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Stockwatch: Listed Investment Companies

January 19th, 2009 · Greg Atkinson · 4 Comments

As many investors would already know, Listed Investment Companies (LIC’s) can be a relatively straight forward way to diversify a shares or investment portfolio. There are many different types of LIC’s trading on the Australian Securities Exchange (ASX) and these can give an investors exposure to a diversified range of assets.

LIC’s also offer investors a way to gain exposure to overseas stocks and unlisted private companies. I first became interested in LIC’s after having my fingers burnt a few times investing in small companies.

Once you start to get outside say the top 500 stocks on the ASX the amount of research available on these companies starts to thin out considerably. Therefore I found it hard to get up to date and accurate information on many small companies and thus I was not really doing a good job of managing my investment in these types of stocks.

The solution for me was to scale bank my investments outside the ASX S&P 200 range of companies and use LIC’s to give me exposure to stocks I did not have the resources or skills to manage.

At present there are just over 60 LIC’s trading on the ASX so there is quite a range of different investment approaches on offer. Some LIC’s for example take a value investing approach, others go for growth and there are even a few which focus on international companies. But as varied as the LIC’s are, there are still a few key areas I look into closely.

1. Historical performance.

Does the LIC have a history of outperforming the ASX All Ords for example? If the LIC seems to always under perform the wider market then maybe it is not such a great place to have my money. There might be reasons why the LIC has not done so well and as they say, past performance is no guarantee of future returns, but I still think it is an important to check historical data anyway. Most stock charting applications allow you to compare the price of a stock versus the ASX All Ords/ASX 200 etc. so this is a useful tool in checking performance.

2. Management Expense Ratio (MER).

A MER of about 1% seems reasonable to me but at the end of the day I would rather have a higher MER and a better return than a low MER and not make any money. Some of the smaller LIC’s struggle to keep the MER low so this is just something to keep in mind.

3. Premium/discount to New Tangible Assets (NTA).

As you look into LIC’s you will find many actually trade at a price higher or lower than their Net Tangible Assets (NTA). For example the LIC might hold stocks and cash equal to a $1.00 a share but the stock price for the LIC is only trading around $0.80 (i.e. at a discount to NTA), alternatively the stock may trade above the NTA at say $1.20. (i.e at a premium to NTA).

Over time this gap may narrow so it is possible to pick up an LIC when it is trading at a significant discount to it’s NTA and then make a capital gain when the share prices rises. However there is no guarantee the gap between the share price and NTA will move in your favour. Also the trading in some of the smaller LIC’s can be fairly light and therefore it is not always easy to offload shares in these companies when you want at a price you want.

3. Realistic ambitions.

Frankly speaking some LIC’s seem to be in fantasy land. Some are quite small in size ($50 million AUD or less) and as much as they want to follow the Warren Buffet investment approach the chances are they do not have the same sort of access to company executives like Warren Buffet has. Just saying you follow a “Buffet like” investment approach does not mean anything unless you get “Buffet like” returns.

Also remember that LIC’s that set themselves up in a swanky office will have a higher cost base than one that operates out of a tin shack. At the end of the day your returns will be impacted by the LIC’s running costs so I prefer to see companies that do not get carried away with trying to impress people with lavish office decor.

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There are of course other areas to check and I will cover some of these in the future when I look at some individual LIC stocks. But the items above will be enough to get you started so that you can narrow down a list of LIC’s to study in more detail.

As always, please do plenty of your own research. To get you started I have included a few links below that might help. Remember I am not suggesting anyone buy any stocks I highlight, I merely toss up a few ideas and let people make their own decisions.

Further Information

ASX Listed Investment Companies fact sheet.

ASX Listed Investment Companies premiums/discounts to NTA information.

Shareswatch ASX Resources.

(if the links to the ASX website are broken just go to the main ASX site and use the site search function. For some reason the ASX seem to change link names and the location of documents on a regular basis)


4 responses so far ↓

  • 1 Senator13 // Jan 26, 2009 at 5:49 pm

    It will be interesting to see how LIC’s will go this year.

    They have been hit pretty hard, but im sure there are some that have a good strong portfolio that have been oversold. Just a matter of finding them…

    Good to see you back in 09, I look forward to following your posts this year!

  • 2 Greg Atkinson // Jan 29, 2009 at 10:32 am

    Hi Senator13. I will be watching the LIC’s closely this year. I am just wondering how long it will take people to look at them again and when the share prices of some of the LIC’s will better reflect their NAV. (Net Asset Value)

  • 3 BJ // Jul 1, 2009 at 12:28 pm

    As a limited capital investor I am looking for tradable companies that have well researched poftfolios which stick to their approach. LICs and LITs seems to fit my preference and so I am interestd in the views of others about simple ways of selecting those which might outperform easily accessible benchmarks such as the ASX indices. Also there is a UK based company that specialises in targeting the boards of underperforming LICs to raise their performance levels so that should be a positive for this sector now that this company is operating in Australia.

  • 4 Greg Atkinson // Jul 5, 2009 at 10:13 pm

    BJ..are you able to mention the name of the UK company that targets underperforming LIC’s?

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