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LIC restructures to ETMF

In a very rare move, a listed investment company has restructured to become an exchange traded managed fund - listing on the ASX today.

The Monash Absolute Investment Company (MA1) has been restructured to become the Monash Absolute Active Trust (MAAT (Hedge Fund) and has commenced trading in its new structure today.

This is Australia's first restructure of a LIC into an ETMF (although seven years ago an Aurora fund converted from a LIC to an ETF), and Monash co-founder and portfolio manager Simon Shields said it has been in the works for a long time.

The LIC listed in 2016, and Shields said within six months the portfolio managers regretted their decision. This was because by 22 March 2017 the LIC was trading at a 13% discount.

After a series of buybacks and options and a merger proposal from Sandon which suggested MA1 be liquidated to cash and taken over at 8% below net-tangible assets in 2018, Shields and co-founder Shane Fitzgerald began the journey to try and transform the LIC into an ETMF.

Unfortunately, their timing was in-line with ASIC's review of the ETMF sector and admission of new active ETFs and ETMFs was paused while ASIC completed its work.

The regulator finished its review in December 2019 but didn't publish new guidelines until April 2020.

Monash received all relevant approvals by February 2021 after working with the ASX and ASIC.

Shareholder approval was the next step and 99.98% of shareholders voted in favour of the proposal in May 2021 with the board, including chair Paul Clitheroe, also voting themselves out of jobs.

Clitheroe is still a substantial investor in the fund, with approximately half a million dollars in it.

The long/short actively managed ETMF has a management fee of 1.38% per annum, a performance fee of RBA cash rate plus 5% with high water mark and a minimum 6% per annum yield paid quarterly.

Three-year returns after fees were 17.6% per annum as of 31 May 2021, five-year returns of 9.7% after fees and nine-year returns of 12.2%.

Shields was blunt in his assessment of the problems with LICs as structures and the issue of LICs trading at discount.

He even went as far as to say it was "besmirching" the name of good managers to manage a LIC trading at a discount.

"Many LIC managers have tried and failed at resolving the discount situation through buybacks and other strategies, but without success. Monash decided the clearest, simplest and fairest way forward for our investors was to restructure MA1 into an exchange traded managed fund utilising the ASX AQUA rules," Shields said.

"We are the first to do so, as far as I am aware, and I suspect we will not be the last."

The restructure breaks the permanent capital nexus, with the new structure requiring the fund to manage more frequent redemption requests, but Shields said he and Fitzgerald are not concerned about increased liquidity needs. They believe the new structure will be a pathway to greater FUM and will benefit unitholders.

However, Shield's admitted ahead of the listing of the ETMF that they were prepared for up to 30% of the fund to sell-out at IPO - however hoped that this would be offset by retail investors who find the new structure more attractive.

Read more: LICETMFShieldMonashASICInvestment CompanySimon ShieldsASX AQUAPaul ClitheroeShane FitzgeraldAuroraAustraliaIPOSandonTrust MAAT Hedge Fund