Listed Investment Companies

Listed Investment Companies, known as LICs, are effectively a managed fund with the main difference being that they are traded on the ASX like a share instead of being unlisted and traded through the fund manager’s administration system. So for one trade, on the ASX, through an LIC, you can buy a portfolio of shares and invest in the skills (or otherwise) of an active fund manager. The other thing you need to know about LICs is that although the underlying portfolio of shares might be worth $100 million, called the NTA – or the Net Tangible Asset value of all the shares that are held in the fund (which is easy to calculate), the share price of the listed LIC can trade below or above the NTA depending on whether people think the fund manager is good or bad. When a fund manager is bad, really bad, the LIC can trade at a significant discount to the NTA, so the LIC might be valued at $90m on the ASX but the underlying share portfolio it represents may be worth, say, $100m. When this sort of big discount opens up someone (usually another LIC fund manager) can come along, buy all the shares in the LIC on market (bid for it, take it over/merge), in so doing get the management rights (although complex documents protect the incumbent fund managers sometimes), then sell all the shares for $100m and make a profit of $10m. That's a bit simple but you get the idea. There are 115 listed investment companies on the ASX. 109 have been around over a year. They vary in size from the Australian Foundation Investment Company ($7.699bn) to tiny LICs worth a million dollars or less. There are grouped into various asset classes depending on what they are invested in including:

• Equity - Asia
• Equity - Australia
• Equity - Australian Small/Mid Cap
• Equity - Australian Strategy
• Equity - Global
• Equity - Global Strategy
• Equity - Infrastructure
• Fixed Income - Australia
• Property - Global

They are all listed on the ASX website HERE which has hyperlinks to the websites of each where you can find a lot more information about performance, the fund, benchmarks, methods, yields etc... So lets look at the performance of the LICs (the share prices not the fund performance) over the last three years of any LIC that’s been in existence for three years or more (only 85 of those). Bear in mind this is not the performance of the fund manager’s fund, that will be on their website and will reflect the NTA over three years, this instead is the performance of the LIC share price listed on the ASX. Bear in mind that these prices can vary from the NTA by (generally) 10% above or below NTA depending on whether the fund manager is in favour. A couple of notes on these tables:

• There is a Market Capitalisation column showing how big they are. LICs bigger than $100m are in blue (small ones are white).
• There are a few indexes shown at the top which you can compare the LICs to as quasi benchmarks. I have also listed the two main listed ETF’s that track the ASX 200 (STW and IOZ).
• Not all LICs are benchmarked to an Australia equity index, so the comparison to the All Ords or ASX 200 index is a bit unfair in some cases when they should be benchmarked to global equities, or small companies, or property....
• The list shows the type of fund which tells you the asset class they represent. Some are in fixed interest so cannot be compared to an equity index.
• The one and three-year performance is shown in the right hand columns.
• If there is an N/A it means the LIC has not existed for long enough to record a 3 year performance.

LIC mechanics aside, you would imagine, wouldn’t you, that with all the smart stuff you see written and said by smart funds managers in the media and on their websites and in the marketing, that most active fund managers would be outperforming their relevant benchmark index by miles.

Well here’s a dose of reality which is not good for the funds management industry. The astonishing statistic is that only 12 out of the 85 LICs that have been around for three years or more have performed better than the All Ordinaries index. Note that there are seven fixed interest LICs in there, which is a bit of an unfair comparison.

Of course some LICs pay franked dividends but this is just the capital performance of the listed share price of the LIC. It's too complex to work out the total returns from each LIC for you today, and if we did we would be comparing them to the All Ordinaries Accumulation Index which has been up 44.6% and 10.9% over three years and one year. So this is the list of LICs that have done better than a zero return in the last three years (above zero) - There are the 53 out of 85 LIC share prices that have returned more than zero over the last three years – compare that to the All Ordinaries index up 6.3% in the last year and 27.7% in the last three years and the ASX 200 ETF up 5.5% and 26.9%. As you can see, 12 have beaten 27.7% in three years. And here is the list of the worst performing LIC share prices over the last three years in order. Blue ones are the big ones which have a market cap over $100m. 35 out of 85 LICs have returned less than zero in three years and 73 (85%) have returned less than the All Ordinaries index. That's over three years. Here is the performance over a year – there are 104 LICs that have been around for a year or more. Here are the 40  whose share prices are above zero in the last 12 months - just 14 have returned more that the All Ordinaries Index: And here is the simply astonishing list of the 64 LICs whose share prices are down in the last year - again, big ones in blue - some are down over 20% in a year against a market up 6% - they are supposed to be making you money, not losing it: In total, out of the 104 LICs listed on the ASX, 90 (86%) have underperformed the All Ordinaries index in the last year. You can pick out the big losers for yourself. Of course all the same issues apply as they do with the big industry funds, there are legitimate reasons for underperformance including:

• Because they are not 100% invested in equities – the moment a fund (a balanced fund for instance) is not 100% fully invested in equities, they will underperform the equity indices in a bull market (they should outperform in a bear market).
• Because they hold some cash - The moment a fund manager holds a dollar of cash they are no longer fully invested in equities and will underperform the equity indices in a bull market (they should outperform in a bear market). Wilson Asset Management, for instance, will tell you that over the journey they have held around 30% cash at all times. If so they will underperform by 0.3% every time the equity market goes up 1%.
• Because they don't perfectly compound dividends at no cost - If fund managers do not perfectly compound dividends without any costs, they will depart from the accumulation index. Almost none of them can/do.
• Because they don't perfectly replicate the index changes at no cost - If fund managers do not perfectly replicate the changes in the index stocks without any costs at all, they will depart from the index. It is impossible to do without cost.
• Because they have dealing costs - If fund managers have any dealing costs at all, they will underperform.
• Because they charge fees - If a fund manager charges you a fee, they will underperform.

But clearly some of this underperformance goes beyond that. It is an amazing list including some of the most high profile and respected fund managers taking you nowhere. It is incredible to see that their ‘fiddling’ has lost money compared to an index. Part of the reason of course is that it is a bull market. A lot of these LICs will hold some cash which guarantees underperformance in a bull market (which is most of the time) and only comes into its own in a bear market. When the market falls 27% instead of rising 27% you will find the equation turns over and most funds will outperform. But again, some of these funds have been disastrous.