A listed investment company (LIC) is an actively managed closed end fund listed on the ASX. Each listed investment company set its own benchmark, either a domestic or international market index, to measure performance depending on its investment strategy.
Listed investment companies predominantly focus on traditional equity investing. The recent trend shows a natural evolution of ASX LICs towards strategies that provide a consistent increase stream via investing in debt.
As these are effectively closed end funds, investors enter and exit the positions via purchase and sale of shares listed on the ASX rather than contribution and redemption of fund units for unlisted managed funds.
Top 3 Difference Between Listed Investment Companies and Exchange Traded Fund (ETF)
Active Manager – ETFs are passive index investment funds that aim to replicate a specific market’s performance. An example of a market index ETF is ASX IVV, which tracks the S&P 500 Index’s performance.
LICs are actively managed funds in which the manager actively practices security selection of shares that will outperform the market over time.
Fees – Like index funds, most of the listed investment companies are also externally managed, with the manager charging a fee based on the AUM. ETF’s advantage over listed investment company funds is its low management cost, but comparing ETF and LIC costs is an apple to orange comparison. ETFs are mostly passive funds, while LICs have an active manager, which incurs a higher cost to compensate for the work required to find the right investments.
The fee represents most of the investor’s cost as the companies themselves do not employ the stock pickers directly or staff.
The aggregate value of the fund is fixed. The total capital base of the LICs is fixed and only changes through dividend reinvestment plans, return on investment or from raising or returning capital to investors.
The total assets in an ETF listed on the ASX are based supply and demand of the fund by investors and vary based on the purchases and sales of the ETF units. Basically, the total amount reflects the market appetite for that particular exposure.
What is a closed end fund?
Listed investment companies are closed end funds in which the total capital base is fixed. Investors buying and selling shares of the listed investment companies have no impact on the company’s underlying value which vary as the value of the security it holds rise and fall. The price of LIC can trade at a premium or discount to the underlying net asset value.
By this virtue, ETFs can be more liquid as excess demand and supply by investors can be filled by the market makers. Market gyrations in demand and supply do not affect the fund’s value as any deviation can be arbitraged away.
Listed Investment Company Premium vs Discount
A quirk of this close ended nature of LIC is that its market value is based on the trading price of its shares listed on the ASX and does not necessarily have to reflect the underlying value of an investment in the company.
In periods of volatility, the price discrepancy can increase from levels seen during calm periods and cause the listed shares to differ materially from the underlying NTA. Sometimes investors can take advantage of this discussion as it can be an opportunity to buy in the below book if those can look beyond the short term volatility.
On the other hand, in rare instances where the manager’s strategy is hotely in favor, the opposite can occur where the listed price of the LIC trades above the book value of the underlying asset because there are limited options for investors to gain exposure to that particular strategy.
LIC Dividends vs Distributions
One of the key attractiveness of these close ended funds is their franked dividends. These investment vehicles are structured as Australian companies (Pty Ltd). As they receive dividends and incur capital gains, they can make their own dividends to investors, and if taxes are paid on the company level, the dividends come with franking credits.
10 largest Australia Listed Investment Companies – LIC Performance Table
The list below is a good representation of the types of LICs available traded on the ASX.
These companies’ performance is benchmarked against the ASX indicies, which means the funds’ performance is tracked against a variation of the Australian share market such as the ASX 200, 300 or the All ordinary index.
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The spread of the performance of the top 10 LICs shows that there is a strong showing of active management and differentiation between these companies.
Most of the underlying benchmarks are against the accumulation version of the index, which is the respective market index inclusive of the accumulated dividends invested overtime. This allows an apple to apple comparison of LIC’s return, including dividends against a benchmark that includes dividends’ reinvestment.
Unlike listed property trusts that as the name implies, are structured as trusts, it is important to note that they are structured as proprietary limited companies (Pty Ltd) rather than trusts.
This means that the companies’ realized gains and dividends are taxed within the company, and the dividends paid to its shareholders include franking credits.
The percentage of franking credit is mostly dependent on the dividend received from the company’s investments and taxes paid. Most of the dividends will be fully franked, while if its strategy is investing globally, the franking credits of dividends from international shares is zero. The franking credit of the LICs from the list above is, in most instances, close to 100%.
10 largest Foreign Listed Investment Companies – Custom Benchmarks
The funds below are LICs that invest in foreign equities. They provide Australian investors a means to gain exposure to offshore equities with active management strategies with daily liquidity.
The list of options is more limited, with only half of the funds near the $1 billion market cap. Another point is that the dividend yields are much lower than the companies just focused on Australian companies.
Due to the dividend imputation system, Australia is an outlier where investors are not double taxed on company profits. Offshore investing is very much a capital gains story at this stage of LIC development.
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