Investing overseas using LICs

One of these tenets is diversification and one way of achieving this is through investing overseas. When looking to invest overseas there are a range of Listed Investment Companies (LICs) that can provide you with exposure to international markets such as the US, UK, India and China, with just one transaction on ASX. Learn more about international LICs and how they can be your passport to the world.

Diversification is one of the golden rules of investing.  By diversifying your investment portfolio across cash, fixed interest, property and shares (both domestic and international), you are decreasing portfolio risk whilst allowing yourself the opportunity to enhance your investment returns.  Many investment professionals recommend allocating between 5% - 15% of your portfolio to international shares. Whilst that sounds like a good idea, what options are available to you to make it happen?

Investing overseas - your options

Firstly, you could invest directly into a foreign market by setting up an account with your stockbroker (assuming your stockbroker provides this service). You can buy and sell shares in companies such as Microsoft, Johnson & Johnson or General Electric in the US if you wish, however you need be mindful of any taxation and foreign exchange implications and may also need to pay custody fees for holding those securities.

Another option is to invest in an international equities managed fund.  These are unlisted funds managed by investment houses such as Colonial First State, AMP and Perpetual, along with a raft of smaller, more boutique, fund managers.  There is a minimum of 400 funds you could invest in, and that's before getting into specialist sectors such as international property and small-cap funds.

Finally, a recent trend that has started to emerge is increasing number of Listed Investment Companies (or LICs) with an international focus. In the past, LIC managers tended to concentrate their efforts on the Australian equities market and very rarely looked off-shore for investment opportunities.  However we have seen a number of funds list on ASX within the last couple of years with a focus on international markets such as the US, UK and more recently, China and India.

What is a Listed Investment Company?

Listed Investment Companies are very similar to unlisted managed funds; however there are a few key differences.

• LICs are closed-ended funds, whereas unlisted funds are open-ended.  A closed-ended fund raises a certain amount of capital at the start, and investors buy and sell shares (or units) in the fund on the ASX, just like you would with stocks such BHP or NAB. With an open-ended fund on the other hand, the fund manager issues and redeems units as investors move in and out of the fund.
• LICs can therefore trade at a premium or discount to the entities Net Tangible Assets (NTA) due to market forces such as supply and demand, whereas open-ended funds always trade around their NTA.
• LICs trade on the ASX just like a normal share, which provides investors with benefits such as T+3 settlement, transparency, liquidity and certainty of pricing.  When selling an investment in an unlisted managed fund, you may not know the unit price until you sell and your funds may not be made available to you for a period of 3 - 10 days.

US, UK, China or India?

You can access most major international markets and industry sectors through the Listed Investment Company sector.

The United States has always been a popular destination for Australian capital with a number of LICs investing amounts of money in this market. 

Magellan Flagship Fund (ASX code: MFF), the largest LIC initial public offer (listed in December 2006), has already invested 20 per cent of the capital raised in the US, taking large stakes in companies such as American Express, Western Union (large cash transfer business) and Sallie Mae (a private lending business servicing the US student market), and smaller stakes in well-known companies such as Nestle, Tesco and Wal-Mart.

Templeton Global Growth (ASX code: TGG), listed on ASX since 1987, has investments in the US, however is currently more heavily skewed towards the European market, with investments in the Royal Bank of Scotland, Vodafone and Royal Dutch Shell (all UK listed companies).

With all the hype around the China market, it's no surprise that the AMP Capital China Growth Fund (ASX code: AGF) traded at a premium to its issue price when listing on ASX in December 2006. Since that time the investment managers have invested almost all of the capital raised in the China A-Shares market, a market only foreign institutions granted licences by the Chinese government are able to access.  AMP is the first and currently the only Australian institution to be granted such a licence, providing Australian investors with a unique way to access this growing market.

India is also a market that is attracting interest from Australian investors, with GDP growing at an average of 6.3% p.a. over the last 10 years (compared to Australia's 3.6% p.a.).  Currently the only LIC trading on ASX with a specific India focus is India Equities Limited.  The Australian-based manager of the fund, Olympus Funds Management, has sub-contracted the stock selection process to a fund manager on the ground in India called Kotak Mahindra who have invested approximately 80 per cent of the portfolio in blue-chip stocks, with the remainder of the funds being invested in the mid-cap sector of the market.

Growing economies such as India can offer investors with great opportunities to achieve greater diversification within their portfolio especially as world markets don't always move in sync!

The LICs mentioned above are only a small selection of the investment alternatives available. View the full list.

Capital growth or income?

To choose a LIC that's right for you, you need to consider the investment outcome you are looking to achieve.

If you are looking to generate income, then LICs that provide a strong fully franked yield are what you should be looking for.

Alternatively, investments in LICs that invest in emerging markets such as China and India are more likely to generate capital growth, and to reinvest any profits back into those markets.

In summary, Listed Investment Companies are a great way to gain diversified, international exposure with just one transaction. However, before you make any investment decision it's important that you do your research and speak to your professional adviser.

This article was prepared by ASX.