In previous articles we have discussed the benefits that come from diversification. This week we want to discuss listed investment companies (LICs) as an investment vehicle that allows for diversification. This structure offers simple access to investing strategies that are difficult to replicate individually.
LICs are bought and sold on the Australian stock market just like ordinary shares. Investors can decide whether the investment style and underlying investment portfolio of a particular LIC suits their own investment objectives.
LICs are incorporated as companies and therefore they are referred to in the industry as closed-ended funds. This means they do not regularly issue new shares or cancel shares as investors join and leave. Instead, they issue a fixed number of shares on initial public offering (IPO).
This closed-ended structure allows the portfolio manager to concentrate on selecting investments without having to factor in money coming into or leaving the portfolio they are managing. This stability can be of assistance to managers who take a long-term approach to investing.
LICs have evolved in competition to traditional unlisted managed funds. Both offer quick diversification and access to expertise. However, LICs offer key advantages around costs, transparency and ease of administration.
LIC’s profits are taxed at 30 per cent with franking credits passed on to investors. They can also control their dividend distributions. Dividend smoothing and deferral can be particularly useful for high tax payers.
This contrasts to traditional managed funds which must distribute all of their income to unit holders as it is earned as per their unit trust structures.
LICs are required to disclose their pre-tax and post-tax net tangible assets (NTA) per share every month.
NTA is simply the total assets of the company minus any intangibles such as goodwill, and less any liabilities.
It is no surprise that over time the price of a LIC usually tracks the progress of its underlying portfolio.
In a rational market a LIC should trade close to the value of its net tangible assets. Usually within markets there is an opportunity to buy a LIC at a share price that is trading at a discount to what its underlying portfolio/NTA is.
One listed investment company which we are interested in at the moment is WAM Leaders (WLE). This LIC is managed by Wilson Asset Management and predominately invests in the top 200 companies on the ASX. WLE had ASX listed options which expired on November 17. We are of the view that the listed options were putting a ceiling on WLE share price.
- Boh Burima, Financial Adviser (Authorised Representative: 000341081) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
