A listed investment company (LIC) is an investment fund which is listed on the Australian Securities Exchange. It is a closed-ended fund, which means that new investors participate by buying shares in the LIC from other investors.
While the price at which an investor buys shares in the LIC will be determined by the market, it will relate to the LIC’s Net Tangible Asset (NTA) value. The NTA is the value of the LIC’s assets (or investments), divided by the number of shares on issues. Sometimes, LICs will trade on the ASX at a ‘premium’ to their NTA, at other times at a ‘discount’ to their NTA.
The closed-ended structure of the fund allows the manager to focus on long-term investment, without needing to consider money coming into or out of the fund. However, the manager will occasionally issue or cancel shares, if they wish to alter the size of the fund.
One of the main ways they differ from traditional managed funds is in relation to their distributions, which are generally paid by way of a dividend. Often, this dividend is fully franked.
LICs mainly provide access to company shares, although the fund manager may elect to incorporate other asset classes. Like other managed funds, investment techniques vary from fund to fund, so LICs are suitable for many different types of investors. Investment styles also vary, therefore catering for both aggressive and conservative investors – and everything in between. Most funds maintain a fairly diversified portfolio.
The four main types of LICs are:
- Funds that invest in Australian shares
- Funds that invest in international shares
- Funds that invest in private or unlisted companies locally or abroad
- Funds that invest in specialised sectors, such as information technology or resources
In choosing to invest in an LIC, Paul Rickard recommends looking at the discount or premium of a fund. He also says to look at their “top 10 holdings” and sector weights to ensure these match with your investment biases. Some of his favourites are AFIC (ASX code: AFI), Argo (ARG) and Milton (MLT).
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.