The Australian listed funds market has always had a complicated relationship with Listed Investment Companies (LICs) and Listed Investment Trusts (LITs).
Periods of enthusiasm have often been followed by prolonged stretches of investor frustration as vehicles traded at persistent discounts to Net Tangible Assets (NTA).
During the mid-2010s, the sector experienced a wave of new listings as asset managers sought access to permanent capital and broker networks actively distributed new vehicles into the market.
Yet recent activity in the market suggests the structure may be entering a new phase, one that looks very different from the LIC boom of the mid-2010s.
The difference this time lies not only in market maturity, but in the structural forces now shaping how listed investment vehicles are designed and distributed.
The ETF Revolution Changed the Landscape
When I began working in ASX Investment Products in 2019, the Australian ETF market was approximately $42 billion.
Seven years later it sits closer to $330 billion, fundamentally changing how investors access professionally managed portfolios.
Through the creation and redemption mechanism, ETFs allow units to expand and contract in response to investor demand, keeping trading prices close to Net Asset Value (NAV).
Investors benefit from:
• transparent pricing
• tight bid–ask spreads
• liquidity aligned with the underlying portfolio
This raises a natural structural question.
When the underlying assets are liquid and priced daily, why place them inside a vehicle that can trade materially away from its underlying value?
Where Closed-Ended Structures Still Make Sense
None of this suggests the LIC or LIT structure is obsolete.
In fact, it can be highly effective in the right circumstances.
Recent capital raisings, including Kapstream’s successful private/public credit raise, highlight ongoing investor demand for listed vehicles that provide access to strategies investing in less liquid income assets.
In these cases, the closed-ended structure can actually work in investors’ favour.
Permanent capital allows managers to deploy funds into assets that cannot easily be traded on a daily basis, while the listed vehicle provides investors with market access and price discovery.
In this context, discounts or premiums to NTA are more understandable, reflecting the market’s view on the value and liquidity of the underlying assets.
When Structure, Liquidity and Distribution Misalign
The structural differences between ETFs and listed investment vehicles help explain some of the tensions the Australian market has experienced over time.
Unlike ETFs, which benefit from multiple layers of liquidity through creation and redemption mechanisms, market maker support and secondary market trading, LICs and LITs rely almost entirely on secondary market liquidity once the IPO is complete.
Outside of the initial capital raising, the only ongoing liquidity comes from natural buying and selling on the exchange.
In stable markets this structure can work well. But when sentiment shifts, the absence of a primary market mechanism means prices can drift away from the underlying value of the portfolio.
During my time working in the listed investment products at ASX, I often struggled with the idea of LICs and LITs trading materially away from their NTA, particularly in cases where the underlying portfolios were highly liquid.
From a structural perspective, it never fully made sense to me.
Investors were effectively gaining exposure to liquid securities through a vehicle whose market price could diverge significantly from the value of those underlying assets.
In many cases, the investment strategy itself was not the issue.
The challenge was often a mismatch between structure, liquidity and investor expectations.
The DDO Shift: Responsibility Moves Back to Issuers
Another important development during my time at ASX was the introduction of Design and Distribution Obligations (DDO) in 2021.
Even before the regime came into effect, it was clear to many of us working closely with issuers and distributors that the market would not look the same afterwards.
DDO fundamentally shifted responsibility back onto the product issuer.
Under the regime, issuers must clearly define a Target Market Determination (TMD) and ensure that products are distributed to investors for whom the product is appropriate.
Historically, many listed fund IPOs were widely distributed through broker networks and often found their way into the portfolios of retail investors seeking income or diversification, sometimes without a full appreciation of the structural characteristics of closed-ended vehicles.
DDO moves the industry toward a more disciplined framework by requiring issuers and distributors to clearly articulate who a product is designed for – and just as importantly, who it is not designed for.
One of the structural features that historically differentiated LICs was the ability to smooth dividends through profit reserves.
For income-focused investors this was attractive, particularly in a market where fully-franked dividends carry significant weight.
But it also meant that the dividend stream investors observed was not always a direct reflection of the portfolio’s current economic performance.
Over time, as long as the dividend remained stable, many investors paid less attention to whether the LIC itself was trading at a meaningful discount to NTA.
In some cases, the dividend effectively became the anchor for sentiment, even when the market price of the vehicle diverged from the value of the underlying portfolio.
A stable dividend can anchor investor sentiment, but it cannot anchor price to underlying value.
As the listed funds market matured, investor attention increasingly shifted toward structures designed to keep price and underlying asset value closely aligned, most notably the exchange-traded fund.
Unlike closed-end vehicles, ETFs incorporate a creation and redemption mechanism that enables authorised participants to arbitrage differences between market price and underlying portfolio value, helping keep the two closely aligned.
Transparency Around Distribution
Historically, the economics of listed fund IPOs were well understood by those participating in the deal syndicate.
Joint Lead Managers and broker networks were typically compensated through a combination of management and distribution fees linked to the capital raising.
As the saying goes, those who are at the table to eat know how the bread is broken.
DDO does not eliminate these economics. But it does place them within a framework that requires issuers to demonstrate that the structure, distribution strategy and intended investor outcomes are aligned.
A More Disciplined Future
None of this means the end of LICs and LITs.
If anything, the sector may be entering a more sustainable phase.
Rather than attempting to compete directly with ETFs for liquid equity strategies, the listed investment trust structure may increasingly be used where stable, closed-ended capital is genuinely required.
The likely equilibrium is intuitive:
• ETFs for liquid assets
• LICs and LITs for strategies requiring permanent capital
If this shift continues, the next phase of the listed funds market may not be defined by how many vehicles can be launched, but by how thoughtfully they are designed.
And in that sense, the renaissance of LICs and LITs may not represent a return to the past.
It may instead reflect a more disciplined market; one where structure, strategy and investor outcomes are finally aligned.
Asset allocation ultimately drives returns, but structure can shape how those returns are realised in listed markets.