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.

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.

Ask Paul: Where are they now?

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