Listed Inv. Companties - backgrounder

[Fred114]

The case for LIC’s or listed investment companies.

This form of investment may not appeal to those DIY investors who are hard core. It was suggested to me by at least one contributor on this forum that it would be suitable for lower self-exposure to the sharemarket for newer DIY investors. It was pointed out with data from a breakdown of self-investment of retirement savings in Australia, that only 0.65% were investing in bonds, and #5% were in equities of which only #$% were listed trusts. Thanks old rider…..see post here.

This investment type does involve management of your investment in a selection of shares, but is not as expensive as using a broker service. This is the thinking behind all unit trusts, low cost managed market exposure.

This article gives a brief list of pros and cons of LIC’s.

http://afr.com/p/personal_finance/smart_money/pros_and_cons_of_listed_investment_LKDT8e6G0mI16L1 9ViW6lL

As they issue only a limited pool of shares, the value of the share reflects the value of the NTA (Net Tangible Asset) or the amount of wealth that is available in the portfolio relative to the share pool. So there might assets to pay $1 per share. As the NTA goes up, the value of the share increases. But according to this article,

http://www.shareswatch.com.au/blog/investing/listed-investment-companies/

the share can trade at a discount (lower) or premium (higher) to the NTA. It also warns that some LIC funds are so small that they are unrealistic to succeed. They proclaim Buffet style strategies, but little eventuates. There are just over 60 LIC’s listed on the ASX. The largest AFI is worth about $4.1 billion followed by Argo Inv (ARG) and then Milton Corp (MLT) third largest. According to this article,

http://www.morningstar.com.au/funds/article/lics-sector-pressure/4433

AFI has returned a loss to shareholders of 14.6% to Dec 2011. Others were down as well, where believers in LIC’s expected better performance for a number of reasons. There were changes to corporate tax in June 10 which brought more flexibility to paying div’s. Financial planning reform in July 2012 expected to also be a boost. The article argued that they are worth more consideration while at a low point.
“Bell Potter statistical analysis suggests LICs have a tendency to revert to their mean discount or premium to their pre-tax NTA through the cycle. Simply put, rather than look at the current discount or premium in absolute terms, investors need to compare it to the LIC's average discount or premium over a longer period.
Of course, discounts and premiums to NTA are only one consideration in choosing an LIC. But having large, well-run LICs, such as AFI and Argo, trading well below their historical averages (in terms of premiums or discounts to NTA) could be an opportunity worth further research.”
This recent Financial review article published 14 April,
http://afr.com/p/personal_finance/smart_money/lic_your_portfolio_into_shape_SVJmeUK8WGtDmwojnFar fP

suggests that they are also undervalued. “Prescott Securities principal Nick Loxton says with many LICs at reasonable discounts to their net tangible assets the time may be right to look more closely at them. With patience, investors who understand the underlying portfolio and can buy them at a discount may be well rewarded over time, he says.
Like others, he thinks it is a matter of time before the value in many LICs is unlocked.”

[Halebop]

..."With patience, investors who understand the underlying portfolio and can buy them at a discount may be well rewarded over time, he says"...

To offer an opposing view to Nick Loxton, if the investor was well versed enough to "understand the underlying portfolio" they could build their own portfolio by purchasing undervalued target companies and avoid the management fees.

[Huang Chung]

One advantage of LICs over managed funds is that the money invested in the underlying shares is seperate from the actual shares of the LIC. This avoids the classic redemption problem that managed funds face when the market is in freefall. Fund holders seek to redeem their funds, which means the funds have to sell stock to meet the redemptions. The LIC shareholder sells his shares to a new buyer (undoubtedly at a lower price), but the LIC isn't forced to see shares at the worst possible time.

For the novice DIY investor, starting off with a LIC might be a way of dipping ones toe in the water, but other than practice in the mechanics of doing a trade, probably doesn't offer much in the way of an education in the markets.

[CJ]

For the novice DIY investor, starting off with a LIC might be a way of dipping ones toe in the water, but other than practice in the mechanics of doing a trade, probably doesn't offer much in the way of an education in the markets.I started off with Infratil which is an LIC of sorts. It has treated me well and learnt alot from them

[Huang Chung]

From memory CJ, Infratil held shares in a limited number of unlisted investments, like a slice of Perth Airport, one or two ports etc. I was referring to the typical LIC that holds shares in 50 to 100 listed coys.

[CJ]

Not a traditional LIC - it takes more of a management role and tends to take significant/100% investments in companies in fewer companies rather than smaller investments in lots of companies

[modandm]

I would self proclaim myself as a bit of an expert on Aussie LIC's having worked for a company that invested clients funds heavily into them and managed a few of our own.

I honestly believe that for many NZ investors they could be the best way to invest in Aussie Large Cap shares.

Ones to purchase are the big ones - and buy when they are at a discount long term discount to NAV as suggested.

I like AFI the best because it doesn't invest in other LIC's (as far as I know). Some of the others do (on a limited scale) which means fees on fees. Sure the fees are low but I'm against it on principal. Other decent ones are Argo, MLT, AUI & DUI. The management fees on these are tiny like under 20 basis point MER - well worth it for the diversification and to keep things simle.

Ones to avoid are all others - especially the ones created in the last 20 years. AUF AQF GRF, GMI etc etc. All fee laden utter ****e

[modandm]

To offer an opposing view to Nick Loxton, if the investor was well versed enough to "understand the underlying portfolio" they could build their own portfolio by purchasing undervalued target companies and avoid the management fees.

as in my reply the management fees are tiny enough (under 20 basis some like 10 basis points) to make it more cost effective to actually buy the LIC's. especially vs holding 50 shares direct with the brokerage and prob custody account required.

[modandm]

One advantage of LICs over managed funds is that the money invested in the underlying shares is seperate from the actual shares of the LIC. This avoids the classic redemption problem that managed funds face when the market is in freefall. Fund holders seek to redeem their funds, which means the funds have to sell stock to meet the redemptions. The LIC shareholder sells his shares to a new buyer (undoubtedly at a lower price), but the LIC isn't forced to see shares at the worst possible time.

For the novice DIY investor, starting off with a LIC might be a way of dipping ones toe in the water, but other than practice in the mechanics of doing a trade, probably doesn't offer much in the way of an education in the markets.

HC notes the close end structure of LIC's. They key here is that because LIC's dont need to buy and sell constantly to meet applications/redemptions the costs incurred by the portfolio are lower and also more tax efficient.

[slimwin]

"Ones to purchase are the big ones - and buy when they are at a discount long term discount to NAV as suggested."

Whats sort of discount do you consider fair or have you seen in the past?

[Fred114]

DUI is trading at -4% discount to NAV

http://www.asx.com.au/products/managed-funds/market-update.htm