Listed investment companies (LICs) and listed investment trusts (LITs) make up the majority of the listed managed funds listed on ASX. These investments primarily provide access to company shares, although they may also incorporate other asset classes.
Investment techniques and operational characteristics differ substantially from one fund to the next, so LICs and LITs can suit many different types of investors. LICs can trade at a premium or discount to their net tangible Asset (NTA) backing.
The differences between LICs and LITs depend on their legal structures, how shares in the fund are managed and how they handle payments to investors
Listed investment companies
Listed investment companies are incorporated as companies, and are closed-ended vehicles. This means they do not regularly issue new shares or cancel shares as investors join and leave the fund. Instead, investors must buy and sell existing units on ASX. Occasionally, new shares may be issued to increase the size of the portfolio, or units may be bought back or cancelled to reduce the size of the fund.
This closed-ended structure allows the fund manager to concentrate on selecting investments without having to factor in money coming into or leaving the fund. This stability assists those managers that take a long-term approach to investing.
Many LICs manage the investment portfolio to minimise tax and produce regular income through fully franked dividends. However, paying dividends is at the discretion of the fund manager.
Listed investment trusts
Listed investment trusts are incorporated as trusts, rather than as companies. LITs are also closed-ended vehicles just like LICs. While LICs may pay fully franked dividends at the managers’ discretion, LITs must pay out all surplus income to investors in the form of distributions. These payments carry the franking levels allocated by the underlying investments.
The investment styles of LICs and LITs can be classified into four broad categories:
- Australian shares funds invest principally in ASX-listed shares.
- International shares funds invest principally in shares listed on international stock exchanges.
- Private equity funds invest in Australian or international unlisted private companies.
- Specialist funds invest in special assets or investment sectors such as wineries, technology companies, resources businesses or telecommunications providers.
Investment approaches vary from fund to fund, and can range from conservative to aggressive. When selecting an LIC or an LIT, investors should consider whether the fund’s structure, investment style and underlying portfolio suits their objectives.