Stock Investment Companies or Listed Investment Companies

May be easy to value!

Stock investment companies, referred to in some countries as listed investment companies (LICs), may be described as a listed managed investments.

'Listed' means traded on the stock exchange like company stock.

Others in this category include 401k investment companies, mutual fund investment companies, online investment companies, private investment companies and regulated investment companies.

Some websites list top investment companies and this provides investors with a starting point to find the best investment companies.

Stock 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 stock investment funds.

LICs/Managed Funds Comparison

  • Investment companies are companies with shares that can be traded via a stock broker on the stock market, whereas managed or mutual funds are unit trusts where the units are bought and sold via a fund manager.
  • When an investment company sells 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 a stock investment company 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 stock investment companies can trade at a premium or a discount to their net tangible asset (NTA) value depending on investors' view of future market movements.

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

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

  • Another difference between investment companies and unlisted managed funds is that listed investment companies 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 listed investment company 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 who have to do something with the cash coming in, irrespective of the state of the market. Investment company managers who take a long-term approach to investing, can hold cash if market conditions suggest that it is a smart strategy.

Positives and Negatives for Stock Investment Companies

Some other pluses for this type of company are that they have to comply with the stock exchange's corporate governance and reporting rules. They also generally have good liquidity when traded on the stock exchange.

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 opportunities 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.

To Conclude

For a value investor like me, if the price that a listed investment company is trading at is below its net tangible assets per share, I can achieve an obvious margin of safety.

This is because the net tangible assets per share represents the price per share that the total portfolio of the LIC is worth if all its stock holdings were sold at that point in time

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 relating to LICs 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.

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