Listed investment companies are managed by investment professionals and invest in a portfolio of assets such as local and international shares, infrastructure assets and private equity..
Australian investors are becoming less willing to pour money into costly managed funds when other investments such as listed investment companies (LICs) do the same thing for a fraction of the price. Both LICs and managed funds are share portfolios that are externally managed by a professional fund manager – the difference being that LICs are listed on the sharemarket and managed funds are not.
An LIC can be a handy addition to your portfolio since your chosen LIC can sit alongside your Rio Tinto and Westpac share holdings in the same share trading account. This can make reporting and monitoring your portfolio much simpler than holding a mix of shares and unlisted managed funds, which are purchased as units from a fund manager not as shares from the ASX.
If you think that LICs are simply another new-beaut product to hit the market, think again. The oldest LIC in Australia, Australian Foundation Investment Company (AFIC) is 79 years old. Other older LICs include Choiseul, Milton and Argo Investments.
Since LICs act like ordinary shares, when more investors buy a particular LIC its share price will rise. Likewise, when investors sell out of an LIC its share price will drop. Analysts like to spend time comparing the current share price of an LIC with its underlying value, called its net tangible asset (NTA) backing. LICs can trade at either a discount or premium to their NTA.
Self-funded retirees are attracted to LICs because dividends are always fully franked, rather than partially franked as is common with managed funds. Typical yields are 3 to 4 per cent.
It’s not uncommon, however, for LICs to periodically weather bad press as they fall out of favour with investors and share prices sag. Typical moments of unpopularity are during booming sharemarkets when investors ditch LICs for direct shares or more aggressive managed funds. An avalanche of new listings can also push the average share price of LICs lower as the market grapples with the extra supply.
Today there are over 60 LICs trading on the ASX across Australian shares, international shares, private equity and specialist LICs including global mining funds.
The trouble for investors in LICs is that it never seems to be the right time to buy. When LICs lose favour, everyone is quick to point out lagging performance and sagging popularity. LICs typically trade at a discount to their NTA during these times. However during more bearish market conditions – when LICs spring to life again and share price bounce to a premium to NTA – they can be branded as expensive. So what should you do?
Most analysts tend to look to buy LICs at a decent discount to NTA, or cheaply. So in that sense, less favourable times are probably the best opportunities to hop on board..
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