Deciding where to put your savings comes down to matching up what you want from an investment with what it can do for you.
There are very distinct features that make LICs the stalwart of managed investments that make them ideal investments for any super portfolio:
1. Closed end structure
The only way to invest in LICs is by buying shares from someone else via the ASX. This is what’s called a closed-end investment. While this might not sound exciting, the advantage is the fund is never forced to sell its investments just to pay out any investors who want to sell, as is the case with exchange traded funds and managed funds. This often happens when markets crash, forcing managers to sell shares at depressed prices.
LICs can trade at a price that reflects, more or less, the underlying value of its investments. So each share of an LIC might be worth $1.00. But if a large enough number of people want to sell, the shareprice could fall below this amount - this is the downside to being a closed end structure. During the GFC - many investors panicked and wanted to exit their investments but there wasn’t anyone on the other side willing to pay a price close to what each share was worth. But the basket of shares underlying the LIC weren't affected by those who wanted to sell.
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2. Owned by the people that run them
The chief investment officers and many board members of LICs also invest in the LIC they are responsible for. It’s something investors can take comfort in knowing their fortunes are tied to those of the people making the decisions.
It’s not a blanket rule that the upper echelons of LICs invest in the fund, but you will find many do. It’s not something unique to managed investments - management at many active managed funds take the same approach.
How do you know? Some LICs will tell you their management own shares in the LIC. But you can also check the top 20 shareholders and it’s there you will find exactly who owns how much - but not all management will be the biggest fish.
3. Active management
While traditional LICs aren’t known for buying and selling, they are active managers in the sense that they will intentionally hold more of a particular company than it’s weight in the index. Or they will avoid certain investments all together.
In addition, generating income is one of the main goals of many LICs, which make them particularly attractive to self-funded retirees who can enjoy the benefits of fully franked dividends.
The careful approach many LICs take mean they won’t shoot the lights out and return 10 per cent more than the benchmark, instead it might only be a per cent or two. It makes them good stewards of your capital (which is linked to the fact managers and board members also invest in the company).
Many of the traditional LICs can be found by using brightday’s Featured Funds tool.
