Diving Deeper into Listed Investment Companies (LICs)
Continuing on from our first article on Listed Investment Companies (LICs), today we’re going to dive further into how LICs differ from unlisted managed funds, and some of the benefits and risks involved.
As a quick refresher, let’s revisit what a LIC actually is…
LICs are companies listed on the stock exchange that are essentially managed funds in a company structure. That means they can pay out franked dividends (if declared) and are closed ended funds (i.e. the managers can’t take on more funds unless they issue more shares). This allows the investment team running the fund to concentrate on the investments, rather than worrying about the cash and liquidity situation of the fund.
Why are some key differences between LICs and unlisted managed funds?
Listed funds (ie. LICs) on the ASX allow you to buy shares in the fund, which represent ownership of part of the pool of investments. If the pool of investments goes up in value, then so does the NAV (net asset value). However because the fund is listed on the ASX, the share price can run in front of the NAV or trade at a discount to the NAV for a wide range of reasons.
Before purchasing a LIC, make sure you have checked out what the NAV is, and decide if you are still happy to purchase at a premium or a discount to that.
Sometimes investors look for LICs trading at a discount to their NAV, and may see this as a good time to purchase the shares. The fund size for a LIC is limited to the size of the capital raised, when the fund listed on the market. For the fund to get bigger it will have to issue more shares.
An unlisted managed fund may own the same assets as a LIC, but the units will trade at their NAV. Unlisted funds issue further units when people wish to invest into the fund, and they redeem units when investors wish to sell their holding. This means the manager of an unlisted fund may be forced to sell investments at the bottom of the market, if too many investors redeem their holdings when the market has fallen.
Unlisted funds usually quote a unit price, in addition to a buy and sell price on their website. This price is calculated by the manger and will be quoted daily, weekly or maybe even monthly. Unlisted funds are the most common type of fund available to investors in Australia, with around 2000 funds available in a large range of specialty areas, and some that are just diversified funds with a cross section of everything. Always do your research before investing in unlisted managed funds. Details for an unlisted fund can be found on the fund manager’s website, and usually include the historical performance and their top holdings.
Key Benefits and Risks of LICs
One of the major benefits of a LIC is getting expertise to manage your money. The manager of the company chooses the investments for the LIC you invest in. Of course some LICs can make bad investment decisions and if the value of your investment has fallen or underperformed the benchmark, you may need to decide whether to redeem your investment or leave it with the manager with the idea that next year the investments may recover.
Investments in LICs are usually not short-term investments, as they can fall in value before the investment choices made by the company come to fruition. If you are an investor that gets nervous, you are likely to pull out money too soon and you may fall into the trap of buying at the top and selling at the bottom.
Read more about LICs on the ASIC MoneySmart website!
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