Listed Investment Companies (LICs)

When investors think about getting exposure to a wide range of assets by way of a single investment, most would consider a managed fund as their first choice. However, there is a listed product that is well worth considering.

Listed Investment Companies (LICs) are a viable and well established alternative to the managed fund and in fact have some considerable advantages when compared to managed funds.

LICs are a great way to achieve market diversification or invest conservatively for those investors without the expertise or inclination to invest directly in other ASX listed companies.

Let’s explore Listed Investment Company's in more detail.

 What is a LIC? 

LICs are a subset of what the ASX calls listed managed investments. They enable an investor to invest in a diverse and professionally managed portfolio of assets which can include shares, property and interest bearing deposits.

LICs in Australia primarily invest in Australian or international shares and offer investors exposure to the same universe of assets that can be accessed through many unlisted managed funds.

LICs are bought and sold on the market just like an ordinary share and investors can decide whether the investment style and underlying investment portfolio of a particular LIC suits their own investment objectives.

 LIC characteristics

Let’s look at the characteristics of an LIC and some of the pros and cons:

Structure

Most LICs are companies and usually distribute their income by way of fully franked dividends on which 30% (company) tax is already paid. See our Franking credits explained page for an explanation of the advantages of franked dividends.

Asset exposure

You can choose an LIC that suits your investment needs. 

Australian shares

Argo

Australian Foundation Investment Company

Small caps  

Contango Microcap

Mining

Global Mining Investments

International shares

Platinum Capital

Net tangible assets (NTA)

The value of the underlying assets held by an LIC on a per share basis is referred to as NTA or Net Tangible Assets. LICs are required to report their NTA on a regular basis and this measure can be used to determine whether an LIC is trading at a premium or a discount to its NTA. Current and historical LIC Premiums/Discounts to NTA data is available from the ASX site and can be used to help investors time their buying and selling.

 Closed-end

LICs do not regularly issue new shares or cancel shares as investors join and leave the fund. Investors buy and sell shares in LICs from each other through the stock exchange. This allows an LIC to concentrate on investment selection without having to factor in the possibility of money leaving the fund unexpectedly as in the case of a managed fund.

 Costs

Generally, a long established LIC charges a Management Expense Ratio (MER) significantly below comparably invested unlisted managed funds. Usually this is a result of long-term buy and hold strategies which cost less and usually LICs are internally managed which results in lower costs.

Transparency

LICs must comply with the stock exchange's corporate governance and reporting requirements which means that they are generally more transparent than a managed fund.

Liquidity

Most LICs are traded easily on the ASX however some LICs can be quite thinly traded.

Volatility

LICs are prone to the overall volatility of the stock market and this may be a disadvantage to some investors.

Regular savings

Unlike a managed fund, LICs don’t offer a regular savings program which means that an investor will need to accumulate funds over a period of time to invest in a meaningful sized parcel. One way to do this would be to set up an online broking account and deposit your regular savings to the attached high yielding savings account. Every quarter or other regular interval perhaps, purchase as many shares of the LIC as possible with the available balance.

 Other resources

The ASX has a short article on LICs (which compares them to Listed Investment Trusts).

Interesting article from Morningstar titled Are LICs worth a Closer Look

If you are interested in how the Listed Invested Companies are performing overall, the ASX in conjunction with the LICs have established a LIC Index which comprises of LICS listed on the ASX that invest directly in Australian and International Equities. 

Interesting LIC article written by Geoff Wilson a leading Australian LIC manager.

Series of articles on LICs make for interesting reading. Make sure you check out the "Making a Comeback" article which has an excellent "Checklist for SMSFs when choosing LICs" – of course this list can be useful for any investor.