A LIC is a listed, collective investment vehicle that provides investors with a diversified exposure to one or more asset classes. These might include Australian and global shares, property, fixed income and cash, and more recently, alternative investments. Investors buy and sell shares in an LIC in the same way they would in other listed securities.
LICs are incorporated as companies and are closed-end funds. They issue a fixed number of shares through an initial public offering (IPO) and investors then buy and sell those shares on an exchange. As a company, LICs generally pay fully franked dividends. These are sourced from the underlying investment portfolio and from company tax paid on its own profit.
The value of the underlying assets of an LIC is measured by its net tangible assets (NTA) [link to glossary]; each LIC should trade close to the value of its NTA, minus ongoing fees. However, many LICs trade at a premium (share price is above its NTA) or at a discount (share price is below the NTA).
While the NTA should be close to the value of the underlying investments, other factors can impact an LIC’s price, such as:
> Portfolio performance
> Market capitalisation
As with any investment structure, there are both positive and negative aspects of investing in LICs.
|Income from franked dividends and underlying investments||Some LICs are thinly traded and may be hard to sell when required|
|Ability to buy at a discount to NTA||May need to sell at a discount to NTA|
|Access to a diversified portfolio||LICs are prone to general volatility of the sharemarket|
|Professional portfolio management||Market price of LICs can be impacted by investor sentiment, independent of the NTA|
|Transparency as LICs must comply with ASX corporate governance and reporting requirements|