Listed investment companies (LICs)
Invest in the investor
Listed investment companies (LICs) and listed investment trusts
(LITs) are a way of getting exposure to a broader range of assets
in a single transaction.
The underlying assets can vary between funds so make sure you
understand how the company or trust is investing your money.
What are listed investment
LICs are a type of investment, incorporated as companies and
listed on a stock exchange, usually the Australian Securities Exchange (ASX). Many LICs operate in a similar way
to a managed
fund. They have an
external or internal manager who is responsible for selecting and
managing the company's investments. You'll need to try to assess
the expertise and experience of the investment manager before you
LICs are 'closed-ended' which means they usually don't issue new
shares or cancel existing shares as investors join and leave. This
allows the manager to focus on selecting investments without having
to worry about cash flow. If investors want to exit, they have to
sell their shares on the relevant stock exchange, they cannot
redeem the investment.
As LICs are companies, dividends paid to investors may have
Listed investment trusts
LITs are also closed-ended funds, meaning investors buy and sell
existing units on stock exchange, such as the ASX. LITs, however,
are incorporated as trusts, rather than companies.
LITs must pay out any surplus income to investors in the form of
trust distributions. These distributions are received by investors
in the same way they were received by the trust from the underlying
investments. Franking levels may vary depending on the income
distributed from the underlying assets.
Traditionally LICs and LITs invested in either Australian or
international shares depending on the fund. Newer funds though
offer exposure to a much broader range of underlying assets which
will suit different types of investors.
LICs and LITs can be classified into four broad categories,
based on their investment style:
- Australian shares funds - that invest mostly
in listed Australian shares
- International shares funds - that invest
mostly in shares listed on overseas stock exchanges
- Private equity funds - that invest in unlisted
companies, either here or overseas
- Specialist funds - that invest in special
assets or particular sectors such as wineries, technology
companies, infrastructure or property
The investment approach of each fund will be different, ranging
from conservative to aggressive. Aggressive funds can have higher
returns but they can also be much higher risk. Some of the riskier
strategies funds may use include short selling, leverage and derivatives. You could lose some or all your
money if the strategies don't work.
This type of investment is usually medium to long term (5 years
or more), because of the potential for volatility of the underlying
assets. Consider whether the fund's structure, investing style and
underlying portfolio suits your needs and objectives before you
How to buy and sell LICs
LICs and LITs usually trade at either a discount or premium to
their net tangible asset backing. Net tangible assets refer to a
company's physical assets less its liabilities.
This means the price of a share may be trading at more or less
than the value of the underlying assets per share. Long established
funds with a history of good investment management often trade at a
premium, while newer funds are more likely to trade at a
LICs and LITs are bought and sold on the ASX, through a broker or online trading account just as
you would buy or sell an ordinary share.
The manager will be paid fees which may include:
- a management fee (commonly around 1 - 1.5% of net assets)
- a performance fee (commonly 15-20% of any returns over a
Some funds have management fees lower than this and some don't
charge a performance fee, however, management fees are payable
regardless of how well the fund performs. The performance fee may
even be payable if the fund has a negative return, as long as the
return is better than that of the benchmark.
There are many different types of LICs and LITs,
varying in risk and complexity. Seek financial advice if you are
not sure if this type of investment is right for you.
Last updated: 03 Jul 2017