Listed Investment Companies (LICs) are a popular option for Australian investors seeking a diversified, professionally managed portfolio. These companies are traded on the Australian Securities Exchange (ASX) and operate similarly to managed funds, but with distinct features that set them apart. LICs pool funds from shareholders to invest in a range of assets, such as shares, property, and fixed income, providing exposure to multiple investments through a single holding. Their structure as a listed company offers transparency, liquidity, and potential tax benefits, making them an attractive option for both beginner and experienced investors.

However, like any investment vehicle, LICs come with advantages and drawbacks that investors need to understand before committing their funds. This blog explores how LICs work, their benefits, risks, and key considerations for Australian investors. By gaining a clear understanding of these factors, you can determine whether LICs are a suitable addition to your investment portfolio.

What Are Listed Investment Companies (LICs)?

A Listed Investment Company (LIC) is a closed-ended investment vehicle that pools capital from shareholders to invest in a diversified portfolio of assets. Unlike managed funds, LICs are structured as companies and are listed on the ASX, allowing investors to buy and sell shares in the company on the open market. The closed-ended nature of LICs means they issue a fixed number of shares, which helps stabilise the fund and protects it from the cash flow pressures that can arise in open-ended funds during periods of market volatility.

LICs are managed by professional investment teams that make decisions about the allocation of funds based on the company’s investment mandate. These mandates can vary widely, with some LICs focusing on Australian equities, others on international markets, and some specialising in specific sectors or asset classes.

How LICs Work

When you invest in an LIC, you purchase shares in the company, effectively becoming a part-owner. The LIC uses the capital raised from shareholders to build and manage a portfolio of investments. The value of the LIC’s shares is influenced by two factors: the net tangible assets (NTA) of the portfolio and the share price determined by the market.

The NTA represents the per-share value of the LIC’s underlying investments after accounting for liabilities. However, the market price of LIC shares can trade at a premium (above NTA) or a discount (below NTA), depending on investor sentiment, market conditions, and the performance of the LIC. This unique pricing dynamic is a key feature of LICs that investors must consider.

Benefits of Investing in LICs

Professional Management

LICs are managed by experienced investment professionals who allocate assets, select securities, and make strategic decisions based on market conditions and research. For investors with limited time or expertise, this provides an opportunity to access professional management without the need for direct involvement in investment decisions.

Diversification

By pooling funds from multiple shareholders, LICs offer diversification across asset classes, industries, and geographic regions. This reduces the impact of poor performance by any single investment, enhancing the overall stability of your portfolio.

Income Stability

LICs often pay consistent dividends, supported by their ability to retain earnings during profitable years. This smoothing of dividend payments can provide investors with a reliable income stream, making LICs particularly appealing to retirees and income-focused investors.

Tax Benefits

Many LICs distribute dividends with franking credits attached, which can reduce the overall tax liability for Australian investors. Franking credits represent the tax already paid by the company on its earnings, allowing shareholders to offset this against their personal tax obligations.

Liquidity

Since LICs are listed on the ASX, their shares can be bought and sold during trading hours, providing liquidity and flexibility. This is a significant advantage compared to unlisted investment vehicles, where accessing your funds may involve delays and penalties.

Risks of Investing in LICs

Market Volatility

LIC share prices are subject to market fluctuations, and their value may rise or fall based on broader economic conditions, investor sentiment, and the performance of the underlying portfolio. While diversification mitigates some risks, LICs remain exposed to market volatility.

Premiums and Discounts

One of the unique characteristics of LICs is the potential for their shares to trade at a premium or discount to NTA. For example, if the LIC’s investments are valued at $1 per share (NTA), but the shares trade at $0.90, the LIC is trading at a 10% discount. Conversely, a share price of $1.10 indicates a 10% premium. While discounts can present buying opportunities, premiums may result in overpaying for an LIC.

Management Fees

LICs charge management fees to cover the costs of professional investment management. While these fees are generally lower than those of actively managed funds, they can still impact returns. Investors should carefully evaluate the fee structure and compare it to the LIC’s performance to ensure value for money.

Limited Flexibility in Redemption

Unlike open-ended managed funds, LICs do not allow investors to redeem their holdings directly with the fund. Instead, shares must be sold on the ASX at the prevailing market price, which could be at a discount to NTA.

Key Considerations Before Investing in LICs

Investment Mandate

Review the LIC’s investment mandate to ensure it aligns with your financial goals and risk tolerance. For instance, an LIC focusing on international equities may provide diversification but also introduce currency risk.

Track Record and Performance

Evaluate the LIC’s historical performance, paying attention to its returns relative to its benchmark and peers. While past performance is not a guarantee of future results, it can provide insights into the management team’s expertise.

Premium or Discount to NTA

Monitor whether the LIC is trading at a premium or discount to its NTA. Buying at a discount can enhance returns, while paying a premium may reduce the value of your investment.

Dividend Policy

Consider the LIC’s dividend policy, including the frequency and consistency of payments. For income-focused investors, LICs with a reliable dividend history and franking credits are particularly attractive.

Types of LICs in Australia

Equity-Focused LICs

These LICs invest primarily in Australian or international equities, aiming to achieve capital growth and income generation. Examples include LICs that track the ASX 200 or focus on small-cap stocks.

Income-Focused LICs

These LICs prioritise income generation through dividends or fixed-income securities, appealing to retirees or conservative investors.

Thematic LICs

Thematic LICs focus on specific investment themes, such as technology, renewable energy, or infrastructure, providing targeted exposure to growth areas.

The Role of LICs in a Diversified Portfolio

LICs can play a valuable role in a diversified investment portfolio by providing access to professional management and exposure to different asset classes and markets. They are particularly well-suited to investors seeking stable income, long-term growth, or diversification beyond direct stock holdings. When combined with other investment vehicles, such as ETFs or direct shares, LICs enhance portfolio resilience and align with various financial objectives.

Seeking Professional Advice

Given the variety of LICs available and the complexities of evaluating their performance, seeking professional advice is highly recommended. A financial adviser can help you identify LICs that match your investment goals, assess their suitability for your portfolio, and monitor their performance over time. Consulting with a Toowoomba financial adviser ensures you receive tailored guidance, taking into account your risk tolerance, income needs, and broader financial plan.

Conclusion

Listed Investment Companies offer a unique and flexible way to access diversified, professionally managed portfolios. Their structure, tax benefits, and dividend policies make them an appealing option for Australian investors seeking income stability and long-term growth. However, like any investment, LICs come with risks, including market volatility, potential premiums or discounts to NTA, and management fees. By understanding these dynamics and aligning LICs with your financial goals, you can make informed decisions about their role in your portfolio. With careful planning and professional advice, LICs can contribute to a balanced and successful investment strategy.