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Guidance

How to invest in a Listed Investment Company

How to invest in a Listed Investment Company

Listed Investment Companies (LICs) consist of a portfolio of shares overseen by a fund manager.

A LIC is traded on the Australian Securities Exchange (ASX) after raising money from an initial public offering (IPO).

Many have a ‘closed-end’ structure that means that while the shares can be bought and sold on the ASX, buyers don’t create new shares. New shares can be created through a corporate issue and shares can be bought back or cancelled to decrease the size of the fund.

But generally, the steady structure can allow for stability in the amount of money the fund has for longer-term investing by the fund manager without a constant inflow and outflow of cash.

Because LICs are structured as a company, they might pay dividends, which can be a source of income and can also be a way of managing taxation liabilities from your investments.

LICs, along with listed investment trusts (LITs), make up the majority of the listed managed funds traded on the ASX.

Income in a low-growth environment

Currently, the world is facing a low-growth environment with interest rates negative in some countries, including Germany and Japan. This, along with volatility in markets and uncertainty in global economies and politics, has been causing some investors to remain cautious and hold cash, while others are actively looking for alternatives.

As a consequence of a search for yield, share markets in the US and property markets in some parts of Australia have reached record highs.

Some of the biggest yield hunters include self managed super funds, which account for 32% of all superannuation assets in Australia.

‘Cheap’ money and surplus liquidity supplied by central banks have “pushed up all asset prices”, according to Watermark Funds Management chief investment officer Justin Braitling.

“When the tide turns, all asset prices may fall and investors will be disappointed,” he said.

While holding cash is one way of avoiding risk, Braitling said adding an actively managed market-neutral strategy to gain exposure to global equities could be an alternative.

Watermark has launched a third LIC, which it said would be the first global market-neutral LIC in Australia.

While investors might benefit from a rising market, the risk of losses can be accelerated in a falling market, but the amount of loss can potentially be lessened through strategic investment, although there is never any guarantee. Past performance is not an indication of future performance.

A market-neutral strategy requires stock-picking expertise to create returns from the relative performance of a long and short portfolio of shares, rather than from a rising share market.

As such, returns from a market-neutral fund should be uncorrelated with the performance of the share market.

It employs the potential benefits of choosing stocks that the fund manager thinks might fall in value along with selecting stocks that the manager believes will gain in value.

“Being ‘long’ on better-quality undervalued companies and ‘short’ on overvalued weaker companies releases value for investors,” said Braitling.

With funds held in Australian dollars, a balanced portfolio across sectors and countries can create a natural currency hedge, another consideration when investing in international shares.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given, including but not limited to Listed Investment Companies (LICs), are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not an indication of future performance. The commentary provided from external companies, including Watermark Funds Management, that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. Neither Commonwealth Securities Limited nor members of the CBA Group accept any liability for losses or damage arising from any reliance on external companies and their products, services and material.