If you want to invest in the stock market, but you don’t have enough money to buy a swag of shares, then a Listed Investment Company (LIC) could be the way to go.
This can be a great way for an investor to get started in the market, especially if you don’t want to take the risk of picking one stock with your first stock market buy.
It’s also a great way for the experienced investor to get some diversification. You may have a portfolio of individual stocks, but if you want to widen your portfolio further, without taking the trouble to pick out one company, then LICs allow you to achieve instant diversification — all from buying into a single stock.
Instant diversification in a flash
An LIC is similar to a managed fund, in that it pools money and invests it in a range of shares.
However, there are a number of differences. With a retail fund, you buy and sell units through the fund directly. There are typically fees involved, especially when you sell or redeem units. However, an LIC is a share listed on the ASX. So you buy and sell these shares through your broker like you would with any other type of share.
There are a range of different LICs you can buy. As a starting point, the two most popular types are:
Australian shares — Some specialise in the top 20, 50, or 100 ASX stocks, others in emerging and microcaps.
International shares — You can invest directly into Asia, Europe, or the United States. Some LICs have a broader mandate to buy a basket of shares globally.
There are also a broad range of alternative LICs. There are fixed interest, private equity, and absolute return funds. These make up a small part of the overall market, with market caps typically ranging from around $20 million through to $80 million.
Let’s look at some examples of the more popular LICs on the ASX.
LICs specialising in Australian shares include:
|ASX code||Name||Market Cap|
|AFI||Australian Foundation Investment Company Limited||$6.8 billion|
|ARG||Argo Investments Limited||$5.3 billion|
|DJW||Djerriwarrh Investments Limited||$1 billion|
|MLT||Milton Corporation Limited||$3 billion|
LICs specialising in International shares include:
|ASX code||Name||Market Cap|
|AGF||AMP Capital China Growth Fund||$480 million|
|MFF||Magellan Flagship Fund Limited||$650 million|
|PMC||Platinum Capital Limited||$400 million|
|TGG||Templeton Global Growth Fund Limited||$290 million|
The price of these LICs rise and fall according to the value of the stocks they own. And it’s not just about growth either. Both Australian Foundation Investment and Argo Investments pay out two fully franked dividends each year.
I bet your managed fund can’t beat these fees
One of the advantages of LICs is that they are a ‘closed-end structure’. This means if you want to invest, you can only do so by buying shares from someone selling them to you. So the shareholders may change, but no capital has to leave the fund when an investor leaves.
Compare this to a managed fund where they may need to sell shares to pay out an investor who wants to leave the fund. The managers need to manage the inflows and outflows of investors’ funds, as well as their underlying investments.
This active management can be costly for the fund, hence the generally higher management fees. As an example, AFI’s management fees for the financial year ending 2014 were 0.17%, or $17 for each $10,000 worth of funds. Check this against your managed fund and see how they compare!
A further complication of managed funds is that their mandate might require them to remain fully invested in the market, even if the market is falling. This can cause big changes in the value of the funds. The constant flow of money into funds during a bull market can force the fund manager to buy stocks at high prices. On the flipside, in a bear market, selling from funds can push prices down even further as investors withdraw from poorly performing funds.
Generally, LICs don’t have that problem. They can choose when and when not to invest, as they don’t have to constantly invest new money into the market.
LICs can be a great way to gain exposure to the market for those who don’t have enough money to buy a handful of stocks. They can also be useful for investors who don’t have the time to analyse individual stocks.
They won’t generally give you run-away returns, but they can be a relatively easy and cost effective way to get into the market.
Income Specialist, Daily Reckoning