Listed Investment Companies
The Listed Investment Companies in Australia manage around $32 billion. There are just short of 100 of them. The managed fund industry on the other hand manages around $2.8 trillion and there are thousands of them. They do the same thing but the main difference is that managed funds aren’t listed on the ASX, whilst the LICs are. They do the same thing, just in different structures.
LICs also tend to have a lot more transparency over what the funds are invested in and the mechanism the fund managers use. For most unlisted managed funds the activity of the fund managers is rather opaque but because LICs also have to market themselves a bit harder than managed funds, they tend to tell you what they do.
LICs are also generally smaller, more boutique and have to ‘win’ rather than receive funds, unlike some of the big unlisted fund managers that invest for the big industry and public sector funds that dump billions of dollars of super funds into their laps provided by their captive public sector employees, industries and unions.
Who are they for? If you are an Australian Plodder holding twenty plus stocks in a large diversified portfolio that, despite your efforts to add value, is now so large and rambling that you are simply getting the average return anyway, then you might consider LICs as an alternative to holding your essentially market matching portfolio. It is a lot easier to simply buy a market exposure through a big established LIC that still pays you dividends (AFIC yields 5.2% plus full franking) rather than manage twenty or more stocks, making twenty stock decisions and doing twenty lots of paperwork.
Instead, with the big LICs like AFIC, Argo, Milton Corporation and WAM Capital, all you have to do is make a couple of decisions a year to be in or out of the market and, unlike in managed funds, those decisions can be effected in minutes instead of days or weeks by simply doing one ASX trade online. And the big LICs also make very good presents for your grandchildren, a good introduction to the stock market.
Outside of the big ones LICs provide easy access to boutique fund managers in a variety of fields. There is a lot to choose from. From microcaps, to contrarian investing to international LICs and specialist LICs. I have provided a spreadsheet of LICs on the Marcus Today website HERE. It is sourced from the ASX and includes links to each LIC website. All LICs have differences in how they are run, what they can invest in, how big they are, their track record and to find that out their websites are the best resource.
Some of the most popular LICs outside of the Australian equity exposed LICs are those that offer an easy way to buy an international exposure. The big ones are Magellan Flagship fund and Platinum Capital. If you need a long-term bet on a falling A$, as the RBA wishes, you might consider them. But you will need to check on each LIC before you assume, some will hedge the currency others won’t.
By scanning across the performance figures some of the funds stand out. Not all are market matching funds, some are very specialized, like microcap funds that rely on the small stock picking skills of its fund managers, and some have performed very well, to the Private Equity fund (IPE) which has been a terrible performer in the last year. There is something for everyone.
On the basis that the stock market is worth investing in for some of the time, not all of the time, trading a market proxy like an LIC is a lot less hassle and changes the investment experience from whatever you are doing now to just a few decisions on the market every year.
You might find it a more peaceful investment experience, letting the stock picking be done by someone else whilst confining yourself to simply trying to time the market. And for some of you who spend all evening and half your weekends ‘buggering about’ in stocks, you get all that time back, throw off all that stress, and with LICs you can spend all day playing ring a ring a roses with your spouse.
Suddenly that 20 stock portfolio is looking good again.
LICs are mostly closed end funds. So whereas a managed fund manager will have to invest your money when you put it into his fund, with an LIC you are simply trading in shares of a vehicle that holds a lump of already invested money.
LICs generally have lower fees than managed funds although performance fees may tilt the balance a bit. But of course there’s nothing for nothing. The price you pay for the ease of execution in LICs is the share price spread and the broker commission, altough dealing online will minimise that and the unlisted funds often have a bigger spread than a market set price.
But the major difference between LICs and managed funds is that the LICs are exchange traded. This means you can buy or sell them in an instant on the ASX which is a huge attraction to investors over the bureaucratic barriers involved in buying and selling most unlisted managed funds, something that matters when the market moves sharply down. There is nothing quite like trying to redeem your units in an unlisted managed fund when the market is collapsing and the price is being quoted by the people you are selling to.
One of the biggest drawbacks of an unlisted managed fund is that feeling that you are not quite in control compared to shares, because you can’t get out in a timely manner.
A large LIC like AFIC will return pretty much the same as the All Ords and includes a fully franked dividend payout that pretty much matches the All Ords yield as well. It’s like buying a diversified Australian investment portfolio yourself but letting someone manage it with the costs of doing so coming off the return. For more details on any LIC there are links to all their websites in the spreadsheet below.
Here is a chart of AFIC’s performance compared to the All Ords since 1996 (20 years ago).
As the AFIC marketing says…an investment in AFIC is a way of satisfying the Australian equities asset allocation of a self-managed super fund, all in one hit. Of course, it is therefore a bet on the market going up…don’t forget that (!) on which basis you might begin to realise that LICs are bull market investments and the enthusiasm, and the share price, wanes in a bear market. You add value by selling when the market looks like going down and buying it again when the market looks like going up and do that rather than trade far more volatile individual stocks far more often.
There are other Australian equity exposures beyond AFIC in the list below, AFI is just the largest.
Australian LICs in market cap order as of 4th April 2017
International LICs in market cap order
Specialist LICs in market cap order
Private Equity LIC
The golden rules is to stick to the oldest biggest LICs for safety and you can tell that from the listing date and the market cap. You will see many of the specialist LICs that sound clever have almost no following. Avoid.
- Expensive- The LICs that are considered most expensive are now Mirrabooka (MIR),Djerriwarrh (DJW), WAM Capital (WAM), and WAM Research (WAX). Among the WAM Funds, we prefer WAM Leaders (WLE) which is trading at slight discount to NTA.
- Most Attractive - Whitefield (WHF), Aberdeen Leaders (ALR), Diversified United (DUI), and Australian United (AUI) are attractively priced.
- Small Caps – Westoz (WIC) and Naos Emerging Opportunities (NCC) have performed well over the year.
- Global Focus LICs – We prefer MFF Capital (MFF), and PM Capital (PGF). Note that the NTA for MFF has been adjusted to account for an approximate 17.4cps reduction in the top line NTA assuming all its 2017 options have been exercised.
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