For self-directed investors, listed investment companies (LICs) are traditionally a popular investment choice. They provide exposure to different markets while offering appealing benefits, including flexibility, professional management, and tax advantages. A staple of self-managed super fund portfolios in Australia, LICs have been one of the most widely-used diversification tools for individual investors since the SMSF emerged in 1999.
With the rise of exchange-traded funds (ETFs) over the past two decades, some investors have shifted away from their standard investment tools in favour of this newer, low-cost option. While ETFs have plenty of advantages as well, LICs are still a good investment, especially for SMSF members.
What are listed investment companies?
A listed investment company is a financial company whose business purpose is to invest in other companies through shares to grow their portfolio. A LIC issues a fixed number of shares through an initial public offering (IPO). The shares can then be bought or sold on the ASX in the same way an investor would buy and sell shares issued by any other company listed on the exchange.
When exploring listed invested companies in Australia, you’ll notice that they usually trade at a price above or below their net tangible asset (NTA). The NTA refers to total physical assets, less the company’s liabilities.
The most desirable LCIs will trade at a premium, generally those with a history of strong performance and good management. Those that may have not performed as well recently, as well as newer LCIs, niche funds, and smaller LCIs, will often trade at a discount.
What are the benefits of investing in LICs?
LICs offer several important benefits to self-directed investors.
Diversified portfolio of underlying assets
You can access a highly diversified portfolio without a huge investment or high broker fees. Every share gives you a piece of all the shares the LIC is invested in. For example, when you invest in Global Masters Fund Ltd, you are exposed to a diverse portfolio of shares known for their capital appreciation potential.
Key holdings include Berkshire Hathaway, the US-based investment company managed by Warren Buffett, and Athelney Trust PLC, which allocates assets to small cap-stocks with long-term capital growth.
There are LICs for every investment strategy
If you’re looking for a way to balance your portfolio with a certain type of shares or a specific market sector, LICs provide easy access to a professionally-managed basket of securities. You can choose listed investment companies that align with your objectives whether you’re looking for specialist funds, private equity shares, Australian shares, or global exposure.
LICs have tax advantages self-directed investors should take note of
Listed investment companies pay tax in Australia on their earnings. This gives them the ability to generate tax imputation credits and attach them to their dividend payments. With franked dividends, shareholders submit their dividend income as well as the franking credit, and then they are only taxed on the dividend portion.
LICs are straightforward
Unlike other types of managed investments, LICs don’t require redemption forms and lengthy applications. Shareholders also don’t have to pay application or redemption fees. Because you can buy and sell on the ASX, you also benefit from intra-day liquidity.
They are professionally-managed
How well the company’s portfolio is managed impacts the returns, as well as the value of the LIC shares. This is also the main reason to choose LICs over ETFs. Listed investment companies have the potential to offer a return above the market. Often investors who chase Alpha (excess returns) will balance their portfolio with LICs.
What are the drawbacks of LICs?
Listed investment companies also come with some drawbacks you should be aware of. As managed investments, shareholders pay management fees, which reduce earnings from dividends and capital growth. For LICs, management fees generally range from 1% to 1.5% of net assets.
You may also be charged performance fees. You only pay a performance fee if the fund goes above a set benchmark. For LICs, performance fees are generally between 15% and 20% of returns above the specified benchmark. Not all LICs charge performance fees.
Another downside is that LICs don’t often perform well in the short term. They are more suitable for long-term growth strategies.
How are LICs different from LITs?
LICs are listed investment companies. LITs are listed investment trusts. They both offer exposure to a basket of securities, usually shares. And, they are run by a professional investment manager. Like LICs, LITs are listed on the ASX.
Their difference lies in their structure.
- LICs are public companies. Profits are taxed before dividends. They are paid to investors, and the directors choose the dividend level.
- LITs are established as trusts so net income and capital gains are distributed on a pre-tax basis. Investors are liable for associated tax on earnings. One unique feature of LITs is that investors who hold assets for longer than 12 months may be eligible to pay a discounted capital gains tax.
How do LICs and LITs work?
Both listed investment companies and LITs are run by a professional team. The fund manager selects what investments to buy and manages the portfolio. Because LICs and LITs are close-ended, they won’t issue new shares or cancel existing ones as new investors join or leave.
What investment strategies do LICs use?
As of March 2021, there are 110 LICs listed on the ASX. Most of these companies invest in Australian shares. There are others that include global shares in their portfolio, as well as other asset classes such as bonds. A small number of specialised LICs invest in real estate.
LICs use different investment strategies, so it’s important to choose companies that align with your investment goals. The overall investment strategy a LIC implements will depend on their return target, the asset class, and any investment limits that have to be adhered to, as well as the preferred investment style. Here are some of the approaches LICs may take:
- Dividend growth – good for investors looking for income from dividend investments
- Value investing – this is a strategy that involves choosing stocks that appear to be trading for less than their intrinsic value
- Aggressive growth – this may involve using riskier investment tactics with the aim of attaining higher returns
LICs versus managed funds – what’s the difference?
Both LICs and managed funds are run by an investment manager. They are also useful if you’re looking for a way to diversify your portfolio. There are a couple of key differences:
Managed funds may or may not be listed on an exchange. With unlisted funds, investors purchase shares directly from the fund rather than trading on an exchange. Managed funds also come with more fees than LICs, which can reduce the returns of the fund or increase the size of losses.
LICs versus ETFs – what’s the difference?
Both LICs and ETFs are traded on exchanges, making them easily accessible. They also both have lower fees than managed funds.
