Ask Paul: Are LICs better than ETFs?


Dear Paul,

With listed investment companies (LICs) being popular in recent years, what are the pros and cons? Are they any better than exchange traded funds (ETFs)?

We have owned Argo Investments for more than 15 years and the returns have been steady.

lics v etfs money magazine

Recently, we purchased some WAM Capital and Argo Global Listed Infrastructure. - Warwick

LICs have real benefits: all the obvious stuff, such as professional management, generally low fees and usually good performance.

Older LICs have often built up reserves to ensure a steady stream of dividends. Any seller needs a buyer, so their listed nature means they are never forced to sell assets to pay sellers.

A new buyer steps in via the ASX.

Where they are a flawed structure, though, is that they regularly trade at a discount to their net tangible asset (NTA) value. Sometimes this can be a big percentage.

For example, I chaired the Monash Investors LIC. It has good managers, who I respect for their ethics, skills and professionalism.

But after it was listed, it was selling at quite a big discount. Management and the board felt this was unacceptable, so with shareholder approval we converted it to a 'managed listed fund'.

It now trades (as MAAT) at very close to its NTA backing. That removes the discount problem.

In my view, quite a number of LICs trading at a discount should do this, but boards and management are reluctant to change. In a managed listed fund, any investor can redeem without a buyer.

So, a fund doing poorly could find itself with no assets to manage, meaning no fees. The joy for LIC managers is that a buyer must meet, through the market, a seller. So, the fund size and, hence, manager fees remain intact. Locked-in fees are a juicy prize for a manager.

The positive news for investors, though, is that it is possible to buy into some excellent LICs, at times at quite a discount.

The risk, of course, is that the discount gets bigger. I'd be doing plenty of research about LICs and thinking about the opportunities in good LICs trading at a discount, as well as listed managed funds that trade at their NTA.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. View our disclaimer.
Roger Slimwood
March 6, 2024 8.00pm

Greetings Paul,

A useful article. However, there was no discussion on the ETF side of the question. We have a large amount invested in LICs, buying over a 25 year period. With the more recent advent of ETFs, we are always reflecting on the pros and cons, and whether to buy in. So far, we have not made the move. We have read many discussions on the ETF subject. However, we prefer not to do what everyone else is doing, unless there is a compelling reason to do so. The herd mentality isn't always the wisest. Therefore, when we saw this question come up on your site, we were eager to read your interpretation. May it be forthcoming?