Investing

GUIDE: Listed Investment Companies (LIC)

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Looking for listed investment companies (LICs) to invest in on the ASX? Everything you need to know about listed investment companies, but were afraid to ask.

What are listed investment companies, what are the pros and cons and how do I invest?

What Listed Investment Companies are on the ASX?

For an updated list of the listed investment companies available to invest on the ASX I recommend you check the Australian Stock Exchange (ASX) website

listed-investment-companies-list-asx

The Listed Investment Company Structure

Investors can buy and sell shares in the listed investment company on the ASX.

The LIC manages an investment portfolio on behalf, and for the benefit, of shareholders.

listed-investment-companies-diagram

The listed investment company structure is tax effective for many shareholders because all profits from investment are taxed at the company tax rate of 30% and investment profits are distributed to shareholders via fully franked dividends.

How to Compare Listed Investment Companies

Here are some important factors to consider when looking for a LIC to invest in:

1What Are the Fees?

The investment fees for listed investment companies on the ASX are disclosed as MER%.

listed-investment-companies-mer-asx

The fees are charged internally through the listed investment company.

The Management Expense Ratio or MER is a representation of the total costs incurred by the investment managers to operate that listed investment company disclosed as a percentage figure for ease of comparison.

A fee of 1.2% means that is you had $100,000 invested the investment fees charged internally by the LIC would be $1,200 per year.

The fees of listed investment companies in Australia range from 0.13% for the Australian United Investment (AUI) fund up to 2.4% for the Aberdeen Leaders fund (ALR).

CHART: Potential Fee Range for LICs

listed-investment-companies-fee-range-asx

All things being equal, lower fees are preferred to higher fees.

As an investor I am happy to pay higher fees if the LIC is providing good performance. I prefer LICs that charge a low base fee plus an additional fee for outperformance, as opposed to high base fees.

2What is the NTA vs The Market Price?

LICs are judged according to two different prices.

The Market Price:

The market price is what the LIC trades at (the price you can buy and sell shares) on the ASX:

listed-investment-companies-afic-price

The NTA Price:

The NTA price is the actual value of the portfolio the LIC manages:

listed-investment-companies-afic-nta

Net Tangible Assets or NTA is management best estimate of the value of the assets held within the listed investment company. A good LIC will disclose this figure on a monthly basis.

If the NTA is greater than the Market Price, the listed investment company is said to be trading at a discount to NTA.

If market price is greater than the NTA, the listed investment company is said to be trading at a premium on market.

In the above example the question for a potential investor is AFI is:

Do you want to pay $5.89 / share for something that is only worth $5.01 after tax?

3What is the Past Performance?

The easiest place to find the past performance is on the each LICs website.

CHART: AFI Investment Performance

Here we have extracted the investment performance disclosed on the Australia Foundation Investment (AFI) website:

listed-investment-companies-afic-performance

LIC Investment Performance is often disclosed on an NTA basis, not an actual market price basis. You are unlikely to get the NTA performance as stated, unless you are a very long term investor (i.e. hold the LIC for many years).

4How Many Shares Trade Per Day?

Some listed investment companies have an active market of people wishing to trade shares on the ASX, while some LICs have a very quiet market with few trades on market.

CHART: AFI Price & Volume History

We have extracted the last 6 months trading data for AFI, and as you can see the shares trade quite actively on the ASX.

You will only have trouble entering and exiting this LIC on the market if you want to trade a large amount of shares, say over $1 million worth.

listed-investment-companies-afic-trade-volume

CHART: BST Price & Volume History

While a smaller ETF like Barrick Street (BST) may not trade as many shares per day.

For example if you wanted to buy $50,000 of BST, it may take a few days to execute on the ASX market. Alternatively you could call Barrick Street and ask the investment manager if they could help get you some stock.

listed-investment-companies-bst-trade-volume

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Pros & Cons of LICs

Here is a quick list of pros and cons regarding LIC investments:

Pros

Cons

A easy way to access a professionally managed investment portfolio. Fees can be high and actual performance may be difficult to track.
Can be a tax effective way for investors to own shares. It is not always easy to buy and sell LIC shares on the ASX.
You can buy/sell your shareholding in the LIC directly on the ASX. Divergences between NTA and market price can last many years.

How do ETFs Differ to LICs?

Listed investment companies (LICs) differ to exchange traded funds (ETFs) in the following ways:

  1. ETFs have portfolios that track the index (index funds), while LICs attempt to beat the index (actively managed funds)
  2. ETFs have market makers whose job it is to ensure the market price on the ASX matches the NTA price.
  3. ETFs tend to be cheaper because they are index funds.
  4. ETFs distribute capital gains to shareholders, while LICs pay the capital gains tax at 30% and distribute remaining profits as fully franked dividends.

Read why Warren Buffett prefers index funds to actively managed funds below…

Summary

  • There are over 100 LICs available to invest in on the ASX.
  • For an up to date list of LICs see the ASX website
  • The structure of LICs can be tax effective for many investors
  • Before you invest in an LIC make sure you review the MER, the performance, the trade volume and the NTA vs market price

 

 

 The Wealth Guy Signature

Joshua Stega

The Wealth Guy

Joshua Stega is an expert financial adviser and founder of JAS Wealth in Sydney. He specialises in the habits and behaviours of wealth. Joshua has a Masters in Taxation and Financial Planning and is regularly featured in the media

M.TaxFP, LLB(Hons), B.Bus(Acc), FTI, Adv.DipFP, Dip.FP, SMSF Specialist
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.

 

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2 Comments
  • ETF Guy Feb 8,2017 at 5:25 pm

    So Wealth Guy LIC’s or ETF’s then for Australian Investors. It would be great to compare both pre and post fees, tax, franking credits
    Comaprsion could be old style LICs and ETF’s and mixed style (3 fund ASX Bond, World & Aus etc)

    • The Wealth Guy Feb 9,2017 at 5:23 am

      Barry, it really depends on:
      1) what structure you are using to invest (your tax rate)
      2) what investment exposure you want to access
      There are so many different LICs / ETFs it is not really possible to do a general apples for apples comparison.

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