Listed Investment Companies (LICs)
Listed Investment Companies or LICs are professionally
managed funds listed on the ASX.
Listed Investment Companies trade on the Australian Stock Exchange (ASX) like any share however provide exposure to the investment vehicle’s underlying portfolio through the one transaction. This allows investors to purchase a LIC gaining exposure and diversification in an investment methodology or particular market segment without having to purchase the individual underlying securities. LICs predominately invest in a basket of ASX listed shares however may also invest in international holdings and or other investment products.
Why we invest in Listed Investment Companies
Our clients actively invest in Listed Investment Companies or LICs because investors are able to perform their own due diligence on a LICs track record, investment methodology, market exposure and management. LICs and the management team will often have track records going back many years. This allows investors to not only invest in LICs which have the required exposure but with a management team which may have outperformed the benchmark in previous years. This is unlike Exchange Traded Funds (ETFs) which are often index tracking and therefore do not provide an opportunity to outperform. Further below we have more information on how we perform due diligence on a Listed Investment Company.
Trading equities employs a rigorous research methodology which seeks to identify which LICs are most likely to perform under current and expected market conditions. This aims to help investors increase returns by taking an active management approach by initially forming a macro view on global markets (sign up to our equity news) followed by further top down analysis breaking down a view on which markets, sectors and/or strategies are most likely to outperform under current conditions. This allows us to actively switch into LICs which have a history of outperforming over the long term and additionally likely to outperform in current market conditions.
LIC Benefits and Risks
- Access LICs with a strong track record of outperforming the broader market
- Access to international equities, specific markets and sectors with one transaction
- Access to portfolio strategies often unavailable or not commercial for retail investors
- Professionally managed by reputable investment teams
- Suitable for both passive and active investors
- Portfolio transparency – see NTA
- Capital growth, income and franking credits
- Closed-end structure
- Can trade at a premium to the LICs net tangible assets
- Management expense ratios for the larger LICs are often less than similar unlisted funds
- LICs are regulated by the ASX.
- LICs are unlikely to trade well below the fair value as investors will likely support the price as the dividend yield increases for the LIC above the yield for the underlying investment.
- LICs may trade above or below the NTA subject to supply and demand.
- Typically LICs which have outperformed consistently will trade at a premium. This is a benefit for investors who bought on the IPO or when the LIC may have traded at a discount.
- LICs may trade at a discount if the theme, strategy or exposure is unlikely to perform in the market conditions. This may create opportunities for investors to buy LICs trading below their fair value with anticipation of the LICs investments likely to turn around in changing market conditions.
- LICs cannot be redeemed for the face value.
- There is no guarantee that the investment will outperform the relevant benchmark.
Suggested Time Frame
Net Tangible Assets (NTA)
Trading Equities provides clear and concise LIC research as well as our independent view on new LIC IPO’s. We aim to identify the listed investment companies likely to perform in the current economic environment providing alternate and additional investment vehicle choices when optimising client portfolio exposures.
Further top down analysis of global markets and related market segments helps to establish whether the LIC has the appropriate exposure to markets, sectors and strategies. Using our technology for portfolio weightings clients are presented with an investment selection weighted across the major asset classes.
As listed investment companies have the potential to out-perform the relevant benchmark or index they can be an attractive alternative and inclusion in an investment portfolio. Once this suitability is established the LIC’s management, track record, industry reputation and structure is rigorously investigated to provide clients with the research to help build diversified long term portfolios.
Research the Australian and Global Economies
Macroeconomic research on Australian and global economies provides an insight into the performance of the entire world economy focusing on measurements including Gross Domestic Product (GDP), unemployment rates and inflation.
While governments and regulators monitor these measurements with the aim of promoting stable growth and price stability, investors may use the data to determine which markets, sectors and Listed Investment Companies are most likely to perform under current and future economic environments.
Further analysis of currencies, commodities, interest rates, forward EPS data and dividend yields help to identify appropriate exposure allocation to Listed Investment Companies invested in the countries and industries positioned for growth.
Research Global Markets
Our top down analysis methodologies examines the underlying trends of world, domestic and sector indices painting a picture of a global investment theme and identifies the accordingly positioned LIC’s.
