Listed Investment Company in vogue


In recent times, one category of collective investment that has become more popular with investors scared by stockmarket volatility is the Listed Investment Company, or LIC.

LICs have been around for decades, being a collective vehicle that allow retail investors to get exposure to a wide spread of holdings that could include shares, property and interest bearing deposits via one entity that can easily be bought and sold.

LICs are essentially listed managed funds, but typically have lower fees and offer greater liquidity than traditional managed funds. Moreover, most LICs are companies that distribute income via fully franked dividends on which the 30% company tax is already paid, so it's a tax boon for income-seeking investors.

listed investment company

Since they are listed on the ASX, LICs are also more transparent than managed funds as they must comply with ASX corporate governance and reporting requirements.

AFIC, the Australian Foundation Investment Company, is one of the oldest and biggest ones, and sits on some $6 billion worth of blue chip stocks on behalf of a raft of mostly retired retail investors.

But there are a lot more LICs listing on the ASX, not least because LICs have come back into vogue after spending a long time trading at a discount to their Net Tangible Asset (NTA) value.

When a LIC trades at a discount to NTA, the value of the underlying holdings is greater than the aggregate - which suggests it's time to buy as the security is trading at a discount.

But what's happening now is the opposite. Because investors don't like sharemarket volatility and they are becoming more income hungry and fee conscious, LICs have enjoyed a new lease of life and many are trading at a premium. AFIC's is around 6.5%, because the managers have a history of delivering better returns than the overall market in the long run.

Another interesting development is that the new breed of LIC is often more adventurous, with the ability to go short as well as long. That means they can make money in the dips as well as the good times. This absolute return focus has added to the appeal of LICs with many investors keen to protect their capital in volatile times when markets fall.

We've seen the revival first-hand. LICs that have listed on the ASX in recent months, or are in the process of listing, include Absolute Equity Performance (listed in December and trading at a 20% premium) Monash (which just closed to subscriptions) and the US property fund Neuberger Berman Monthly Income Trust, which recently opened for subscriptions. These have all been offered via the OnMarket Initial Public Offering (IPO) app and portal.

Both Absolute Equity Performance and Monash, the latter being chaired by investment guru Paul Clitheroe, have a mandate to go short as well as long, which can be a significant benefit in a volatile market.

Neuberger's a monthly income fund based on home lending but is an investment company and it's going to be listed, incidentally promising Australian investors a 6% annual yield. This attractive yield will no doubt appeal to income hungry investors with interest rates expected to stay at very low levels for a long time.

There's another advantage the LICs enjoy over conventional managed funds and that is they are more liquid because they are closed-ended. That is, the LIC does not issue or redeem units in its fund. In the event that the market plummets, every seller of a LIC share must be met by a buyer - that means that the overall size of the fund does not change.

A conventional long-only fund manager is often hit by redemptions in a down market, as investors ask for their money back. To achieve liquidity the manager has to sell what might well be high quality shares at low prices. And when markets are running hot, managers can find themselves being deluged with new money at a time when they don't see much of value that they can buy.

Overall, it's an asset class that is gaining in popularity among investors seeking income-generating investments that are liquid and considered to be less risky than many listed shares.


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