Benefits and risks of investing in Listed Investment Vehicles (LIVs)
LIVs provide easy access to a professionally managed portfolio of securities. There are specific risks to be aware of when investing.
A LIV provides the ability to gain exposure to a professionally managed, diversified portfolio of securities, an asset class or a market sector in one transaction.
Like any investment, LIVs have risks you need to understand. You should seek independent advice from a professional adviser before investing.
LIVs can help you diversify your portfolio across asset classes, sectors and geographies that otherwise could be difficult to access directly. For example, there are LIVs that cover international shares, emerging markets, specific sectors, corporate bonds, government and semi-government bonds and commodities.
For example, if your portfolio is comprised primarily of Australian shares, you can easily diversify your portfolio by adding a LIV that covers international shares.
Experienced professional investment managers actively manage the portfolio with the aim of generating above market returns.
Expert investment management aims to deliver a better performance than the market. Investing in a LIV gives you exposure to the wider range of styles and strategies used by professional managers – including investment capabilities from around the world. You can also access investments where it is difficult for individual investors to gain research insights, such as small caps, alternative assets, fixed income and emerging markets.
LIVs can change in value as the underlying assets change in value. Depending on the type of fund and the investment objective of the manager, investors can earn returns through price growth and dividends/distributions.
As LIVs are close-ended vehicles, they issue a fixed number of shares or units on initial public offering (IPO) and investors buy and sell those shares or units on ASX.
A benefit of a closed-ended structure is that it allows the fund manager to focus on long term investment objectives, rather than manage daily cashflows generated by investors seeking to buy and sell their holdings. A further benefit is that there isn’t the risk that the asset quality of the fund could dilute in the event the fund becomes popular.
It is possible to change the number of shares or units on issue. LIVs can issue new shares or units to increase the number on issue, or conversely, it can cancel or buy-back shares or units to reduce the number of shares or units on issue.
Investing in LIVs carries specific risks to be aware of before investing.
LIVs often trade at a premium or discount to the value of their underlying assets.
The value of a LIV’s shares is usually referred to as the fund’s net tangible assets (NTA). A fund’s performance is usually assessed on a combination of the performance of the underlying investments and the market premium or discount to the fund itself.
The on-market price of a LIV is closely related to its NTA, but can be impacted by a number of factors, independent of the NTA, such as investor sentiment and market cycles. There are a range of reasons why a LIV may trade at a premium such as market perceptions of sound management. If you decide to pay a premium, it is important to have reasons for doing so.
When a LIV trades at a discount, it could be due to poor performance, market concerns about management, low liquidity or other factors. When your LIV trades at a substantial discount, it can be difficult for you to sell your holding for a price that you would like.
The ASX requires LIVs to publish their NTA within 14 days from month’s end.
Smaller LIVs may not have the liquidity of larger LIVs, particularly if they invest in niche sectors. Consequently they may trade at substantial discounts to its NTA and you may not be able to sell your LIV at a price that you would like.
While investment managers try to outperform the market or sector in which they invest, there is a risk that the fund may underperform the market or decline in value, affecting your return.
Risk that a government or a regulator may introduce regulatory or tax changes which can affect the value of securities in which the fund invests, the value of the shares/units or the tax treatment of the fund.
Certain countries or regions may be subject to additional degrees of market volatility, or economic and political instability. This may reduce or preclude the ability to trade securities or negatively impact a security’s value.
Currency risk is a consideration when investing globally. A weak Australian dollar will increase the value of investments held in non-Australian dollars. On the other hand, if the Australian dollar rises, the value of investments held in non-Australian dollars will fall; all other factors being equal.
Funds that use derivatives are subject to particular risks. Some funds for example may use some types of over the counter (OTC) derivatives that are not subject to central counterparty clearing arrangements and therefore have a higher exposure to counterparty risk.
Some funds may also carry additional risks, depending on the strategy they use or the assets they invest in. For example, some funds may use borrowing or leverage, which may increase risk. To understand fund-specific risks, read the prospectus or product disclosure statement and seek independent advice from a professional adviser before investing.