Listed Investment Companies (LICs) are ASX listed investment products that offer access to a professionally managed portfolio of securities. They offer a wide range of exposures to different asset classes, including domestic equity, international equity, fixed income and alternatives. The industry has an extraordinarily long and rich history with the first LIC being incorporated in 1923. Click here to read the discussion paper on LICs.
Positioned for longer term growth
A LIC operates in a closed-ended structure and its shares trade on an exchange. This means that new shares cannot be created or redeemed at asset backing; only existing securities can be bought and sold on market. This gives the investment manager access to a stable pool of capital that can be invested for longer periods without being exposed to capital inflows (applications) and outflows (redemptions), which can adversely impact on investment decisions.
Stable dividend policies can be implemented
An LIC is able to smooth out its dividend and franking as it is not required to distribute all its realised capital gains and income each financial year. Further, an amendment to the Corporations Act in 2010 allows a company to pay a dividend in absence of a profit provided certain requirements are met including a balance sheet test. This will further enhance the ability of an LIC to pay a dividend through market cycles.
Tax aware at the investment level
An LIC is treated as a company for tax purposes which means that it pays tax on realised profits, similar to any other company. This makes the fund manager aware of the after tax impact on returns as tax realisation will impact on the company’s net tangible assets which ensures that the manager seeks to maximise after tax performance. Although managers of unit trusts clearly seek to maximise returns, generally these managers are focussed on pre-tax returns as the tax impact occurs at the investor level as distinct from the unit trust.
High level of corporate governance and disclosure
An LIC has a board of directors that oversee the investment decisions of the fund. They also offer a high degree of corporate governance with a requirement to meet ASX rules and regulations, deliver annual and half yearly report, host an AGM and release monthly Net Tangible Assets. LIC Industry best practice is to release the Top 20 investments monthly, alongside fund and market commentary, and other relevant detail.