The difference is that LICs are listed companies with a board of directors, corporate governance policies, and a specified investing intent. There are experienced professionals working hard to ensure the securities in the fund are aligned with stated investment goals and objectives.
ETFs, on the other hand, are usually passively managed. They allow investors to buy into a diverse basket of investments, such as the MSCI or a range of investment-grade Australian corporate bonds. There are also more ETFs, so investors have plenty of ways to diversify.
How do you know a LIC is a good investment?
No matter what security you invest in, there’s always risk involved. The same holds true for LICs. However, there are a few factors you can consider to help you decide if a LIC is a good investment for your portfolio.
- What are the return objectives? Has the fund been historically managed in a way that has allowed it to reach those objectives?
- Why are types of assets involved? Does the LIC invest in blue-chip companies, dividend earners, growth stocks, or something else? Is the focus on a small niche, such as the technology sector, or does it invest broadly?
- Does the LIC invest in companies on the ASX, or does it invest in shares listed on other stock exchanges such as the New York Stock Exchange and the London Stock Exchange?
- Does the investment manager have a history of investing in line with the state benchmark?
- What advantages does the LIC’s investment strategy have that could enable it to beat the market?
- Where does the LIC fit in with the rest of your investment portfolio? Does it complement your other investments, or will you have a portfolio that’s weighted too heavily in a certain asset class or market segment?
When doing a comparison of ASX LICs, look into the background of the company. Read reports to get a granular view of how the fund performs each year and to learn what changes the investment manager made. You can also see total dividends, revenue, and how much these figures have gone up or down. Check company announcements to learn about specific changes made by the director.
The more research you do when comparing listed investment companies, the more confident you can feel about your choice to invest in one.
What are the best performing LICs in Australia?
Another tool to help you research your investments is a listing of high performing LICs. Financial services company, Morningstar, posts lists of the best performing LICs in 2020 and 2021.
Global Masters Fund Limited is a listed investment company that offers global exposure
Global Masters Fund Limited (GFL) consistently outperforms the market and has outperformed major benchmarks such as the MSCI repeatedly. First listed on the ASX in 2006, our goal has always been to provide a vehicle for Australian investors seeking long-term capital growth through Berkshire Hathaway and through a diverse basket of shares on major global exchanges, as well as companies on the Australian Stock Exchange.
Our shareholders benefit from reduced share investment risk through a diversified portfolio, professional management, and easy access to useful information on our website including investing news, reports, and more. If you have any questions about GFL and our approach to investing, get in touch with us.
Why are LICs a good investment for SMSFs?
LICs are a good investment because they are easily accessible to self-directed investors and offer diversification. They also can come with tax advantages. With professional management, there’s the potential to beat the market without having to pay a lot of fees as you would with a managed fund.
What’s better? ETFs or LICs?
Both of these investment vehicles have advantages that can add value to your portfolio. ETFs have lower fees, but they tend to rely on passive management. With LICs, shareholders benefit from active management and a clearly outlined objective.
One reason LICs can be a better choice than ETFs is that they have a fixed level of capital. As a result, the focus is more on long-term investing. The regular inflows and outflows of capital that normally impact other shares on exchanges don’t impact a LIC’s investment approach.
On the other hand, with lower fees, it’s easier to realise returns with ETFs. Also, even though they are usually passively managed – meaning there’s no professional manager buying and selling securities to achieve a specific benchmark – ETFs historically perform better than many managed funds and LICs.
What is the difference between an ETF and a LIC?
An exchange-traded fund has a completely different structure than a listed investment company. ETFs will track an index such as the NASDAQ 100 or the Australia 200 Index. Their expense ratio is generally very low – usually less than 1%.
LICs are a financial company working to make a profit for the company and for shareholders. They do have management fees, although these are not that much higher than what you’ll find with ETFs – most are less than 1.5%. The primary difference is the team of investment professionals who manage the securities in the company’s portfolio. Where ETFs will track the market, LICs have the potential to provide excess returns.
How do you buy and sell LICs?
You can buy and sell LICs through a broker or an online investment account. The process is the same as what you would do if you were buying shares for Telstra, BHP, or any other listed company on the ASX.
One thing to keep in mind when looking at LICs is trade volume and liquidity. Because they can be sold at a discount or a premium, you may have to wait for a buyer to sell shares. This is a little different from many ETFs and common shares, which can be sold quickly because they are traded at high volumes.
Where do LICs invest their money?
LICs invest their money in other companies. They can also invest in asset classes such as bonds or real estate. You can learn about the investments in a LIC’s fund by reviewing their annual report.
How can I invest in global shares?
If you want to add global shares to your portfolio, explore LICs, as well as managed funds and ETFs, that have shares from the regions you’re interested in purchasing from. GFL is a LIC with a global focus. We invest in companies on the New York Stock Exchange, the London Stock Exchange, the Johannesburg Stock Exchange, and the ASX. Our key holding is a US company: Berkshire Hathaway.
When should I buy LICs – at a discount or a premium?
When investing in LICs, you’ll have to decide what the right price is for you. Some investors prefer to buy at a discount, with the objective of seeing the value increase over the long term. However, whether a LIC is priced above or below the NAV is only one factor. Also consider factors such as historical performance, investor confidence at the time you are looking at the price, underlying assets, size, and portfolio concentration.
How can I buy GFL shares?
You can purchase GFL shares on the ASX through a broker or an online investment account. If you have any questions, contact our team of financial experts.