Investment Choices

Listed Investment Companies & Trusts

Investing in LICs & LITs

Background

Listed investment companies (LICs) and listed investment trusts (LITs) are another form of managed investment that are listed on the ASX, and have a range of unique characteristics.

What are LICs

LICs are investments that are listed on the ASX, and are incorporated companies. They are similar to managed funds, in that they have a fund manager who is managing an underlying pool of assets. Its just that with LIC’s, an investor does not own units in a fund or ETF, they actually own shares in the company itself.

Think of it like this. With regular ordinary shares (like CBA for example), the business operates and makes a profit, and as a shareholder you get to share in that profit via dividends and hopefully a rising share price. Well, with LICs, think of it like the profit of the business is the performance of the underlying investment portfolio. The better the investments do, the more profit there is for the shareholders.

LIC’s don’t pay distributions. They pay dividends (just like other shares) as they are a company, and generally have franking credits attached to them.

What are LITs

LITs are similar to LICs in that they are traded on the ASX, however they are incorporated as trusts, not companies.

This means that they must pay any extra income out to investors as trust distributions. Franking credits can still be attached, as they (if any) are passed through from the underlying investments.

Closed-ended

One big difference with LIC’s and LITs compared to managed funds and ETFs is that they are closed-ended. This means that they are not issuing or cancelling shares each time someone invests or redeems, like what happens with units in managed funds and ETFs.

The advantage of this for the fund manager is that they have this one pool of money to invest, and are not distracted with money coming and going from the pool. Note that they can do a capital raising at certain points in time, whereby they can go to their existing investors or go to the open market and raise more money for the pool.

Price can trade at a premium or discount

The other big difference with LIC’s and LIT’s compared to managed funds and ETFs is that the price of the securities listed on the ASX can trade at either a premium or discount to their actual underlying value.

For example, with an ETF if the underlying value of the pool of assets being held or managed equates to $1 per unit, then it will trade at (or close to) $1. With an LIC or LIT, this is not the case. As each share or unit is traded by buyers and sellers, and it is closed-ended, the price of these securities may trade higher or lower. So in our example, if it was an LIC that was performing well and became popular with investors, then it may trade at say $1.20 per share, representing a 20% premium to the underlying pool value of $1.

LIC & LIT research

LICs & LITs are not without risks, and its important for investors to fully consider each individual investment on its merits.

Lonsec provide comparison tables with filters, along with Product Viewpoint pdf reports. These reports are a two-page summary research report, which includes information of what the investment company or trust is, performance tables, how to use the them in a portfolio, their risk characteristics, their “rating”, Lonsec’s overall opinion of the investment, Lonsec’s suggested risk profile suitability, and it’s strengths and weaknesses.

CLICK HERE for more information.

Latest Research & Insights

Chart of the Week: how inflation will negatively affect the business cycle

One of the key themes of 2021 has been the return of inflation, after many years of absence. In fact, there would be an en...

Read article

Gold trending higher and what’s driving it

Gold is one of those assets that has a lot of misinformation around it. It gets promoted by some as something to be held w...

Read article

Hybrids / Listed Income Model Portfolio Changes

There has been a change to the Hybrids / Listed Income model portfolio. One of the Consumer Discretionary subordinated not...

Read article

Register for our FREE newsletter to receive investment insights, education, and SMSF trustee updates