A Listed Investment Company (LIC) is a listed pooled investment vehicle that offers investors access to a diversified portfolio of shares in other companies also listed on the stock market.
The underlying portfolio offers investors a range of different strategies. A LIC is a company structure listed on the ASX just like BHP or CBA.
A major benefit of the LIC structure is that it is a closed-end pool of capital. By closed end we mean that if an investor wants to leave the fund, he or she sells shares to another investor. This is usually done through a broker. Effectively, no money leaves the fund and only the shareholders change. This differs from a managed fund/unit trust structure, where an investor leaves the fund by redeeming units and withdrawing the money from the fund.
We believe that a closed end fund is a superior structure to a managed fund/unit trust structures. With closed-end funds or LIC’s, the manager of the fund does not have to sell stocks in the portfolio to raise cash for a departing investor. That means investment decisions are based on the fundamentals of the companies the manager invests in, rather than money flow via redemptions.
Most other funds, like managed funds and mutual funds, are open-ended. This means that when an investor wants to leave the fund the manager is forced to liquidate stocks to finance the redemption. This places pressure on the manager who has to put fundamental investing to the side while he or she manages the cash flows. Invariably, most investors depart a fund when stocks have fallen significantly, which historically has proven to be the best time to buy. This means the manager may have to sell companies which they believe represent good value.
At the other end of the scale, most money pours into the market and open-ended funds, when stock prices are soaring in a bull market. The manager of the managed fund may then be forced to buy companies at inflated prices due to their strict mandates. This type of momentum investing can cause a serious destruction of capital when the bull market ends.
As a LIC is a closed-end fund it does not have any of these problems which can be of significant advantage and benefit to the investor.
LIC’s are unique investment vehicles because they can trade at a discount or premium to the assets that they own. When investors want to take their money out of LIC’s, selling may result in the share price falling below the value of its net asset backing (or NTA). We refer to this as trading at a discount to NTA. This can provide a great buying opportunity for investors. On the other hand, when investors are buying shares in LIC’s, the share price may trade higher than the value of the assets it owns. This is referred to as trading at a premium to NTA. This can provide a selling opportunity for investors.
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