Get ready for LICs
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Krystine Lumanta is a journalist with ifa magazine, a Morningstar publication.
A listed investment company (LIC) provides investors with a diversified portfolio of assets and trades at either a premium or a discount to the underlying value of investments held in the portfolio. Most aim to distribute fully franked dividends to shareholders, in addition to an increase in the value of the holdings.
LICs are now being recognised as a good vehicle for long-term performance, particularly as managed funds have come under fire of late for continuing to charge high management expense ratio (MER) fees, the average around the 1 per cent mark, for poor performance returns.
According to the April 2012 Morgan Stanley Smith Listed Investment Companies report, Australian equity LICs have outperformed the broader equity market since 1979 and have also exhibited stronger performance than their unlisted managed fund peers over three, five and 10-year time horizons.
Features and benefits of a LIC
LICs are essentially a subset of managed fund investment arrangements and listed on the stockmarket. The majority are set up as trusts, but in this case, they are incorporated as quoted companies and investors buy shares into the company, as opposed to buying units in a fund.
Its closed-end structure means it holds a fixed amount or closed pool of capital whereby investors can only buy shares in a LIC when another is willing to sell. The share price moves according to supply and demand rather than being based on the underlying assets, hence LICs trade at either a premium or a discount to net tangible assets (NTA).
The benefit of not being influenced by redemptions or applications is the ability to use setbacks in the market as opportunities to buy stocks, rather than being forced to sell and vice versa. This has appeal for investors who want to manage their involvement in the market more closely.
LICs exercise tight cost control as they are not forced to grow the size of the fund, thus management fees are substantially lower than other investment vehicles, namely managed funds. Most offer an MER well below actively managed funds.