Listed Investment Companies (LICs) are a great option for dividend focused investors who aren’t comfortable or simply don’t want to pick individual stocks. It’s what I personally use for the majority of my portfolio, and LICs are generally what I think a beginning investor should start with before moving on to individual stocks.
What is a Listed Investment Company?
A Listed Investment Company (LIC) is essentially an ASX listed company established to invest in a portfolio of listed securities, managed by a professional fund manager. LICs may also invest in other investments, although in Australia at least, this is somewhat rare. Income from LICs is derived from the profitability of the portfolio. Generally, dividends are paid semi-annually and are fully franked (although you should check!).
LICs as a group have delivered strong capital growth, rising at slightly greater than 10% per annum over the past 15 years. LICs have also become more popular, with the number of new LICs listed increasing by approximately 50% over the same period. Approximately $30b of listed investment companies currently trade on the Australian stock exchange.
Shares in LICs are traded like any other listed company, meaning access to the underlying portfolio and investment expertise of the manager is extremely simple. LICs have a closed structure, meaning that no new shares are issued when an investor buys an individual LIC – shares must be bought from existing investors. This means the amount of capital in the fund is extremely stable, but can occasionally see large price deviations from the stated net tangible assets of the company (known as discounts or premiums).
Why are LICs becoming more popular?
The two main reasons for LICs becoming more popular over the last five years are the increasing importance of the self managed super (SMSF) sector and changes brought about by the Future of Financial Advice (FOFA) reforms.
SMSF’s are increasingly looking for investments that can pay a defensive and growing stream of dividends. With SMSF’s now comprising more than 30% of Australia’s total superannuation assets, this group of investors is increasingly important. Recent changes to the regulations surrounding the payment of dividends has allowed LICs to be more consistent in paying dividends, and because they are structured as companies, to pay fully franked dividends. As a result, there has been huge demand from SMSF’s for new listed investment companies.
Changes to regulations around financial advice mean that advisors have been banned from receiving trailing commissions from the sales of mutual funds. This means that ETF’s and LICs are well placed to win new investment contributions, as and when they are made.
How to monitor your LIC holdings.
LICs must provide an estimate of net tangible assets monthly. This allows an investor to monitor the LICs trading price in relation to its NTA. A LIC that is trading at a price above its NTA is said to be trading at a premium; a LIC that is trading at a price below its NTA is said to be trading at a discount.
A few reasons why LICs trade at prices different to their NTA include size, investment performance and dividend performance. Large LICs typically trade at a slight premium; small LICs (particularly those with less than $50m in assets) typically trade at high single digit discounts.
LIC performance has historically been exceptional – better than the equivalent unit trusts. Therefore, buying LICs with consistent dividend policies at slight discounts to NTA has historically delivered excellent investment results.
Listed Investment Companies Premiums/Discounts
The Benefits of Listed Investment Companies:
- Established LICs in Australia typically own well diversified portfolios, allowing investors to gain access to the underlying with just one trade.
- Some LICs in Australia have extremely long track records, with good operating history, well defined dividend policies and well defined portfolio strategies.
- Research highlights that LICs (particularly well-established large cap LICs) typically have a market beta of approximately 0.6, while performing in line with the broader market.
- Large LICs are relatively liquid, allowing ease of investment
- Entry costs for LICs are limited to brokerage, with no upfront portfolio loading fees
- Ongoing costs for a number of LICs are extremely low (with some having management expense ratios of just 15-16 basis points!)
Drawbacks of Listed Investment Companies:
- LICs are close ended, and thus can trade at both discounts and premiums to the underlying assets. Although I believe that investors typically make a bigger deal out of this than they should, it is still something to be aware of.
- LIC dividends are at the discretion of management, due to the corporate structure of LICs.
- Some LICs (particularly some of the newer LICs) have large ongoing fees and management fees, which can be detrimental to long term compounding.
Conclusion:
Listed Investment Companies are a great way to add diversification and income to a portfolio. Some funds which are consistently mentioned when talking with dividend investors include AFI and ARG at the larger end, and MLT/WHF and BKI at the medium end. I am also reasonably positive on QVE. For further discussion on my favourite LICs, click through! As always, you should do your own research and talk with an investment professional to determine the best avenues given your particular investment circumstances.
(Disclaimer: The information in this piece is personal opinion and should not be interpreted as professional investment advice. The author makes no representations as to the accuracy, completeness, suitability, or validity of any of the information presented. As always, seek professional advice.)