Listed investment companies (LICs) and listed investment trusts (LITs) make up the majority of the listed managed funds on ASX. Investments in these funds most commonly provide exposure to a basket of underlying shares, although there are some specialist funds that provide exposure to other asset classes.
Investment techniques and operational characteristics can differ significantly from one fund to the next, so LICs and LITs can suit many different types of investors.
LICs and LITs are closed-ended funds that normally trade at a discount or premium to their net tangible asset (NTA) backing.
Listed investment companies
LICs are incorporated as companies, and are closed-ended funds. This means they do not regularly issue new shares or cancel shares as investors join and leave the fund. Instead, they issue a fixed number of shares on initial public offering (IPO), and investors must buy and sell those shares on ASX.(Occasionally, new shares may be issued to increase the size of the fund, or shares 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 can be of assistance to managers who take a long-term approach to investing.
As companies, LICs have the ability to pay franked dividends.
Listed investment trusts
Listed investment trusts are incorporated as trusts, rather than as companies. LITs are also closed-ended vehicles just like LICs, so investors buy and sell existing units on ASX. While LICs have the ability to pay franked dividends, LITs must pay out any surplus income to investors in the form of distributions. These distributions 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 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 deciding whether or not to invest in a LIC or a LIT, investors should consider whether the fund’s structure, investment style and underlying portfolio suits their personal investment objectives.