Listed Investment Companies

Listed Investment Companies are the oldest type of managed investment.
The first such investment company was the Foreign & Colonial Investment Trust which was established in the United Kingdom in 1868. Its objective at that time was stated as being “to give the investor of moderate means the same advantages as the large capitalists in diminishing the risk of spreading the investment over a number of stocks”

What are listed investment companies?

Listed Investment Companies (LIC) are public companies whose shares are listed on a Stock Exchange.  By buying shares in a listed investment company, you become a shareholder.  The price of a LIC share is ultimately determined by supply and demand for the shares on the market. Although, they can trade at discounts or premiums to the value of their investment portfolio, or Net Tangible Assets (NTA), LICs’ market prices tend to revolve around their NTA.

You are entitled to a share in the company's profits, paid to you in the form of a dividend - although, like other listed companies, this dividend is not guaranteed.

But whereas other listed companies aim to make profits through activities like manufacturing goods or providing a particular service, listed investment companies make money for their shareholders by investing in other companies.

What are the different types of listed investment companies?

There is a wide variety of listed investment companies so most investors should be able to find one which suits their needs and objectives.

You can choose from companies which invest solely in Australia, or companies which invest in overseas markets.

Some investment companies do not focus on a geographic market, but instead, on a particular industry such as technology, wineries, resources or healthcare. In this way, they can allow investors to target a particular market sector very precisely.

What listed investment companies can achieve for you.

A diversified portfolio through a single investment

Through investing in a LIC, investors gain exposure to a range of underlying securities. This reduces risk, as the investor’s funds are not tied closely to the fortunes of one security. You can begin investing in a LIC with a few thousand dollars.

Both capital appreciation and income

The philosophy of each LIC differs. However, most LICs offer the opportunity for capital appreciation as well as regular dividends. As the NTA of a fund rises, it can usually be expected that the market price of the LIC will rise as well.

Relative consistency in returns

The closed-end nature of LICs means their managers can concentrate on investment selection without having to factor in the effects of money coming into or leaving the fund. Research shows that this can improve investment performance.

Due to their company structure, LICs can also hold back returns from one year to the next. This allows the ability to ‘smooth out’ dividend flows, making them more predictable over time.

Taxation advantages

Listed Investment Companies can provide taxation advantages to individual investors. The net income of the LIC is taxed at the 30% taxation rate and the net income plus franking credit is passed on to investors. With some LICs capital gains may be returned gross to shareholders, who are liable for capital gains tax. Many LICs used ‘buy and hold’ investment strategies which reduce realized capital gains, and those capital gains are typically eligible for the 50% capital gains tax concession.

An example of this is where a LIC sells some shares that it has held for more than 12 months, producing an eligible capital gain of $100. The LIC pays tax on that gain at the corporate taxation rate of 30%, leaving $70 to distribute to shareholders. The shareholders add the net dividend of $70 to the imputation credit of $30 (for the tax already paid). Therefore, the grossed-up gain is $100. However, due to the CGT concession, Individuals have their gain reduced to only $50 (50% of the gain) and for super funds to $66.67 (After a 1/3 reduction).  If an Individual is on the top marginal tax rate (45% excluding the Medicare levy), then Income tax comes to $22.50. The Super fund tax rate is 15% resulting in income tax of $10.00. This figure is then subtracted from the imputation credit ($30), to arrive at a total tax credit of $7.50 for the individual and $20.00 for the super fund. You should consult a qualified advisor to assess how these tax treatments affect your situation.

Risks involved

Like all investments an investment in a listed investment company involves some risk.

Some of these include:

§          Market Risk – the value of LICs can fall as other assets become more attractive or the value of their underlying portfolio falls;  Market prices may reflect a discount or premium to the LIC’s NTA;

§          Distribution Risk – future distributions are not guaranteed by the LIC or NSX;

§          Security Risk – LICs may perform differently due to the operations of their underlying assets or their structure;

§          Diversification Risk – a lack of diversification within a LIC can tie an investor’s performance to a narrow section of the market;

§          Liquidity Risk – there are two levels of liquidity risk. The first is the ability of the LIC to buy and sell assets.  The second is the investor’s ability to buy or sell the LIC.