Your Guide to Listed Investment Companies (LICs)

How and why to invest?

Listed Investment Companies make up a substantial number of managed funds that can be traded on the Australian Securities Exchange (ASX), and appeal to many investors for several reasons. There are currently around a hundred LICs on the ASX, amounting to in excess of $30 billion.

What is an LIC?

Put simply, an LIC is an investment that has been incorporated as a company and listed on the ASX. Many LICs operate in a similar manner to a managed fund, with an internal or external fund manager responsible for selecting and managing the company’s investments.

How Does an LIC Work?

LICs are closed-ended, meaning that they do not issue new shares or cancel existing shares as investors join or leave. Instead, they issue a fixed number of shares through the process of initial public offering (IPO). Investors can buy and sell these shares on the ASX, allowing the fund manager to focus his or her efforts on investing, without the worry of cash flow.

Types of LICs

LICs can generally be categorised into one of four main types, based on their investment style:

1. Australian Shares
   LICs that are invested in stocks listed on the ASX
2. International Shares
   LICs that invest predominantly in shares listed on overseas exchanges.
3. Private Equity Funds
   These LICs are considered to be high-risk, with investments in unlisted companies both locally and overseas.
4. Specialist Funds
   LICs that focus on specific industry sectors such as technology, energy, mining, property, infrastructure, or even wineries.

Pros & Cons of an LIC

PROS

• Portfolio diversity. LICs tend to own a number of shares in different companies, instantly giving you a diversified investment portfolio.
• Exposure to overseas markets. Aside from the LICs that trade exclusively in Australian shares, all other types of LICs have some sort of exposure to global markets, adding international investments to your portfolio.
• Franked dividends. This arrangement eliminates double taxation so that you can receive more of your dividends. This is especially applicable to superannuants.
• Managed fund. Your LIC’s assets are managed by professional fund managers, who are focused on making profitable decisions that will increase the portfolio’s value.

How to Buy or Sell LICs

An LIC can be bought or sold on the ASX through a broker or online trading account. As with ordinary shares, you will pay a broking fee when buying or selling.

What Risks to Look for When Considering an LIC

1. Investment Strategy

What kind of investment strategy is the LIC employing? Is it an aggressive one that comes with higher risk? What kind of markets are they investing in – is it an international one that may be affected by events local to them? If they invest mainly in one industry, is that sector performing well?

2. Manager Performance and History

How does the LICs fund manager’s track record look? How has the portfolio performed after all management fees and costs have been deducted (except tax)? Compare this result with that of the LICs competitors.

3. Share Liquidity

Does the LIC have any liquidity issues that may hinder you from freely buying or selling stock?

4. Fees

It’s not unusual for your LIC’s fees to be higher than that of other managed funds. LICs tend to charge a management fee and a performance fee, and some funds will even charge a performance fee if the fund has made a negative return. Do your research to ensure that fees will not eat up any potential return.

LICs can be a great way to instantly diversify your portfolio and break into other sectors or markets, however, it’s best to do so with caution. For an obligation-free enquiry about how Super Network can assist you with acquiring an LIC for your portfolio, contact us today.