Listed Investment Trusts (LITs), offer exposure to a “portfolio” of corporate debt (loans) with the promise of much higher yields than cash in the bank and with much better capital protection than dividend-paying shares. Credit LIT’s are listed entities that invest exclusively in debt markets. The composition of their portfolios varies a lot and so does the quality of the assets and the expertise of the manager.

Because LIT’s are tradable on the ASX, they are easily bought and sold at full value with virtually no costs (no stamp duty and insignificant brokerage costs)  which is usually not the case with many of the underlying loans which make up much of the assets of the funds. (borrowers like to keep the loan for once established for multiple years and not be obliged to pay it back at a moment’s notice!). Investors in the LIT receive a monthly/quarterly income distribution, in the range of 4-6% per annum.

The underlying loans are generally repaid in full on maturity to the fund. Each loan is generally no more than 2-3% of the portfolio so if one issuer/borrower fails to repay some interest or some or all the capital, the impact will be modest. Credit focused investment trusts are considered less risky than shares, because in the event of a default on an underlying asset, creditors are paid first. Subsequently, debt holders are more likely to get their money back.

What about Hybrids – Don’t they pay more income?

Investments in secured corporate loans are in our (Helm’s) considered opinion, a lot safer than hybrid securities, which have similar risk profile to ordinary shares but are constrained in how far they can appreciate because of the limitations of the structure. Hybrids have been quite popular in Australia especially those issued by the banks, however, in our opinion the latest crop of Hybrids aren’t worth the risk they carry. As such, Helm has not invested in Hybrids in recent years.

As with any investment offering superior returns, the LITs are not risk-free, with returns subject to interest rate movements, economic conditions and the chance of corporate defaults. The skill of the manager (to choose the right companies to lend to in the first place, and to recover underperforming loans) is extremely important in this matter.

As of June 30, LIT’s had raised more than $4 billion on the ASX and that number is rapidly increasing.

Choosing the right LIT out of the growing number that are available is important. We at Helm have done our research and have a list of LIT’s that we believe will provide quality outcomes for our clients.

Helm’s approved LIT’s have a sound track record since they have been admitted into Helm portfolios. We expect them to maintain their steady performance of about 5.5% paid in monthly instalments, into the future. We will be keeping an eye on these investments, looking for mispricing opportunities. With the possibility of great prosperity there is also potential for loss. Being careful with these types of investments is crucial to receiving the full benefit

You will hear of some examples where investors have lost money on their investments.

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