A large number of our ‘blue chip’ companies continue to face headwinds, with the likes of the banks weighed down by regulatory challenges and a slowing housing market, Telstra struggling with the pressures of the pricing of the NBN and Woolworths and Wesfarmers being impacted by international competition.
As a result, there is an increasing need to look at investment strategies which further diversify investment portfolios in order to achieve an acceptable level of return for the risks involved.
We have therefore been spending more time with clients explaining the benefits on using Listed Investment Companies (LICs) in their portfolios.
For those not familiar with LICs, they are companies which are listed on the Australian Stock Exchange that invests shareholders funds into a portfolio of shares according to an approved investment strategy.
Every month they publish a report that shows their performance and also their top holdings, providing shareholders with high levels of communication and transparency.
LICs offer easy access to strategies that are difficult to replicate within the standard investment portfolio.
When the markets are strong and you have a rising tide lifting all boats, diversification is less of a consideration.
Looking back, the decade from 1997 to 2007 really did spoil us as investors in the Australian market, as it was easy to invest in a portfolio of 'blue chip' Australian companies and achieve an acceptable return.
Fast forward to today and this isn't the case, hence the need to evolve investment strategies that assists in diversifying investment portfolio beyond what we have always owned, being predominantly Australian blue chip companies.
There are more than 90 LICs listed on the Australian market which can be grouped into four different categories.
There are those LICs which invest in different parts of the Australian market, while there are others which invest only in international shares along with some which are more specialised, involving absolute returns and alternative strategies.
When investing in Listed Investment Companies, it is important to only invest in those companies which have a stable and quality management team, which have a strong long term (at least 10 years) track record on investment performance.
Management should also be true to their stated investment strategy.
It is also important to understand whether the LIC is trading at a premium or discount to the valuation of their underlying investment portfolio.
It's important to not pay a premium for a LIC.
- Justin Still, Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
