All you need to know about Listed Investment Companies
Listed Investment Companies (or LICs) have been around for decades and are more popular now than ever. It’s one category of collective investment that has been powering ahead despite the recent market volatility. Here’s all you need to know about the recent LIC revival and investing in LICs.
What exactly is a LIC?
Essentially, LICs are collective investment vehicles that can be easily bought and sold since they are listed on ASX. They allow retail investors to get exposure to a wide spread of holdings like shares, property, and interest bearing deposits.
How are LICs different from traditionally managed funds?
1. They win out on fees, which are often lower.
2. Since they are listed on ASX, shares in LICs are easy to buy and easy to sell.
LICs are also more transparent than managed funds since, as a result of being listed, they must comply with ASX corporate governance and reporting requirements. Also, LICs are companies that distribute income via fully franked dividends on which the 30 per cent company tax is already paid, so holding shares in an LIC is a tax boon for savvy, income-seeking investors.
What are the other benefits of LICs (in down markets too)?
There’s another advantage the LICs enjoy over conventional managed funds and that is they avoid the liquidity problems caused by market lurches because they are, what’s called closed-ended. That is, they do not issue or redeem units in their fund. In the event that the market plummets, every seller of a LIC share must be met by a buyer – that means that the overall size of the fund does not change.
A conventional long-only fund manager will probably be hit by redemptions in a down market, as investors ask for their money back. To achieve liquidity, the manager has to sell what might well be high quality shares at low prices, thus weakening the fund. And when markets are running hot, managers can find themselves being deluged with new money at a time when they don’t see much of value that they can buy.
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AFIC, the Australian Foundation Investment Company, is one of the oldest and best known, and sits on some $6 billion worth of blue chip stocks on behalf of a raft of mostly retired retail investors.
That’s one of the biggest ones but there are lots more popping up, not least because LICs have come back into vogue after spending a long time trading at a discount to their Net Tangible Asset (NTA) value.
LICs are listed on the ASX and must comply to regulations
How can you tell how shares in LICs are priced?
When a LIC trades at a discount to NTA it essentially means that the value of the underlying holdings is greater than the aggregate – which, in theory, is a good time to buy.
Say for instance a LIC’s share price is trading at $1.10 and the NTA is $1.20. Given that the LIC regularly publishes a list of its holdings and charges investors a fee, a lot of investors could say “I can do this for less” and invest directly in the underlying holdings. If they don’t buy shares in the LIC, and this happens at scale, the LIC share price decreases and the discount to NTA increases.
Why are LICs more popular now than ever?
Nowadays, markets are ever more complex and investors don’t much like volatility. They are also becoming more and more fee-conscious as well so LICs have enjoyed a new lease of life and the good ones are trading at a premium to NTA. For example, AFIC’s is around 6.5 per cent, because the managers have a history of delivering better returns than the overall market in the long run.
Another interesting development is that the new breed of LIC is often more adventurous than previous, with the ability to go short as well as long. That means they can make money in the dips as well as the good times.
From the front lines: what is it like seeing the LIC revival first hand?
OnMarket has listed or are listing three LICs in the last four months, with at least one more coming down the pipe. They are Absolute Equity Performance (listed in December and trading at a 20 per cent premium) Monash (which recently closed to subscriptions) and Wilson Asset Management’s third LIC, WAM Leaders Limited, which recently opened for subscriptions.
WAM Leaders, Absolute Equity Performance and Monash all have a mandate to go short as well as long, which can be a significant benefit in a volatile market. Overall, it’s an asset class worth looking at, particularly for those savvy investors seeking income-generating, liquid, inherently diversified opportunities.
Have you invested in LICs before? Join the conversation below.