Fred114
19-04-2012, 05:55 PM
The case for LIC’s or listed investment companies.
This form of investment may not appeal to those DIY investors who are hard core. It was suggested to me by at least one contributor on this forum that it would be suitable for lower self-exposure to the sharemarket for newer DIY investors. It was pointed out with data from a breakdown of self-investment of retirement savings in Australia, that only 0.65% were investing in bonds, and #5% were in equities of which only #$% were listed trusts. Thanks old rider…..see post here.
This investment type does involve management of your investment in a selection of shares, but is not as expensive as using a broker service. This is the thinking behind all unit trusts, low cost managed market exposure.
This article gives a brief list of pros and cons of LIC’s.
http://afr.com/p/personal_finance/smart_money/pros_and_cons_of_listed_investment_LKDT8e6G0mI16L1 9ViW6lL
As they issue only a limited pool of shares, the value of the share reflects the value of the NTA (Net Tangible Asset) or the amount of wealth that is available in the portfolio relative to the share pool. So there might assets to pay $1 per share. As the NTA goes up, the value of the share increases. But according to this article,
http://www.shareswatch.com.au/blog/investing/listed-investment-companies/
the share can trade at a discount (lower) or premium (higher) to the NTA. It also warns that some LIC funds are so small that they are unrealistic to succeed. They proclaim Buffet style strategies, but little eventuates. There are just over 60 LIC’s listed on the ASX. The largest AFI is worth about $4.1 billion followed by Argo Inv (ARG) and then Milton Corp (MLT) third largest. According to this article,
http://www.morningstar.com.au/funds/article/lics-sector-pressure/4433
AFI has returned a loss to shareholders of 14.6% to Dec 2011. Others were down as well, where believers in LIC’s expected better performance for a number of reasons. There were changes to corporate tax in June 10 which brought more flexibility to paying div’s. Financial planning reform in July 2012 expected to also be a boost. The article argued that they are worth more consideration while at a low point.
“Bell Potter statistical analysis suggests LICs have a tendency to revert to their mean discount or premium to their pre-tax NTA through the cycle. Simply put, rather than look at the current discount or premium in absolute terms, investors need to compare it to the LIC's average discount or premium over a longer period.
Of course, discounts and premiums to NTA are only one consideration in choosing an LIC. But having large, well-run LICs, such as AFI and Argo, trading well below their historical averages (in terms of premiums or discounts to NTA) could be an opportunity worth further research.”
This recent Financial review article published 14 April,
http://afr.com/p/personal_finance/smart_money/lic_your_portfolio_into_shape_SVJmeUK8WGtDmwojnFar fP
suggests that they are also undervalued. “Prescott Securities principal Nick Loxton says with many LICs at reasonable discounts to their net tangible assets the time may be right to look more closely at them. With patience, investors who understand the underlying portfolio and can buy them at a discount may be well rewarded over time, he says.
Like others, he thinks it is a matter of time before the value in many LICs is unlocked.”
This form of investment may not appeal to those DIY investors who are hard core. It was suggested to me by at least one contributor on this forum that it would be suitable for lower self-exposure to the sharemarket for newer DIY investors. It was pointed out with data from a breakdown of self-investment of retirement savings in Australia, that only 0.65% were investing in bonds, and #5% were in equities of which only #$% were listed trusts. Thanks old rider…..see post here.
This investment type does involve management of your investment in a selection of shares, but is not as expensive as using a broker service. This is the thinking behind all unit trusts, low cost managed market exposure.
This article gives a brief list of pros and cons of LIC’s.
http://afr.com/p/personal_finance/smart_money/pros_and_cons_of_listed_investment_LKDT8e6G0mI16L1 9ViW6lL
As they issue only a limited pool of shares, the value of the share reflects the value of the NTA (Net Tangible Asset) or the amount of wealth that is available in the portfolio relative to the share pool. So there might assets to pay $1 per share. As the NTA goes up, the value of the share increases. But according to this article,
http://www.shareswatch.com.au/blog/investing/listed-investment-companies/
the share can trade at a discount (lower) or premium (higher) to the NTA. It also warns that some LIC funds are so small that they are unrealistic to succeed. They proclaim Buffet style strategies, but little eventuates. There are just over 60 LIC’s listed on the ASX. The largest AFI is worth about $4.1 billion followed by Argo Inv (ARG) and then Milton Corp (MLT) third largest. According to this article,
http://www.morningstar.com.au/funds/article/lics-sector-pressure/4433
AFI has returned a loss to shareholders of 14.6% to Dec 2011. Others were down as well, where believers in LIC’s expected better performance for a number of reasons. There were changes to corporate tax in June 10 which brought more flexibility to paying div’s. Financial planning reform in July 2012 expected to also be a boost. The article argued that they are worth more consideration while at a low point.
“Bell Potter statistical analysis suggests LICs have a tendency to revert to their mean discount or premium to their pre-tax NTA through the cycle. Simply put, rather than look at the current discount or premium in absolute terms, investors need to compare it to the LIC's average discount or premium over a longer period.
Of course, discounts and premiums to NTA are only one consideration in choosing an LIC. But having large, well-run LICs, such as AFI and Argo, trading well below their historical averages (in terms of premiums or discounts to NTA) could be an opportunity worth further research.”
This recent Financial review article published 14 April,
http://afr.com/p/personal_finance/smart_money/lic_your_portfolio_into_shape_SVJmeUK8WGtDmwojnFar fP
suggests that they are also undervalued. “Prescott Securities principal Nick Loxton says with many LICs at reasonable discounts to their net tangible assets the time may be right to look more closely at them. With patience, investors who understand the underlying portfolio and can buy them at a discount may be well rewarded over time, he says.
Like others, he thinks it is a matter of time before the value in many LICs is unlocked.”