LICs Superior In A Market Downturn
The listed investment company structure has a number of features that make it a superior investment vehicle, including a closed-end pool of capital. During market downturns, this provides a significant benefit to shareholders, particularly when compared with other types of managed funds.
A listed investment company, commonly referred to as a ‘LIC’, provides investors the opportunity to invest in a managed and diverse portfolio of assets (including shares and cash) through a company structure listed on the Australian Securities Exchange (ASX). Investors can buy and sell shares in LICs ‘on market’ like shares in other listed companies.
The LIC structure offers a number of significant benefits to investors. As a listed entity, a LIC must comply with rigorous corporate governance principles that ensure a high degree of transparency and accountability for shareholders. Importantly, a LIC has the opportunity to pay shareholders fully franked dividends over time.
A key advantage of the LIC structure, especially during a market downturn, is its permanent and closed-end pool of capital.
Many other managed investment structures, such as unit trusts, have a capital base prone to fluctuations resulting from redemptions and contributions, while a LIC has a fixed pool of capital. This allows the LIC investment manager to make rational investment decisions based on sound investment principles while taking a long-term view. During a market downturn, a fixed pool of capital as opposed to an open-ended pool of capital is a significant benefit for investors.
In a market downturn, investors in can sell their units to realise cash, forcing the fund manager to liquidate some of their holdings to repay the unit holders – called redemptions. This means the manager is selling into a market that has fallen, and may be forced to sell stocks that they believe are cheap.
In a bull market, when money is rapidly flowing into managed funds, the reverse is the case. The fund manager may be compelled to buy shares they know are over-valued as money pours in from investors – called contributions. This is never the case with LICs. The LIC investment manager can continue to hold the same portfolio of assets, and is never forced to sell or buy any stock to fund redemptions or contributions. Their total focus is on managing money for the benefit of all their shareholders without being dictated by market sentiment or the flow of capital into and out of their fund. LIC investment managers have the opportunity to buy in a market downturn when stocks may be undervalued. Conversely, they may sell stocks that become overvalued in a bull market. Supporters of LICs argue that the closed-end structure enables them to invest more efficiently and outperform unit trusts or other managed funds over time.
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Chris Stott is Chief Investment Officer and Portfolio Manager at Wilson Asset Management. Wilson Asset Management is an independently owned leading boutique funds management business established in 1997 and based in Sydney.
Wilson Asset Management manages more than $1 billion of funds under management predominately in three ASX-listed investment companies: WAM Capital Limited (ASX: WAM), WAM Research Limited (ASX: WAX), WAM Active (ASX: WAA).
Chris is responsible for the research, management and construction of the company's portfolios and is a Director of WAM Capital, WAM Research and WAM Active. Chris joined Wilson Asset Management in 2006 and has more than 10 years' experience in the funds management industry. Previously, Chris was employed at Challenger Financial Services Group for four years in various research and administrative roles specialising in Australian equities. He holds a Bachelor of Business from the University of Technology, Sydney and a Graduate Diploma in Applied Finance and Investment.
Disclaimer: Gavin Wendt, who is a Financial Services Representative of Summit Equities Ltd ACN 097 771 634, and is a director of Mine Life Pty Ltd ACN 140 028 799, compiled this document. In preparing the general advice of this report, no account was taken of the investment objectives, financial situation and particular needs of any particular person. Before making an investment decision on the basis of the advice in this report, investors and prospective investors need to consider, with or without the assistance of a securities adviser, whether the advice is appropriate in light of the particular investment needs, objectives and financial circumstances of the investor or the prospective investor. Although the information contained in this publication has been obtained from sources considered and believed to be both reliable and accurate, no responsibility is accepted for any opinion expressed or for any error or omission in that information.