A LIT time: LITs, LICs prove popular with ASX investors

Listed investment company's (LICs) and listed investment trusts (LITs) are proving remarkably resilient in the volatile year 2020 has been

| More on:
hand holding miniature tree on top of pile of coins signifying growing investment or magellan share price

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In an investing world increasingly dominated by exchange-traded funds (ETFs), it can be easy to forget about good old listed investment companies (LICs) and listed investment trusts (LITs). Yet, unlike ETFs, LICs and LITs have been around in Australia for a long time — about 95 years in fact.

Perhaps it's this wealth of experience that has led to LITs and LICs holding up well in 2020 so far, a year that has seen its fair share of sharemarket turmoil and volatility.

According to the Listed Investment Companies and Trusts Association (LICAT), the sector's market capitalisation has dropped just 2% over 2019-20. That compares favourably with a 10.9% drop in the market capitalisation of the S&P/ASX 200 Index (ASX: XJO) over the same period.

The advantages of the LIC, LIT structures

Unlike an ETF, LICs and LITs are usually 'closed-ended'. That means that there is a finite number of shares issued under each structure. ETFs, by comparison, are normally 'open-ended'. That means new shares are issued every time a buyer makes an investment (and cancelled when the units are sold).

As such, the value of the shares of a LIT or LIC can depart from the 'true value' of the assets that it might hold. This can give LIC or LIT investors an advantage over ETF investors.

Let's look at an LIC as an example: WAM Global Ltd (ASX: WGB). As of 31 July, WAM Global reports it has $501.6 million in assets within the company. That works out to be worth $2.33 per share. Yet today, WAM Global shares are trading for just $2.07. That means a potential investor is only being asked to pay $2.07 for every $2.33 in assets. You are effectively getting a 12.5% discount on those assets compared to buying the underlying holdings yourself. Or buying dollar bills for 87.5 cents each, as Warren Buffett might say.

What about dividends?

An LIC (although not an LIT) also has another built-in advantage. It can 'store' dividend payments in reserve to smooth out income payments to its shareholders in tough times. In contrast, ETFs and LITs are trust structures. That means they are legally compelled to pay out all income to their beneficiaries every year. The LICAT released quotes from Geoff Driver, General Manager of one of the ASX's oldest LICs, Australian Foundation Investment Co. Ltd (ASX: AFI) in this respect:

During the (COVID market crash) period, AFIC continued to adjust the portfolio and took advantage of the decline in share prices to increase holdings in companies in which it wanted to own more. This included participation in the recent deeply discounted capital raisings that have occurred… Drawing upon reserves, the final dividend was maintained despite the fall in income. We think this speaks to the strength of the LIC structure in more difficult times, particularly for AFIC which has a long history"

The chairman of LICAT, Angus Gluskie, echoes these sentiments:

The efficiency and stability of their closed-end structure coupled with the corporate governance disciplines of ASX listing have proven to be far more durable than many other investment structures.

Foolish takeaway

ETFs might be all the rage with investors in today's investing landscape But I think that LICs and LITs shouldn't be overlooked. They offer many advantages to managed funds and ETFs. As the data shows, they can be great investments to hold in times of market turmoil.

Motley Fool contributor Sebastian Bowen owns shares of WAMGLOBAL FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

An older executive man dressed in suit trousers and a white shirt sits against a wall smiling with cash rains down over him representing dividend shares like BHP, FMG and Newcrest paying dividends in retirement
How to invest

How you can earn $10,000 a year in passive income from a $10k ASX 200 investment today!

Looking to boost your retirement with an extra $10,000 a year in passive income. Read on...

Read more »

A couple are happy sitting on their yacht.
How to invest

How soon can I become a millionaire if I invest $1,000 every month?

It might be shorter than you think.

Read more »

Couple holding a piggy bank, symbolising superannuation.
How to invest

How ASX shares can help you retire early

Here's what you need to do if you want to retire early.

Read more »

A close up picture taken from the side of a man with his head face down on his laptop computer keyboard as though he is in great despair over a mistake or error he has made or bad news he has received.
How to invest

Are you falling for any of these 6 common investment mistakes?

Biases can affect even the most savvy investors.

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
How to invest

Can you own too many ASX 200 stocks?

Today, we examine the ideal number of ASX 200 stocks to have in a share portfolio.

Read more »

Woman with a concerned look on her face holding a credit card and smartphone.
Share Market News

I've got $10,000 cash. What's the harm if I don't invest it in the next 5 years?

Investors may be nervous to invest at the moment.

Read more »

A man looking at his laptop and thinking.
How to invest

What could go wrong with owning just 10 ASX 200 stocks?

Is it enough to have 10 stocks in your portfolio? Let's find out.

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
How to invest

How ASX 200 stocks and ASX ETFs can be combined to build the perfect portfolio

Want to build a strong portfolio? Then take a look at this strategy.

Read more »