Generation has a fantastic Social Impact Manager (Emily Fuller),” says Gurney. “In the next few years, we want to do more work to quantify the social return from Future Generation’s investments and report and track that return for our shareholders.”

Gurney’s other passion is seeing more women join the LIC sector and financial services industry. She was among the few female Managing Directors at UBS, held senior roles at other global investment banks, and has served on a few NFP boards.

“We need to raise awareness of career and governance opportunities for women in the LIC sector. It’s a great area to work in and the LIC structure is ideal for long-term capital growth, philanthropy as well as other initiatives. There are many good people in our industry and, in the case of Future Generation, a lot of excellent work from many people to build on.”

LIC governance

As Gurney makes her mark in LIC executive leadership, other women are contributing to the sector as Chairpersons and non-executive directors of LIC boards.

Capital management is another consideration for LIC Boards. LICs that trade at a persistently large discount to their Net Tangible Assets (NTA) frustrate shareholders and can trigger closure or takeovers as stronger LICs acquire underperforming competitors.

Simply put, the LIC’s share price is less than the value of its underlying investments – thus the discount. Some investors argue that buying $1 worth of assets (the NTA) for, say, 80 cents (the share price) is an opportunity. But some LICs struggle to narrow the gap to their NTA because the market doubts their performance, personnel or dividend record. The discount can widen when the asset class the LIC invests in is out of favour or less liquid.

For LIC Boards, this means finding ways to reduce the discount to NTA and ideally trade at a slight premium to NTA. This could involve an on-market share buyback (as Platinum Capital and Platinum Asia have in place), although these have proven to have limited success. Alternatively, the LIC can strive for greater promotion among analysts and investors, to improve its share liquidity.

Capital raisings add other challenges for LIC Boards. Raise capital when the LIC trades at a large discount and existing shareholders can be diluted, depending on the instrument used. Raise capital when the LIC trades at a large premium and new investors overpay for assets. 

Knowing if and when to wind up an underperforming LIC and return funds to shareholders is another LIC Board task. 

Towers says this layer of governance from LIC Boards is valuable for investors. “I firmly believe every listed or unlisted entity that takes money from investors needs strong governance and oversight. There’s huge value in having an independent Board overseeing the LIC and ensuring all its shareholders are treated equally.”

Platinum’s LIC boards meet quarterly, in addition to other discussions outside the Board-meeting cycle. “Regardless of the size of company, there’s a significant amount of work involved in being on a LIC Board,” says Jefferies. “In the LIC sector, there is a lot of money being invested on behalf of shareholders. As corporate entities, LICs are subject to the provisions of the Corporations Act 2001 and being listed on the sharemarket adds another dimension in terms of the ASX Listing Rules.”

Jefferies would like to see more women on Boards of LICs and in the financial services sector generally. “My observation is that gender diversity in Australian financial services lags other markets, such as the UK (where Jefferies worked for 11 years). You see too many women here leave the industry to raise families and then never move on to senior executive roles or Board positions. That’s a lost opportunity.”

Jefferies favours the introduction of quotas, where financial services Boards are required to meet diversity numbers. “That’s my personal view,” she says. “We need to get more women on Boards and quotas are a way to fast-track that. Some people disagree about the need for quotas, but I see firsthand the contribution women make on Boards and how Boards generally are better off having a mix of men and women.”