Listed Investment Companies (LICs)
May be easy to value!

Listed investment companies (LICs) may be described as a listed managed investments. Others in this category include listed property trusts (LPTs), infrastructure funds, hedge funds and exchange-traded funds.

Listed investment companies invest in a portfolio of assets such as shares, private equity and infrastructure funds. Managed funds or mutual funds invest in similar asset classes but there are important differences when comparing mutual funds vs stocks in LICs.

These include ...

• LICs are companies with shares that can be traded via a stock broker on the stockmarket whereas managed or mutual funds are unit trusts where the units are bought and sold via a fund manager.
• When LICs sell some of their investments, they pay tax on the profits at the company rate and may then pay a fully franked dividend to investors. Managed funds distribute all their profits to investors, who then pay tax at their marginal rate.
• The share price of an LIC is determined by the market, based mainly by their ability to make capital gains (or losses). The price of units in managed or mutual funds are determined according to the total value of the fund's assets divided by the units on issue.

  This means that the shares of LICs can trade at a premium or a discount to their net tangible asset value depending on investors view of future market movements.

• Listed investment companies generally have lower fees than managed funds. These could be less than 0.5 per cent for established LICs compared to an average of 1.8 per cent for managed equity funds.

  However, investors in LICs have to pay brokerage costs when buying and selling and some of the newer LICs have performance fees. On the other hand, LICs don't have entry and exit fees.

• Another difference between LICs and unlisted managed funds is that LICs are closed-end; that is, they do not regularly issue new shares or cancel shares as investors enter and exit the fund. Investors trade from each other through the stock exchange.

  The closed-end structure allows LIC fund managers to concentrate on investment selection rather than money coming in and out of the fund. This can be a concern for unlisted managed funds and an advantage for LIC managers who take a long-term approach to investing, unlike active fund managers.

A negative is that they are exposed to the overall volatility of the stock market that does not always go the investors' way.

Also they tend not to perform as well in bull markets when more exciting opportunuties present themselves to investors, but come more into their own when markets are subdued.

However, LICs in dollar terms are easy to value since the net (after company and capital gain tax) tangible asset value per share that they report on a quarterly basis is what each share is worth at that time if they were sold on the market.

Older LICs with a proven track record may sometimes trade at a premium of up to 20 per cent or more compared to their NTA.

If the price that a listed investment company is trading at is below its net NTA per share, I can achieve a margin of safety. Sometimes this margin of safety can exceed 20 per cent - which sounds great but which sometimes indicates a more recently floated company with little track record and larger fees!

So ... as well as a decent margin of safety, I look for important qualitative aspects such as: proven management; at least a five-year or longer track record; a long-term value investing approach in stock selection; and an investor-friendly management structure.

For beginners investing in the stock market, choosing an LIC with the above characteristics may provide an easy entry into the world of stock value investing.

Return from Listed Investment Companies to Managed Share Funds