What is a listed investment company?
A listed investment company, or LIC, is a publicly traded investment company that invests in a diversified portfolio of assets, such as shares, bonds, property, and other securities. They are listed on a stock exchange and issue shares to investors who can buy and sell them on the open market, much like any other listed stock.
LICs are typically managed by professional fund managers who make investment decisions for the company and its shareholders. They may focus their investment strategy on a particular sector, region, or investment style, such as growth or value investing.
Fund managers charge a fee for managing the investments, usually a percentage of the company's net tangible assets (NTA). Some also charge a performance fee if the management company achieves higher returns than a benchmark it measures against. These fees can reduce the return to shareholders.
What makes listed investment funds unique is they are 'closed-ended'. This means there are restrictions on how many new shares they can create or cancel, so they can't just issue more shares if there is a surge in demand. This has benefits and drawbacks, which we will discuss below.
Some examples of a LIC
There are more than 100 LICs listed on the ASX. Browsing these, most focus on investing in Australian and international shares.
The Australian Foundation Investment Co. Ltd (ASX: AFI) is Australia's largest listed LIC by market capitalisation. The company compares its performance to the S&P/ASX 200 Accumulation Index (ASX: AXJO) and is known for its diversified portfolio of some of Australia's top listed companies.
The investment team manages money with a long-term lens, aiming to return substantial profits with a stream of fully-franked dividends and capital growth.
Founded in 1946 in Adelaide, Argo Investments Limited (ASX: ARG) is one of the oldest LICs in Australia. Argo has investments in about 100 different Australian equities, with a particular focus on providing a sustainable dividend. Argo aims to provide consistent tax-effective income and long-term capital growth for shareholders.
WAM Capital Ltd (ASX: WAM) provides exposure to undervalued growth companies listed in the ASX, focusing on small to mid-cap companies. WAM Capital's investment objectives are to deliver a stream of fully franked dividends, provide capital growth and preserve capital.
The MCP Master Income Trust (ASX: MXT) is managed by Metrics, a corporate lender and asset manager specialising in fixed income, private credit, equity and capital markets. The trust is relatively new, officially listed on the ASX in 2017. It aims to provide direct exposure to the Australian corporate loan market, a sector typically dominated by banks.
Brickworks Limited (ASX: BKW) is behind the BKI Investment Company Ltd (ASX: BKI). Brickworks established a portfolio of LICs via subsidiaries in the 1980s, and BKI was listed on the ASX in 2003. BKI aims to generate an increasing income stream for distribution to shareholders through fully franked dividends from a portfolio of assets that can also deliver long-term capital growth.
LICs and LITs: What's the difference?
LICs and listed investment trusts (LITs) are both investment vehicles that pool money from investors and use it to invest in a portfolio of assets, such as shares, bonds, property, and other securities.
However, there are some key differences between them. LICs are structured as companies, whereas LITs are structured as trusts. This means that LICs issue shares, while LITs issue units.
LICs and LITs may have different investment strategies. LICs focus on long-term investments and may invest in a diversified portfolio of assets. In contrast, LITs may invest in a narrower range of assets and use more complex investment strategies, such as leverage.
LICs are traded on the stock exchange and are more liquid than LITs, which are traded over the counter. This means that the former may be easier to buy and sell, but their price may be more volatile due to fluctuations in the stock market.
What are the benefits of investing in LICs?
The beauty of the closed-ended structure is that the investment company doesn't redeem or create units, so it isn't forced to sell its investments if a holder wants to cash out. Instead, investors sell to other investors on the share market. This creates stability for the fund manager and leaves them free to make long-term investment decisions and take advantage of volatility in the market.
LICs can provide exposure to a large number of companies, thereby making it quick and easy to diversify your investments through a single trade. They can also be a helpful investment option for superannuation funds, as they provide exposure to a diversified portfolio of assets.
Compared to mutual funds, shares in LICs can be more convenient to buy or sell because they are listed on the share market, just like individual companies. Having a professional manager at the helm also appeals to some people.
And the drawbacks?
One drawback of actively managed LICs is they often have higher fees than exchange-traded funds (ETFs), especially low-cost passive ETFs that simply mirror the returns of an index.
A potentially more significant drawback of investing in LICs is the risk of being unable to sell when you need to at an acceptable price.
Shares in LICs are bought and sold on the share market between investors. They can be hard to sell if no one buys at the price an investor wants.
This can create a disconnect between the share price and the value of the investment company's net tangible assets. It can also be a big problem if you need your money quickly or if the company becomes unpopular with investors. Conversely, if the LIC is especially popular, shares might trade at a premium price above the value of the assets.
Finally, LICs generally only report the value of the assets they hold at infrequent intervals, making it hard to know the asset value at a given time. On the other hand, ETFs report the value of their positions daily.
Alternatives to investing in LICs
While there are some advantages to investing in LICs, the drawbacks mean they're not for everyone. Two alternatives – considered close cousins – are managed funds and ETFs.
Managed funds can look very similar to listed investment companies in that a managed fund is a pool of investors' money that gets put to work by a fund manager. Unlike LICs, however, managed funds exist outside the stock market. Managed funds are usually 'open-ended', which means the fund manager can create and redeem units in the fund directly.
ETFs can be active or passive investment funds bought and sold over an exchange like the ASX. ETFs are open-ended and designed so the price per unit trades close to the fund's net tangible assets.
If the value of the ETF units falls below the value of the underlying net tangible assets, a special company called an 'authorised participant' can swoop in and buy units in the ETF, which pushes the price back up.
An authorised participant is an organisation, such as a large bank, with the right to create and redeem shares. The units then get exchanged for the underlying assets, which can be sold for a profit — a form of arbitrage.
Passive ETFs track the returns of a particular index, like the S&P/ASX 200 Index (ASX: XJO), by holding shares in the same proportion as the index. They don't require a manager to make buying and selling decisions, so they charge much lower fees than some LICs. This makes them an efficient way to invest your money.
Which is better: LICs or index funds?
LICs and index funds both have advantages and disadvantages. Choosing between them will depend on the individual investor's goals, investment strategy, and risk tolerance. Here are some key considerations:
Diversification: LICs can provide investors with diversification power across a range of assets, sectors, and regions, as they are managed by professional fund managers who make investment decisions on behalf of the company and its shareholders. Index funds also offer diversification, but it's across a specific market index or benchmark, such as the ASX 200.
Fees: Index funds generally have lower management fees, as they track a passive index and require less active management. LICs, on the other hand, can have higher fees due to the costs associated with professional management and active investment decisions.
Performance: LICs may have the potential to outperform the market due to the active investment decisions made by professional fund managers. However, this also means that LICs may underperform the market, particularly if the fund manager's investment decisions are not successful. On the other hand, index funds track the market and aim to match its performance, which may be more predictable over the long term.
Liquidity: LICs and index funds are both generally liquid investments, but LICs may have lower liquidity than index funds due to the potential for the share price to trade at a discount or premium to the value of the underlying assets held by the company.
