Advantages and Tips in Investing in a Listed Investment Company
Listed Investment Vehicles (LICs) make up a good portion of the managed funds you can trade in the ASX. Around 100 LICs are listed in the ASX, amounting to a combined valuation of at least $30 billion.
LICs usually fall into one of the following investment categories, depending on what their managed portfolio contains:
- Australian shares – LICs invested in stocks listed in the ASX.
- International shares – they’re more invested in international markets.
- Private equity – high-risk vehicles with investments in unlisted companies here and abroad.
- Specialists – LICs that focus on investing in specific sectors in the ASX like energy, technology, and mining.
LICs follow a close-ended structure of managing funds. This makes their fund less susceptible to influx or flight of investors.
Many retail investors see the advantage of LICs in enhancing their portfolios. What benefits can you get from getting in an LIC?
Advantages of LICs
1) Portfolio diversity
LICs deal with a variety of assets. The company usually owns a number of shares of different companies so you instantly get a diversified portfolio once you buy an LIC share.
2) Exposure to other markets
All LIC categories other than those that are involved only in Australian shares have a decent amount of exposure to foreign markets. Some also get a mix of bonds and stocks to get the most out of available investment vehicles in the country.
3) Franked dividends
Franked dividends eliminate double taxation so you can receive more of your dividends. This happens because dividends paid out to shareholders have already been subjected to tax when it’s taken from company profits.
4) Managed fund
You don’t have to fuss much about handling different assets because when you buy an LIC share, you are buying a share of all the assets it holds. These assets are managed by professional fund managers who are tasked to make profitable decisions to grow the portfolio’s value.
Tips to Consider
When buying an LIC share, make sure you’ve done your due diligence on what the company has to offer. If you don’t know what to look for in an LIC, see the list below on things you should consider before putting your money in their care.
1) Know the investment strategy
What are the strategies employed by the company in selecting which shares to buy or sell? Do they allow shorting on their portfolios? How about gearing? Before buying an LIC stock, know what you’re getting into.
What about the markets they’re involved in? The LIC may be investing in a foreign market that’s not currently doing well.
Understand the underlying assets the LIC invests in. Are they into property, options, bonds, or stocks? If they’re involved in a specific sector, take a look at the overall condition of the group. Identify if the stocks in there are overvalued or undervalued.
2) Manager performance
Take a look at the historical performance of the asset manager that handles the funds. Assess portfolio performance based on its annual returns when all the management fees and costs have been subtracted except tax. Compare this with the average performance of their competitors’ portfolios.
You should look at longer timeframes and not just the recent year’s performance. Be wary of managers who show stellar short-term performance. They may just have had a bullish year where everything is going up.
The profit strategy for each fund varies from an aggressive approach to a more conservative scheme. Aggressive ones have higher returns but pose a greater risk because of the strategies employed to grow the fund.
3) Liquidity of shares
As there are a lot of LICs in the ASX, not all of them move at the same rate. Some may have liquidity issues that will hinder you from freely getting in and out of the stock.
Fees charged by LICs are often higher compared to ETFs and other managed funds. Fund managers usually charge clients with a management fee and performance fee. The management fee, especially, is charged regardless of the fund’s performance, so make sure your expected returns won’t just be eaten by fees.
5) LICs trading at a premium/discount
LICs with proven track record often trade at a premium compared to competitors and the Net Tangible Assets (NTA) value. The likes of Australian Foundation Investment Co. Ltd. and Argo Investments are priced higher due to their established presence in the market. They’ve been through bearish and bullish cycles, as well as market crashes. The fact that they’re still in operation proves how resilient and effective their fund management skills are.
On the other hand, newer LICs trade at a discount because they still lack proof of their money management skills. However, just because, they’re cheaper doesn’t mean they’re worth your money. You might think you’re getting a steal because you’re buying a company that’s cheaply valued by the market. There’s a reason why they’re valued that way so make sure you do your research properly.
These factors will affect your decision in choosing an LIC. Choose an LIC that’s always in line with your profit objectives and risk tolerance.
LICs are really appealing to investors who are looking for a way to get shares of international markets, get involved in specific sectors only, or get a hold of a mix of different investment assets. However, you should not haphazardly buy any LIC you see just because they’re cheap or seemingly undervalued. The same goes for highly-valued LICs where fees may be greater than the returns you’ll be earning.
Buying stock shares of an LIC may prove to be an advantageous decision as long as you do your research. Always look at its performance over the long-term, the type of assets it holds, the management style the LIC employs, and its price against the NTA, whether it’s trading at a fair value or not.