An exercise we have promised to do for our shareholders for some time, has been to produce a historical return series over the life of the Company on a before tax and other non-investment items basis. The reason for this is that looking at the investment returns of a listed investment company (LIC) in this manner is comparable to looking at the investment returns reported by open-ended investment trusts, which are the most common collective investment vehicle used in Australia. The most important difference between the two investment vehicles is that trusts typically do not pay tax on behalf of their investors in the way a LIC does.
In our view, the LIC is a wonderful corporate structure available to Australian investors, and one that is well suited to many of the investment strategies that are available today. Unlike a trust, a company comes with a board of directors who are tasked with representing shareholders’ best interests in a far broader manner than what the trustee of a trust is charged with. A company is also its own legal entity under law, making it a much more flexible corporate vehicle. In practice this means that boards can adjust a company’s objectives through time to reflect, say, shareholder feedback or changing market conditions.
Probably the most important benefit of the LIC structure, however, is its ability to accumulate retained profits over time, and thus build up a dividend reserve that can be drawn down against in leaner investment years. This important feature of the LIC means shareholders in these vehicles can benefit from a reliable dividend stream when planning out into the future.
In building retained profits LICs pay tax on behalf of their shareholders (and generate franking credits in the process). This process of paying tax can make it hard to assess what a LICs investment returns have been over time, or to compare their investment returns to those reported by investment trust offerings, which essentially operate on a pre-tax basis. Looking simply at the changes in a LIC’s NTA between two months will miss how much tax was paid on behalf of shareholders during that period. It can also miss the accretion or dilution to NTA that occurs when new shares in the company are issued, something that is separate to the investment returns a manager generates.
Calculating these investment returns for GVF over its seven-and-a-half-year life has been a painstaking exercise, one that has taken longer than we had hoped. We are pleased to present the information below and going forward we will provide the data on a regular basis in both our monthly reports and here on this page of the website.