Our top down approach to researching global markets aims to form a view of the bigger picture starting with global markets and breaking it down to specific countries, indices, sectors and specific equities or investments. Further trend or momentum analysis compliments the process identifying the underlying trend of world, domestic and sector indices.
Further bottom up analysis can be conducted on specific stocks however the focus employed by trading equities is to identify LICs with an attractive portfolio of investments rather than specific stock picking or trading. The LICs investment managers will often perform bottom up and value investment methodologies as part of their portfolio construction.
LICs Investment Universe
An LICs investment universe may include a global focus, domestic focus, sector/industry focus, emerging markets, fixed income and bonds, private equity and a thematic focus. Once a view on which markets and industries are most likely to perform under the current economic environment, the LICs investment universe will be reviewed for suitability. Typically LICs in Australia will have exposure to specific indices or sectors however other LICs focus on a particular theme or strategy.
LIC’s investment strategy and research methodology
Finally we will review the LICs investment strategy and research methodology. Trading equities aims to rotate into the funds which employee methodologies which are more suitable for the current market conditions. For example, fund managers which employ absolute return strategies might under-perform a long only methodology when markets are very bullish. Alternatively when appropriate, dividend scalping strategies and methodologies might be favoured for investors with an appetite for income.
ASX listed investment companies will release updates to the market on both their investment strategy and research methodologies. The initial prospectus released for the IPO will also have detailed descriptions of the LICs methodologies and strategies however it is important to review the company updates for changes including new investment managers.
Research methodologies generally fall under three categories with many investment managers favouring a combination of three styles.
Active vs Passive
Review LICs Track Record
Trading equities will review an LICs track record while aiming to optimise asset allocation when constructing investment portfolios by firstly selecting those managers with above benchmark track records and secondly providing clients with macroeconomic and market research allowing investors to take an active approach when choosing an LIC weighting in an investment portfolio.
An active management approach aims to hold those investments and listed investment companies, which are trending in the profitable direction while reducing exposure to those that are not.
Listed investment companies will usually on a monthly basis update the market on the LIC’s Net Tangible Asset backing per share (NTA), Top 20 investments, market overview and the NTA performance compared with the benchmark. We produce news and updates on LICs here.
Many investment managers and LICs have track records going back five to ten years with some outperforming relevant benchmarks consistently through both bull and bear markets. Long term track records may give clients the confidence to invest in those managers with confirmed ability to outperform the markets over the long term helping to simplify the client’s investment process.
Diversify with LICs
Listed investment companies, through the one transaction may give clients exposure to a diversified portfolio. Additionally LICs may provide portfolio enhancement or optimisation having the opportunity for out-performance when in included in a well diversified portfolio consisting of several asset classes including direct equities, international equities, ETFs, Bonds and other investment classes.
Diversifying with listed investment companies can give investors the confidence to build portfolios and invest in those managers, which have a strong track record and industry reputation. This can give investors their time back not having to spend countless hours reading through research. Listed investment companies are transparent publishing reports on performance, strategy and exposure keeping investors informed on their portfolio.
Clients of trading equities have access to our unique approach to portfolio construction using Nobel Prize winning portfolio theories to optimise portfolio exposures across major asset classes. Clients have the option of including listed investment companies as a way of gaining exposure to the major asset classes recommended by trading equities.
For example a portfolio may have a suggestive weighting towards domestic equities and portfolios can then be constructed with a mixture of direct equities, ETFs and those hand picked listed investment companies with strong track records and appropriate exposures and strategies.
The inclusion of the listed investment company may help towards building a portfolio with an opportunity of outperforming the market compared to owning index tracking funds.
Trading Equities Pty Ltd is an Authorised Representative of Vested Equities Pty Ltd ABN 54 601 621 390 AFSL 478987. All advice (if any) is general advice only. Your personal circumstances and financial objectives have not been taken into consideration. Accordingly you should consider if the advice is right for you. Past performance is not a reliable indicator of future performance. Please be aware that all investment and trading activity is subject to both profit & loss and may not be suitable for you. All advice and education content is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or personal advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. Investing and Trading involves an inherent level of risk. The decision to trade or invest and execution methods employed are a personal decision. You must obtain your own advise and undertake your own research when making investment decisions regarding the suitability of a product for your circumstances.
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