In an earlier post, I wrote about selecting your first stock – and suggested first-time investors might want to consider a listed investment company (LIC) or an exchange traded fund (ETF) for their first purchase.
Now some advisors would just go ahead and suggest you whack your funds into one of the big LICs such as Argo Investments Limited (ASX: ARG) or Australian Foundation Investment Co.Ltd. (ASX: AFI) (AFIC), with no consideration for the risks or other factors you need to consider.
Here are 3 things you always need to take into account when selecting a listed investment company.
Fees
Like managed funds, there's not much point if your LIC outperforms the index, but once the managers take out their fees, your performance lags below the index. Watch for LICs with high fees, such as Aberdeen Leaders Limited (ASX: ALR) which charges fees as high as 2.4% – especially when you can invest in a quality LIC like Milton Corporation Limited (ASX: MLT) which charges fees of around 0.16% or fifteen times cheaper! Aberdeen is by no means the only one charging high fees though.
Performance
There's also no point investing in an LIC if the manager can't achieve returns above the benchmark. Using Aberdeen Leaders again as an example, over the past 5 years, the S&P/ASX 200 Net Total Return (INDEXASX: XNT) (ASX: XNT) which includes dividends reinvested – has returned 8.6% per annum. Aberdeen Leaders Fund has returned 5.4% after fees.
Net tangible assets
Since most LICs buy shares in existing ASX-listed companies, investors could, in theory, replicate the LIC by buying the same shares on market. Given that, beware of LIC shares that trade above the net tangible asset value (NTA). AFIC's net tangible asset backing per share at the end of April 2015 was $6.19 – very close to today's price of $6.18, so that's fine. Argo is similar, with assets per share of $7.84 at the end of April and a share price of $7.88. Be extra careful when the share price of an LIC is well above its stated NTA.
Bonus fourth factor
It's also important to take a look at the stocks that make up the majority of each LIC's portfolio. With the big four banks representing 25% of the ASX, and Australia's Top 10 stocks close to 47%, they will have a big impact on where the index goes and how your LIC performs. Depending on your view of the banks in the near future, you might want to consider an LIC that has an under market weighting.
