What is a Listed Investment Company (LIC)?

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. If you wish to redeem your money from a LIC, you need to sell your shares in the company.

ASX Investment Product Summary — May 2018

Some LIC’s are run by astute managers who outperform the stock market year after year and pay regular dividends. Other managers can, of course, invest in the wrong companies or sectors and suffer losses. A key reason that people choose to invest in LICs is that they can offer experience and expertise in certain fields, as well as diversification (all of which may be important for a new investor into the stock market).

The ASX and Morningstar issue a report each month on the value and pre and post NTA (net tangible assets)* of all the LICs traded on the market, which are worth taking a look at when getting started.

*Net tangible assets (NTA) refer to a company’s physical assets less its liabilities (ASIC MoneySmart Website).

How do you buy and sell shares of a LIC?

To buy or sell shares in your chosen LIC you can trade them on the ASX just like CBA shares. Do your research and read the LICs website and their financial accounts, and if available read the monthly updates they publish on the company’s investments. When you feel comfortable about the underlying investments of the LIC and the company itself, you can put an order in with your stockbroker or online brokerage platform (e.g. Comsec, Nabtrade).

When you wish to sell all or part of your holding in the LIC, the same rules apply. Do your research and place a sell order through your stock broker or online brokerage platform. Remember that LICs can go up and down with the share market like any other company on the ASX.

Understanding the value of a LIC

In general, the LIC share price is the sum of all the assets they hold less any debt or liabilities (this may include taxes) divided by the number of shares that are issued (less some fees and charges). This is often referred to as the post-tax NTA of the LIC. Funds will also quote pre-tax NTA, which does not deduct tax that is due. As the assets or liabilities change in value, the LICs NTA and share price moves in value also.

It is important to note that some LICs are traded for more than the sum of their parts. Why is this? Because the market (investors like you and me) think that the company is doing such a great job, that they bid up the price of the shares over the LICs NTA. Investors may be willing to pay more than the LICs NTA as they think over a long period of time, the firm will continue to do well. This is called buying at a premium, and if you do this you are hoping to sell at a premium as well.

The opposite is also possible where you can buy a LIC where the share price is worth less than the sum of its parts. In this case, the LIC can be referred to as trading at a discount. This might happen because investors may not know the manager well, poor performance or sometimes just a lack of marketing. Sometimes money can be made when buying LICs at a discount, as one would hope that over time this discounted price trades back towards the net asset value of the company.

We will delve further into the differences between LICs and unlisted managed funds, as well a looking at some of the benefits and risks of investing in LICs in Part 2.

If you’re interested in learning more about money and personal finance, catch us on the How To Money podcast which you can find on iTunes, or via our online web-player. Follow us on Twitter @HowToMoneyAUS, and on Medium at How To Money Australia.

If you have any questions or comments please leave them in the comments below.

Susan — HTM Co-Host

Important Information

The information on this blog and website is of a general and educational nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision, as we are not an advisory service. We recommend you consult a licensed financial adviser in order to assist you. The information is based on assumptions or market conditions which can change without notice, and this will impact the accuracy of the information provided. This website and blog occasionally provides links to third party sites, aimed at helping you gather the information required to make an informed decision — we may receive payment for these referrals.